Notice: To view this week’s big picture outlook, click here.
What Happened: U.S. stock index futures auctioned higher as bond yields eased from their 14-month highs.
What Does It Mean: During Wednesday’s trade, alongside monetary policy announcements, the S&P 500 established a new all-time high.
Thereafter, participants took back the news-driven vertical price range, pushing indexes well into prior range.
All in all, Thursday’s dip comes after a significant recovery that managed to establish a new overnight all-time high in the S&P 500.
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.
Further, coming into Friday’s derivative expiry, market liquidity suggested strong selling Thursday with the resolve of resting orders (opportunistic buying or short covering into weakness) below the market. Speculative options activity was concentrated in near-dated tenors on the put-side, in the face of increased buying pressure (as witnessed through measures like DIX).
More On DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market making side) — we can measure buying pressure.
What To Expect: Friday’s regular session (9:30 AM – 4:00 PM ET) will likely open inside of prior-range, suggesting a limited potential for immediate directional opportunity.
During Thursday’s trade, lower prices failed to facilitate increased participation, evidenced by the S&P 500’s divergence from intraday value. The divergence continued until a test of the $3,904.25 low-volume area (LVNode) solicited 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.
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 $3,937.25 Virgin Point of Control (VPOC). In the worst case, the S&P 500 finds acceptance (i.e., resolves lower or sideways) below the $3,937.25 VPOC.
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.
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 and $3,879.25 low-volume LVNodes for a response.
Levels Of Interest: $3,937.25 VPOC.