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.
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).
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.