Market Commentary For 3/5/2021

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 rebounded overnight, ahead of releases that would shed light on the economic recovery.

What Does It Mean: Broad market indices sold heavy, Thursday, with volatility picking up after Federal Reserve Chair Jerome Powell failed to soothe investor concerns.

CNBC: Fed chair Jerome Powell – inflation is set to increase, but likely temporary.

As stated yesterday, on a relative basis, the Nasdaq-100 is weaker, while the S&P 500 and Russell 2000 are stronger. This push-pull dynamic, in prior sessions, made it hard for participants to resolve directionally, evidenced by volatility.

On Thursday, the Russell 2000 and S&P 500 broke their consolidations, resolving lower.

Adding, despite indexes being best positioned for sideways or lower trade, in the longer-term, near-term downside discovery may have reached as a limit, based on market liquidity metrics and the inventory positioning of participants.

According to SqueezeMetrics, the steepness of the GammaVol (GXV) curve suggests that there’s more risk to the upside, than downside, at the S&P 500’s present juncture.

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: SqueezeMetrics data suggests near-term turnaround after Thursday’s violent liquidation.

Given the market’s transition into short-gamma (Graphic 2), however, volatility is a given. That’s due to dealer hedging requirements, as discussed above.

Graphic 2: SpotGamma data suggests Nasdaq-100 at or below “Short-Gamma” juncture.

Similar to yesterday, market liquidity, suggests (1) buying pressure is increasing or (2) sellers are absorbing resting liquidity (which could be opportunistic buying or short covering into weakness).

Graphic 3: Market liquidity for the SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index.

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

During Thursday’s trade, the worst case outcome occurred: the S&P 500 broke from balance, and auctioned past the $3,777.75 regular trade low (RTH Low). Thereafter, lower prices solicited responsive buying near the $3,727.75 HVNode.

Participants did not establish definitive excess at the lows.

More On Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).
Important to mention is overnight discovery, which established clear excess on the composite profile.

More On Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

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 aforementioned dynamics, participants can trade from the following frameworks.

In the best case, the S&P 500 either (1) remains rotational, trading responsively between the $3,785.00 low-volume area (LVNode) and $3,720.50 minimal excess low.

Thereafter, if higher, attention shifts to whether the S&P 500 can get past the $3,785.00 (LVNode). Doing so suggests the most recent downside probe was an auction failure (i.e, participants rejected lower prices, sparking a rapid recovery).

In the worst case, participants auction past the $3,720.50 minimal excess low. In such a case participants may target the $3,689.50 HVNode.

Graphics 4 and 5: Profile overlays on the Micro E-mini S&P 500 Futures.

Levels Of Interest: $3,785.00 LVNode.

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