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Commentary

Daily Brief For August 2, 2021

Daily commentary for U.S. broad market indices.

Editor’s Note: On Thursday (8/5) and Friday (8/6) there will be no Daily Brief newsletter. Additionally, there will be no Weekly Brief Sunday (8/8), either. All commentaries to resume August 9, 2021.

Market Commentary

Equity index futures higher overnight.

  • Infrastructure bill gains in the Senate.
  • Ahead: PMI, ISM, construction spend.
  • Favoring sideways, responsive trade.

What Happened: U.S. stock index futures auctioned higher after a busy week of earnings and positive developments with respect to an infrastructure package.

Ahead is data on Markit manufacturing PMI, ISM manufacturing, and construction spending.

Graphic updated 6:40 AM ET. Sentiment Risk-On if expected /ES open is above 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, Monday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open on a small 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.

Take the word potential lightly. Despite the gap higher, the S&P 500 is trading within a larger area of balance, 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 responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

As a side note, this balancing activity comes as the market enters into the worst two-month period of the year. At the same time, the CBOE Volatility Index (INDEX: VIX), a measure of the market’s volatility expectation based on S&P 500 options, and high-yield spreads (which can signal a worsening in economic conditions) have become stickier at higher levels.

At a more micro level, in support of responsive trade are metrics with respect to breadth, market liquidity, and the options market. For instance, as stocks went sideways, Friday, breadth, at the exchange level, was negative with a steady, albeit soft inflow into the stocks that were down, versus those that were up.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,406.25 low volume area (LVNode) puts in play the $4,422.75 minimal excess high. Initiative trade beyond the minimal excess high could reach as high as the $4,428.25, $4,449.00, and $4,470.75 Fibonacci price extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,406.25 LVNode puts in play the $4,392.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as low as the $4,370.50 minimal excess low 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.

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 6:30 AM ET.

News And Analysis

World’s biggest pension fund slashes U.S. bond weighting. 

Real GDP expands above pre-pandemic levels, BEA said.

Goldman Sachs’ flow desk – earnings beats not rewarded.

Senate plans to deliver infrastructure win for Biden agenda.

The broadest China outbreak since Wuhan; COVID update.

‘Buy Now, Pay Later,’ plans are having their moment again.

Nordea: Bullard is likely a muppet, but he is probably right.

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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