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Commentary

Daily Brief For August 4, 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 trade higher ahead of key fundamental events.

  • Worry dwindles and volatility ebbs.
  • Ahead: Data on jobs and services.
  • A mixed bag. Positioned for higher.

What Happened: U.S. stock index futures auctioned higher and sideways as participants discounted drivers like the COVID-19 coronavirus and China clampdown. 

At the same time, earnings are robust and stimulus remains in play; “Aside from the healthy earnings outlook, we also see equities being supported by continued monetary stimulus from the Federal Reserve and the attractiveness of stocks relative to low bond yields,” said Mark Haefele of UBS Group AG (NYSE: UBS). “Cyclicals are expected to benefit from the shift in consumer spending away from pandemic winners such as mega-cap tech.”

Ahead is data on ADP employment, Markit services PMI, and the ISM services index.

Graphic updated 6:30 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 6:30 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open just inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, the best case outcome occurred after a repair of the $4,370.50 minimal excess low; after testing the low (a level which corresponded with a volume-weighted average price or VWAP anchored from the July 19 swing low), responsive buyers initiated a rally that pushed prices to a higher close, away from value. 

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.

More On Volume-Weighted Average Prices (VWAPs): 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.

In doing so, participants negated all of Monday’s selling which, as stated Tuesday, was not supported by value or strong metrics with respect to breadth and market liquidity

Coming into today’s session, opportunity resides in the S&P 500, Nasdaq 100, and Dow Jones Industrial Average; indices are trading at key go/no-go levels. 

Further up movement puts in play balance-area breakouts. In such a case, the modus operandi shifts from responsive trade (i.e., fade the edges) to initiative trade (i.e., play the break). Failure to expand range portends a rotation back into balance. 

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).

Below are some rough levels to base expectations around. The width of the balance area, projected off the high end of the balance, is the typical target in such a breakout (e.g., $4,490 SPX cash).

Graphic: 65-minute candlestick charts of the cash-settled S&P 500 (INDEX: SPX), Nasdaq 100 (INDEX: NDX), Russell 2000 (INDEX: RUT), and Dow Jones Industrial Average (INDEX: DJI).

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 $4,406.25 low volume area (LVNode) pivot puts in play the $4,417.75 LVNode. Initiative trade beyond the $4,417.75 LVNode could reach as high as the $4,428.25 and $4,438.50 Fibonacci price extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,406.25 LVNode puts in play the $4,392.75 micro-composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,381.75 untested point of control (VPOC) and $4,365.25 LVNode.

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 6:30 AM ET.

News And Analysis

Markets primed for Powell second term at risk from surprise pick.

China typhoons create latest supply-chain threat as ports close.

Economic data positive for risk but business cycle risks building.

New York City to require proof of vaccination for indoor activities.

Asia-Pacific on track for a strong rebound although scars will last.

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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