Market Commentary For 2/18/2021

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

What Happened: U.S. stock index futures balanced within prior range, ahead of releases on weekly jobless claims.

What Does It Mean: After a v-pattern recovery and sideways trade in the weeks prior, stock index futures auctioned out of prior-balance and -range, via Friday’s end-of-day spike.

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).

Since then, the S&P 500 had difficulty in maintaining higher prices.

At the end of regular trade Wednesday, the aforementioned spike and shift from balance (i.e., the transition from two- to one-time frame trade) was accepted. Overnight, however, the market rotated back into the meat of Wednesday’s range, putting in jeopardy the near-term bullish bias. This is likely the resolve of uninspired buying interest during regular trade (as measured by volume delta).

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

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Noting, as the bid in volatility drops, demand is seen rising.

That’s according to one statement by Goldman Sachs Group Inc‘s (NYSE: GS) trading desk which said: “CTAs [are] purchasing ~$5B of S&P this week, regardless of what the tape does.”

That statement echoes what JPMorgan Chase & Co (NYSE: JPM) Marko Kolanovic’s said last year. Kolanovic suggested equities would rally short-term with the S&P 500 auctioning as high as $4,000 on the basis of low rates, improved fundamentals, buybacks, as well as systematic and hedge fund strategies. Kolanovic has since downgraded growth and suggested the limited potential for further upside despite odds of a sustained economic recovery.

Important to add also is the large February monthly options expiration (OPEX), after which, the interest at the $3,900.00 S&P 500 option strike will roll-off. 

Why is this important? Option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire worthless) and the reduction dealer gamma exposure.

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

This comes alongside a resumption of balance, acceptance of higher prices (above a prominent high-volume area), and an overnight rally-high at $3,959.25.

More On Overnight Rally Highs: Typically, there is a low historical probability associated with overnight rally-highs ending the upside discovery process.

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.

Given the above dynamics, and the S&P 500’s move back below the $3,919.75 spike base (i.e., Wednesday’s worst case outcome), the following frameworks ought to be applied.

In the best case, the S&P 500 opens and remains above the $3,900.00 confluence zone. Auctioning beneath $3,900.00 turns the high-volume area (HVNode) nearby into supply, offering initiative sellers favorable entry and responsive buyers favorable exit.

So, above $3,900.00, expect balance-to-higher. Below $3,900.00, expect the potential for downside discovery.

Levels Of Interest: $3,900.00 HVNode.