Notice: To view this week’s big picture outlook, click here.
What Happened: After an end-of-day spike liquidation, overnight, U.S. stock index futures rebounded.
What Does It Mean: Broad market indices are no longer in price-discovery mode. Instead, indices are in balance, two-sided trade as participants look for more information to base their next move on.
While leading economic indicators point to expansion, stock market liquidity has weakened and volatility has expanded, exacerbated by the market’s transition into short-gamma.
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.
What To Expect: Wednesday’s regular session (9:30 AM – 4:00 PM ET) will likely open inside of prior-value and -range, suggesting a limited potential for immediate directional opportunity.
During Tuesday’s trade, the best case outcome occurred: the S&P 500 was able to maintain higher prices, rotating within Monday’s trading range, above the $3,860.75 LVNode. However, near the end of regular trade, the S&P 500 experienced a rapid spike liquidation, away from value, or the price level that participants transacted most at.
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).
Given the aforementioned dynamics, and an overnight failure to reclaim the high-volume area (HVNode) at $3,894.25, which offered initiative buyers (responsive sellers) favorable exit (entry), participants can trade from the following framework.
In the best case, market’s remain rotational, with the S&P 500, in particular, remaining within Tuesday’s trading range, above the $3,860.75 low-volume area, or LVNode.
In the worst case, participants auction past Tuesday’s regular trade low, emboldening sellers and starting a new auction, to the downside.
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.
Levels Of Interest: $3,860.75 LVNode.