Market Commentary For 1/28/2021

Daily commentary for U.S. broad market indices.

Notice: To view this week’s big picture outlook, click here.

What Happened: Alongside the earnings of heavily weighted index constituents and news the Fed would maintain monetary stimulus amid a slowing recovery, U.S. index futures sold heavy Wednesday, and found acceptance at lower prices during the overnight session.

What Does It Mean: During Wednesday’s regular trade in the S&P 500, market participants were unable to maintain higher prices.

This came as the market failed to drum up initiative buying after an upside break of the $3,852.50 ledge, in addition to profile structures denoting the presence of excess (which forms after an auction has traveled too far in a particular direction and portends sustained reversal). Both of the prior occurrences provided increased confidence among responsive sellers.

Additionally, participants saw a proxy for buying derived from short sales (i.e., liquidity provision on the market making side) decline and a substantial change in tone in terms of speculative derivatives activity.

Graphic 1: Speculative derivatives activity for January 27, 2021
Graphic 2: DIX by Squeeze Metrics suggests large divergence between price and buying

What To Expect: Thursday’s regular session (9:30 AM – 4:00 PM ET) will likely open inside of prior-balance and -range, suggesting limited directional opportunity.

Further, yesterday’s move through the $3,824.00 – $3,763.75 balance-area was the most negative outcome and portends further downside discovery.

Graphic 3: 15-minute chart of the Micro E-mini S&P 500 Futures show near-term damage to bullish thesis

Given that increased capital was not committed into yesterday’s lows, evidenced by a divergent delta (i.e., the difference between buying and selling pressure), participants can expect a near-term low, per graphic 4.

Graphic 4: Divergent delta in the SPDR S&P 500 ETF Trust (NYSE: SPY), the largest ETF that tracks the S&P 500

That said, because the market initiated out of balance, lower, responsive sellers have been emboldened. As a result, participants ought to respond to probes into value. Therefore, as long as the S&P 500 remains below the $3,794.75 high-volume node (HVNode), an area that offers favorable entry and exit, the bearish narrative remains intact.

The go/no-go for upside is the $3,806.50 regular-trade high. The go/no-go for downside is $3,703.25 overnight low. Anything in-between portends responsive, non-directional trade.

Above $3,806.50 puts in play the $3,842.00 HVNode. Below $3,703.25, participants ought to look to the $3,611.50 and $3,556.00 HVNodes.

Graphic 5: 4-hour profile chart of the Micro E-mini S&P 500 Futures

Levels Of Interest: $3,806.50 regular-trade high, $3,703.25 overnight low.

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