Notice: To view this week’s big picture outlook, click here.
What Happened: Ahead of Producer Price Index and University of Michigan Consumer Sentiment releases, U.S. stock index futures fell, overnight.
What Does It Mean: The drop comes after a significant recovery.
The S&P 500 nearly took out its overnight all-time high at $3,959.25, while the Russell 2000 established a new high and Nasdaq-100 remained generally weak, in comparison.
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.
Coming into Friday’s session, market liquidity suggested (1) buying pressure was leveling out and/or (2) buyers were absorbing resting liquidity (opportunistic selling or selling into strength), while speculative options activity was concentrated on the put-side. These dynamics suggest range-bound trade in the coming session(s) as participants look to establish balance, two-sided trade after a rapid recovery.
In simpler terms, the market may start to base for its next move.
IWM Market Liquidity 
QQQ Market Liquidity 
SPY Market Liquidity 
Option Activity
What To Expect: Friday’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 Thursday’s trade, the best case outcome occurred, evidenced by initiative trade above the $3,934.25 ledge, that failed to retake the $3,959.25 overnight rally high (ONH) by less than one point.
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).
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, which corresponds with a prominent low-volume area and VWAP anchored from Thursday’s peak.
In the worst case, participants lack the conviction to maintain higher prices, evidenced by trade below the $3,902.25 low-volume area (LVNode). In the latter case, participants may target the $3,861.25 LVNode.
Volume-Weighted Average Prices (VWAPs): Metrics highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs. 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: $3,934.25 ledge, $3,902.25 LVNode, $3,861.25 LVNode.
