Notice: To view this week’s big picture outlook, click here.
What Happened: U.S. stock index futures rotated higher, overnight, as bond yields declined and European stocks posted their best gains in months of trade.
What Does It Mean: U.S. stock index futures ended lower, Monday, after responsive sellers stepped in and resolved a morning consolidation.
The volatile price action is happening in the context of rising bond yields — a correlation that has a knack for disappearing, suddenly — and the short-gamma environment.
More On Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options 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.
Furthermore, the economy is poised to take off. Why? Record amounts of stimulus and a country-wide re-opening. Adding, the recent pricing in of rising debt and inflation fears, as a result, is likely nearing an end, based on market liquidity metrics and the inventory positioning of participants.
What To Expect: Tuesday’s regular session (9:30 AM – 4:00 PM ET) will likely open on a small gap, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.
During Monday’s trade, the best case outcome occurred, evidenced by rotational trade between the $3,861.25 low-volume area (LVNode) and $3,762.25 high-volume area (HVNode).
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.
For today, participants can trade from the following frameworks.
In the best case, the S&P 500 resolves a multi-session consolidation to the upside, evidenced by initiative trade that finds increased participation (e.g., higher volumes and range expansion) above the $3,861.26 LVNode.
In the worst case, the S&P 500 resolves lower, evidenced by initiative trade that finds increased participation below the $3,839.25 HVNode, a volume-area that ought to offer initiative sellers (responsive buyers) favorable entry (exit).
In case of upside (downside) resolve, participants may target the $3,892.75 HVNode ($3,801.25 LVNode).
Levels Of Interest: $3,861.25 LVNode (Upside Go/No-Go Level).