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Commentary

Daily Brief For July 16, 2021

Daily commentary for U.S. broad market indices.

Market Commentary

Equity index futures higher overnight.

  • Watching: Delta variant, HK warning.
  • Light day ahead: OPEX, retail sales.
  • Indices rotating, recover lost ground.

What Happened: U.S. stock index futures auctioned sideways to higher last night ahead of the Friday monthly options expiry (OPEX). 

Key developments include a bump in the consumer price index (CPI), expectations the Biden administration will issue an advisory about the risks of doing business in Hong Kong, and the spread of COVID-19 variants.

Today, participants get data on retail sales, Fed speak, and earnings.

Graphic updated 7:00 AM ET. Sentiment Neutral if /ES open is inside of the prior day’s range. Sentiment Risk-On if /ES open is above the prior day’s range. Sentiment Risk-Off if /ES open is below the prior day’s range. See here for more on the Dark Pool Index and Gamma. A positive Dark Pool Index reading is bullish. At the same time, the higher (lower) the gamma, the less (more) volatility. SHIFT Search data used for options activity. Note that options flow is sorted by the call premium spent; if green and more (less) positive then more (less) was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator.

What To Expect: Friday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by trade below the $4,357.75 low volume area (LVNode) pivot. This is significant because that pivot marked a break from a multi-session balance area. 

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.

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).

The downside resolve was the result of initiative sellers stepping in. For weeks, equity indices – particularly the S&P 500 and Nasdaq 100 – rose with tremendous speed, leaving behind low volume (poor) structures. Thereafter, responsive sellers surfaced, evidenced by sideways trade in the day’s prior. That said, weak breadth transpired into material price action with the Nasdaq 100 losing its relative strength – a deviation from prior trade – as it and the Russell 2000 sold into trend support. The S&P 500 and Dow Jones Industrial Average traded strong, in comparison, with the Dow positioned for a potential break higher. 

All of this push-pull and divergence comes ahead of the options expiration (OPEX) cycle which starts on the third Friday of each month (July 16). Associated hedging forces make it so there’s more liquidity and less movement. After OPEX, according to SpotGamma, “the market tends to experience its largest intraday volatility which corresponds to the reduction in large options positions, and the hedging associated with them.”

Graphic: SpotGamma’s EquityHub shows 30% of the S&P 500’s gamma expiring July 16 which, as SpotGamma has said in the past, “creates volatility because, as large options positions expire[], are closed and/or rolled, dealers have large hedges they need to adjust.”

Given the expectation for so-called unpinning in coming sessions, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,357.75 LVNode pivot puts in play the $4,371.00 untested Point of Control (POC). Thereafter, if higher, participants can look for responses at the $4,384.50 regular trade high (RTH High) and $4,398.50 Fibonacci price extension.

POCs: POCs 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 the worst case, the S&P 500 trades lower; activity below $4,357.75 puts in play the $4,346.75 high volume area (HVNode). Trade beyond $4,346.75 could reach as low as the $4,332.25 LVNode and $4,314.75 HVNode.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Note the developing VWAP pinch. Buy above a flat/rising VWAP pinch. Sell below a flat/declining VWAP pinch.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). See the response to trend support in the Nasdaq 100 and Russell 2000. Also, note the Dow’s relative strength.

News And Analysis

Politics | U.S. warns investors on Hong Kong, citing China’s pressure. (BBG)

FinTech | Ethereum is the most important technology since the internet. (DDI)

Politics | Ocasio-Cortez warns progressives can ‘tank’ infrastructure bill. (BBG)

Markets | OPEC sees world oil demand reaching pre-pandemic levels. (REU)

Mobility | Biden looks into lifting Europe travel ban, a boost for airlines. (BBG)

Economy | Biden to reappoint Jerome Powell as Fed chair, some saying. (REU)

Markets | “Bad omen” for meme stocks as novice traders stop investing. (Axios)

What People Are Saying

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. Additionally, Capelj is a finance and technology reporter that’s interviewed leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, Canadian businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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