Notice: To view this week’s big picture outlook, click here.
What Happened: After strong earnings from Amazon.com Inc (NASDAQ: AMZN) and Alphabet Inc (NASDAQ: GOOGL), alongside stimulus optimism, market participants traded responsively in Tuesday’s regular trading range, suggesting an acceptance of higher prices.
What Does It Mean: Late last week, market’s were in a good position for downside discovery. Since then however, conditions have changed markedly.
Further, given the retracement, the S&P 500, in particular, is in a position to digest the recent advance. In other words, two-sided trade that repairs some of the poor structures (as evidenced by low-volume areas) left in the wake of initiative buying would be the most positive outcome.
In the simplest way, high-volume areas can be thought of as building blocks. 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. If participants were to auction and find acceptance into areas of prior low-volume, then future discovery ought to be volatile and quick as participants look to areas of value for favorable entry or exit.
What To Expect: Wednesday’s regular session (9:30 AM – 4:00 PM ET) will likely open inside of prior-balance and -range, suggesting limited potential for directional opportunity and high volatility.
Currently, the S&P 500 is rotating at the $3,842.00 high-volume area (HVNode).
As stated, HVNodes can be thought of as building blocks — they also denote areas of supply and demand. In this case, $3,842.00 can be thought of as an area of supply. The primary strategy is to respond to probes into these supply (i.e., selling responsively) and demand (i.e., buying responsively) areas as they offer favorable entry and exit.
Important to add is the presence of divergent speculative flows (Graphic 1) and the decline in a proxy for buying derived from short sales (i.e., liquidity provision on the market making side), per Graphic 2.
Given that the market will likely open in-range, participants should look to whether the advance holds (i.e., a market will transition from up and down, to sideways trade). Holding the gap would suggest initiative buyers are in control, near-term. Auctioning below Tuesday’s regular-trade low ($3,799.00) would be the most negative outcome.
In the best case, the market will initiate above, or find acceptance at (in the form of rotational trade) the $3,842.00 HVNode. In the worst case, responsive sellers appear and restart the downside discovery process. Any break that finds increased involvement below the $3,799.00 regular-trade low, would favor continuation as low as the $3,727.75 HVNode.
The go/no-go for upside is the $3,843.50 overnight-trade high. The go/no-go for downside is $3,799.00 regular-trade low. Anything in-between portends responsive, non-directional trade.
Levels Of Interest: $3,843.50 ONH, $3,799.00 regular-trade low.