Notice: To view this week’s big picture outlook, click here.
What Happened: U.S. stock index futures auctioned higher after the Federal Reserve kept its policy rate unchanged and ramped up expectations for growth. Afterwards, the news-driven vertical price range was taken back, evidenced by an overnight liquidation that brought price back into range.
What Does It Mean: In light of reaffirmed monetary policy expectations, participants have more information to base their next move.
Heading into Wednesday’s policy meeting, stock indexes were balancing, trading back and forth in a small range. Now that participants have more information, attention is shifted to the Nasdaq-100’s relative weakness, the large March monthly options expiration (OPEX), after which, the interest at the $4,000.00 S&P 500 option strike will roll-off, as well as improving market breadth.
Bonus: Most funds are committed to holding long positions. In the interest of lower volatility returns, these funds will collar off their positions, selling calls to finance the purchase of downside put protection.
As a result of this activity, option dealers are long upside and short downside protection.
This exposure must be hedged; dealers will sell into strength as their call (put) positions gain (lose) value and buy into weakness as their call (put) positions lose (gain) value.
Now, unlike theory suggests, dealers will hedge call losses (gains) quicker (slower). This leads to “long-gamma,” a dynamic that crushes volatility and promotes momentum, observed by lengthy sprints, followed by rapid de-risking events as the market transitions into “short-gamma.”
If the interest near $4,000.00 S&P 500 is not rolled up in price and out in time, then option hedging requirements will change.
However, it is important to note that, in recent days, some exposure has been rolled up in price and out in time. This suggests an inclination by participants to maintain long exposure through OPEX.
What To Expect: Thursday’s regular session (9:30 AM – 4:00 PM ET) will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.
During Wednesday’s trade, participants found acceptance above the $3,931.00 Virgin Point of Control (VPOC), prior to establishing a new all-time rally-high. Overnight, participants failed to gather enough conviction to continue upside price exploration. Thereafter, prices came back into prior-range.
More On POCs: POCs (like HVNodes described above) are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.
Based on that information, for today, participants can trade from the following frameworks.
In the best case, the S&P 500 finds acceptance (i.e., resolves higher or sideways), above the $3,932.25 high-volume area (HVNode). In the worst case, the S&P 500 finds acceptance (i.e., resolves lower or sideways) below the $3,932.25 high-volume area (HVNode).
In case of higher prices, participants may look to auction as high as the $3,951.75 and $3,965.25 HVNodes. In case of lower prices, participants can look to the $3,904.25 low-volume area (LVNode) for a response.
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: $3,932.25 HVNode.