Market Commentary For 1/29/2021

Daily commentary for U.S. broad market indices.

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

What Happened: After a slew of the earnings reports by heavily weighted index constituents, U.S. index futures further accepted lower prices.

What Does It Mean: Earlier in the week, the S&P 500 failed to drum up initiative buying after an upside break of the $3,852.50 ledge. Participants sold the break, introducing excess (which forms after an auction has traveled too far in a particular direction and portends sustained reversal) and acceptance below the $3,824.00 – $3,763.75 balance-area. This invalidated last week’s break-out to new highs.

Since then, market participants were witness to violent two-sided trade, a result of the market moving into a short-gamma environment (graphic 1); in such cases dealers hedge their derivatives exposure by buying into strength and selling into weakness. This, alongside the presence of short-term traders in U.S. equities (as evidenced by selling that transpired at yesterday’s high, since institutions tend not to transact at exact technical levels) will exacerbate volatility.

Graphic 1: SpotGamma data suggests S&P 500 has entered short-gamma environment

Adding, it’s important to bring back yesterday’s graphics that showed 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.

Since posting graphics 2 and 3, the bearish thesis is still intact. This is due to the divergent speculative flows and delta (e.g., presence of non-committed buying or selling as measured by volume delta) during Thursday’s session, as can be viewed in Graphic 4. This information means that the short-covering rally that lasted much of yesterday’s regular trade was not supported; increased capital was not committed into yesterday’s highs.

Graphic 2: Speculative derivatives activity for January 27, 2021
Graphic 3: DIX by Squeeze Metrics suggests large divergence between price and buying
Graphic 4: Divergent Delta in the SPDR S&P 500 ETF (NYSE: SPY), the largest ETF that tracks the S&P 500

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

Given today’s month-end derivatives expiry and yesterday’s acceptance inside of the $3,824.00 – $3,763.75 balance-area, the odds of substantial downside during Friday’s session is low. Instead, participants should position themselves for two-sided, responsive trade.

Still, 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 $3,823.75 regular-trade high. The go/no-go for downside is $3,721.00 overnight low. Anything in-between portends responsive, non-directional trade.

Above $3,823.75 puts in play the $3,842.00 HVNode. Below $3,721.00 , participants ought will look to respond to the $3,611.50 and $3,556.00 HVNodes, in the worst case.

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

Levels Of Interest: $3,823.75 regular-trade high, $3,721.00 overnight low.

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