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Commentary

Daily Brief For July 27, 2021

Daily commentary for U.S. broad market indices.

Market Commentary

Led by the Russell 2000, U.S. equity index futures explored lower overnight.

  • Risk-off everything China-related.
  • Ahead: Data dump and earnings.
  • S&P stuck in range, VWAP pinch.

What Happened: U.S. stock index futures auctioned sideways to lower as equity weakness in China deepened. Chinese government bonds and the yuan fell also, alongside fears that U.S. funds are selling Hong Kong and China assets aggressively.

In light of the volatility, Crescat Capital portfolio manager Otavio Costa tweeted: “A yuan devaluation is one of the main deflationary risks today. I know you heard this over and over again… but something is indeed unraveling. Chinese banks and ADRs are in big trouble. PBOC will be forced to act.”

A devaluation is indeed something to fear. The People’s Bank of China (PBOC) roiled global equity markets after its 2015 yuan devaluation.

In addition to this context, ahead, participants will receive data on durable and nondefense capital good orders, the S&P Case-Shiller home price index, consumer confidence, housing vacancies, as well as Apple Inc (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT), and Alphabet Inc (NASDAQ: GOOGL) earnings.

Graphic updated 6:40 AM ET. Sentiment Neutral if expected /ES open is inside of 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: As of 6:40 AM ET, Tuesday’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.

After establishing a new high – $4,416.75 – overnight, weakness in China spilled over; U.S. equity index futures, led by the Russell 2000, traded lower in conjunction with yields, a boost to the tech- and growth-heavy Nasdaq 100.

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. To note, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive). In conjunction with the rapid recovery, lower rates may solicit hawkish commentary as policymakers look to inhibit inflation.

To note, Monday’s trade happened on positive, albeit weak breadth, similar to Friday’s session. At the same time, a Volume Weighted Average Price pinch developed.

Volume Weighted Average Price (VWAP): A metric 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. ​​

Look to buy above a flat/rising VWAP pinch. Sell below a flat/declining VWAP pinch.

All that said, similar to Monday, a key thing to watch for is an auction failure and subsequent liquidation break, confirmed by trade below the $4,372.50 regular trade low (RTH Low).

Liquidation Breaks: The profile shape suggests participants were “too” long and had poor location.

Moreover, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,398.75 high volume area (HVNode) pivot puts in play the $4,408.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,416.75 overnight high (ONH) and $4,428.25 Fibonacci extension.

In the worst case, the S&P 500 trades lower; activity below the $4,398.75 HVNode pivot puts in play the $4,390.50 minimal excess low. Initiative trade beyond the $4,390.50 low could reach as low as the $4,374.25 HVNode and $4,353.00 untested Point of Control (VPOC).

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.

Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

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.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Graphic updated 6:40 AM ET.

News And Analysis

China’s yuan, bonds tank amid fears of foreign selling.

U.S. infrastructure talks are encountering some snags.

Bitcoin steady below $40,000 on Amazon speculation.

Hypothetical look at 35 years of SPX option strategies.

The Federal Reserve meeting starts today. Watch this.

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. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, 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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