Notice: To view this week’s big picture outlook, click here.
What Happened: After a report on U.S. consumer prices helped calm fear around rising inflation, U.S. stock index futures auctioned higher.
What Does It Mean: On a relative basis, the Nasdaq-100 is weaker, while the S&P 500, Russell 2000, and Dow Jones Industrial Average are stronger. This push-pull dynamic, in prior sessions, made it hard for participants to resolve directionally, evidenced by volatility.
Now, it appears that relative strength could be shifting back to the Nasdaq-100, evidenced by supportive market liquidity and option activity dynamics, over the last few sessions.
Option Activity 
IWM Market Liquidity 
QQQ Market Liquidity 
SPY Market Liquidity 
Slope of Gamma in QQQ
Important to note is the tenor of the speculative derivatives activity, dominance of put side open interest, and divergent delta in the the S&P 500 and Russell 2000.
These dynamics suggest near-term conviction. In other words, participants with a short-term outlook are dominating recent trade. This is also evidenced by the mechanical trade (e.g., flat highs during Tuesday’s session in the S&P 500, and subsequent end-of-day liquidation that was taken back during Wednesday’s trade).
More On Liquidation Breaks: The profile shape in the S&P 500 suggests participants were “too” long and had poor location. More On Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer. 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.
What To Expect: Thursday’s regular session (9:30 AM – 4:00 PM ET) will likely open outside of prior-range and -value, suggesting the potential for immediate directional opportunity.
During Wednesday’s trade, the best case outcome occurred, evidenced by initiative trade that retook the $3,891.00 spike base.
For today, participants can trade from the following frameworks.
In the best case, the S&P 500 trades sideways or higher, as high as the $3,934.25 ledge. Auctioning above the ledge may portend a fast move to the $3,959.25 overnight rally high (ONH).
More On Ledges: Flattened area on the profile which suggests responsive participants are in control, or initiative participants lack confidence to continue the discovery process. The ledge will either hold and force participants to liquidate (cover) their positions, or crack and offer support (resistance). More On Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.
In the worst case, participants lack the conviction to maintain higher prices, evidenced by trade below the $3,907.25 high-volume area (HVNode). Any trade below the $3,861.25 low-volume area (LVNode) would put in question this most recent 4-day recovery.
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: $3,959.25 ONH, $3,934.25 ledge, $3,907.25 HVNode, $3,861.25 LVNode.