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Commentary

Daily Brief For September 21, 2021

Daily commentary for U.S. broad market indices.

Market Commentary

Equity index futures trade higher with commodities and yields. Volatility ebbs. 

  • Ahead is a 2-day FOMC meeting.
  • SPX below balance, 50-day SMA.
  • Conditions slowly start improving.

What Happened: End of day rally continued overnight with U.S. stock index futures negating much of yesterday’s liquidation. This comes alongside news questioning Evergrande’s ability to make good on its liabilities, as well as the Federal Reserve’s two-day policy meeting.

Ahead is data on building permits, housing starts, and the current account (8:30 AM ET).

Graphic updated 6:40 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

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 outside of prior-range and -value, suggesting a higher potential for immediate directional opportunity.

Gap Scenarios In Play: 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.

During the prior day’s regular trade, on weak intraday breadth and divergent market liquidity metrics, the worst-case outcome occurred, evidenced by trade below yesterday’s pivot, the $4,365.25 low volume area (LVNode). 

This trade is significant because it was an acceptance of the overnight gap, a willingness to transact at lower prices. We’re carrying forward the presence of emotional, multiple distribution structures left behind the initiative trade. Also, though the selling covered a lot of ground, it was measured and the CBOE Volatility Index (INDEX: VIX) is now down 20% from Monday’s peak. 

To note, coming into Monday’s liquidation, according to SqueezeMetrics, “the current combination of weak put flows and large customer vanna exposure” was fragile; “Historically, this means SPX down, VIX up.”

Adding, according to SpotGamma, it’s likely Monday’s liquidation was a combination of equity de-risking, combined with short gamma from options positioning. See definition below.

Analysts at JPMorgan Chase & Co (NYSE: JPM) support that belief: “The market sell-off that escalated overnight we believe is primarily driven by technical selling flows in an environment of poor liquidity, and overreaction of discretionary traders to perceived risks.”

Graphic: Tier1Alpha market research graphic via The Market Ear.

Coming into Tuesday’s regular trade, conditions have improved; now, the focus is the September 21-22 Federal Open Market Committee (FOMC) meeting ending Wednesday.

Moreover, for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,365.25 LVNode pivot puts in play the $4,393.75 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,425.00 untested point of control (VPOC) and $4,481.75 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,365.25 LVNode puts in play the $4,346.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,294.00 regular trade low (RTH Low) and $4,233.00 VPOC, or lower.

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

Definitions

Gamma: To note, gamma is the sensitivity of an option to changes in the underlying price. Those that take the other side and warehouse these risks hedge their exposure by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

News And Analysis

Megacap tech selloff hits $500B since Nasdaq 100 peak. 

Fintech SPACs pick up as revenue clarity allays concern.

J&J said a second COVID shot boosts protection to 94%.

Wall Street’s message on Evergrande: China has control.

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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