Market Commentary For 2/1/2021

Daily commentary for U.S. broad market indices.

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

What Happened: As investors looked to another round of earnings, amidst a popularized retail stock buying frenzy, U.S. index futures tested lower and returned violently into Friday’s regular trading range.

What Does It Mean: After signs of deleveraging, inversion of the VIX term structure, a shift into short-gamma, and a rise in purchases of downside protection with time, U.S. stock indexes are best positioned for downside discovery.

However, after the best case scenario — the S&P 500 taking back Friday’s liquidation and auctioning above the $3,727.75 high-volume area (HVNode) — was realized in overnight trade, participants can expect continued balance on supportive speculative flows and delta (e.g., committed buying as measured by volume delta).

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

As a result, participants ought to zoom out, and look for valuable areas to transact, such as those highlighted zones in Graphic 1 which denote high-volume areas.

A structurally sound market will build on past areas of high-volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area which denotes directional conviction and ought to offer support on any test). 

If participants were to auction and find acceptance into areas of prior low-volume, as they have in the week prior, then future discovery ought to be volatile and quick as participants look to areas of value for favorable entry or exit.

Graphic 1: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

In the best case, the market will initiate and find acceptance (in the form of rotational trade) above the $3,767.75 high-volume node.

In the worst case, responsive sellers appear and continue the downside discovery process. Any break that finds increased involvement (i.e., supportive flows and delta) below the $3,689.50 HVNode, would favor continuation as low as the $3,611.50 and $3,556.00 HVNodes.

The second to last HVNode corresponds with the $361 SPY put concentration, which may serve as a near-term target, or bottom, for this sell-off, given last week’s activity at that strike (Graphic 2).

Graphic 2: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust, for the week ending January 30, 2021.

The go/no-go for upside is the $3,770.50 regular-trade high. The go/no-go for downside is $3,685.50 regular-trade low. Anything in-between portends responsive, non-directional trade.

Levels Of Interest: $3,770.50 regular-trade high, $3,767.75 HVNode, $3,685.50 regular-trade low.

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