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Commentary

Daily Brief For July 30, 2021

Daily commentary for U.S. broad market indices.

Market Commentary

Screens go red as equity index and commodity futures trade lower.

  • Mega-cap growth, China concerning.
  • Earnings, sentiment, and much more.
  • Favoring sideways, responsive trade.

What Happened: U.S. stock index futures auctioned lower overnight alongside narratives surrounding slowing mega-cap growth, China, and COVID-19. 

“The earnings season has delivered strong results so far, however, some investors are concerned that earnings growth will slow from here,” said Lewis Grant of Federated Hermes. “On the other hand, the economy is opening up as we move past the peak infections and consumer balance sheets are strong, and that should support the cyclical end of the market.”

Moreover, ahead is data on earnings, as well as the employment cost index, personal income, consumer spending, core inflation, Chicago PMI, and University of Michigan sentiment.

Graphic updated 6:40 AM ET. Sentiment Risk-Off if expected /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: As of 6:40 AM ET, Friday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open on a gap, outside of prior-range and -value, suggesting a potential for directional opportunity.

Gap Scenarios: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

That said, we take the word potential lightly, given the current technical juncture; the S&P 500 is trading within a larger balance area, the result of participants finding higher prices valuable as they position themselves for a directional move, given increased clarity on earnings, taper, and more. 

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 modus operandi, in light of the above, is therefore responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

In support of a fade are metrics with respect to breadth, market liquidity, and the options market. 

Breadth, at the exchange level, was positive yesterday with a steady, albeit soft inflow into the stocks that were up, versus those that were down. 

Similarly, into Thursday’s price rise, the cumulative volume delta became increasingly divergent, decreasing confidence in initiative trade beyond the $4,416.75 overnight high (ONH). 

In light of the decreased confidence, volume profiling also reveals a minimal excess high which could be construed as an improper end to price discovery. 

Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

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.

Putting it all together, with options market activity supporting potential pinning into Friday’s weekly options expiry, odds favor sideways trade, more than anything else. 

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,393.75 high volume area (HVNode) pivot puts in play the $4,406.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as $4,419.00 untested point of control (VPOC) and $4,428.25 Fibonacci price extension.

In the worst case, the S&P 500 trades lower; activity below the $4,393.75 pivot puts in play the $4,370.50 minimal excess low. Initiative trade beyond the minimal excess low could reach as low as the $4,353.00 VPOC and $4,341.75 micro composite point of control (MCPOC).

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.

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

Industrial policy is back as the West dusts off old ideas to counter China.

Global financing condition – issuance strong despite modest contraction.

Nordea talks European-area GDP and inflation: country-level differences.

Fears of a U.S. market correction increase as stocks climb to new highs.

Robinhood got Catherine Wood’s backing despite miserable trading day.

Chinese stocks slipped, ending the wild week as traders price in realities.

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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