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Commentary

Market Commentary For 2/9/2021

Daily commentary for U.S. broad market indices.

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

What Happened: U.S. stock index futures established record all-time highs Monday before trading back into range.

What Does It Mean: On an end-of-day spike, U.S. stock index futures established new all-time highs.

This price action occurred on the heels of a quick de-risking event and v-pattern recovery, alongside non-participatory speculative flows, a divergence in the DIX, and the market’s re-entry into long-gamma.

More On The V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation. 

More On Speculative Flows: Participants looking to capitalize on either upside or downside through the purchase and sale of options, the right to buy or sell an asset at a later date and agreed upon price.

More On DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market making side) — we can measure buying pressure.

More On Gamma: Gamma is the sensitivity of an option to changes in underlying price. Dealers that take the other side of option trades hedge their exposure to risk by buying and selling the underlying. 

When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.
Graphic 1: SpotGamma data suggests S&P 500 at or above “Long-Gamma” juncture.

Important to note: unlike in prior sessions, participants saw some change in the undercurrents. A divergence between price (lower) and cumulative volume delta (higher). This divergence resolved itself in the last hour of trade on Monday.

More On Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

What To Expect: Tuesday’s regular session (9:30 AM – 4:00 PM ET) will likely open inside a spike, within prior-balance and -range, suggesting minimal directional opportunity. This comes after participants traversed nearly 7%, a non-typical weekly trading range.

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

Further, given how far the discovery process has come, attention is drawn to a few key references.

The first is the end-of-day spike. Trade below the $3,899.00 spike base would be the most negative outcome and may trigger a new wave of downside discovery that would repair some of the poor structures left in the wake of the aforementioned advance.

The second key reference is the overnight high. Typically, there is a low historical probability associated with overnight rally-highs ending the upside discovery process. Add on the fact that Monday’s regular trade left minimal excess (i.e., a proper end to price discovery) at the high, odds point to the potential to trade higher in the coming session(s).

Given those key references, the following frameworks apply.

In the best case, the S&P 500 does some backfilling to repair poor structures left in the wake of strong initiative buying. In such a case, participants would look for responsive buying to surface at or above the $3,880.00 high-volume area (HVNode). 

In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below the $3,880.00 HVNode, would favor continuation as low as the $3,794.75 and $3,727.75 HVNodes.

More On 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, then future discovery ought to be volatile and quick as participants look to areas of high-volume for favorable entry or exit.

Today’s go/no-go level is the $3,899.00 spike base. Below, would portend downside discovery and structural repair. At or above denotes balance or continued upside discovery.

Levels Of Interest: $3,899.00 spike base.

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