Categories
Commentary

Daily Brief For November 30, 2021

Daily commentary for U.S. broad market indices.

What Happened

Overnight, equity index futures auctioned sideways to lower. The Russell 2000 led the decline while the Nasdaq 100 buoyed the S&P 500 as yields were a touch lower.

Though volatility is bid, related metrics suggest the removal of fear and added market stability. 

In short, conditions aren’t as bad as they were, Friday. 

Ahead is data on the S&P Case-Shiller Home Price Index (9:00 AM ET), Chicago PMI (9:45 AM ET), Consumer Confidence (10:00 AM ET). Scheduled also is testimony by Federal Reserve and Treasury members (10:00 AM and 1:00 PM ET).

Graphic updated 6:30 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. 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. Learn the implications of volatility, direction, and moneyness. 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

On lackluster intraday breadth and divergent market liquidity metrics, the best case outcome occurred, yesterday, evidenced by a decisive move away from intraday value (i.e., the price levels at which 70% of the day’s volume occurred), into an area of resting liquidity that coincided with a volume-weighted average price (VWAP), anchored from the start of the decline. 

To note, VWAPs are metrics 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.

Moreover, given the divergences (one is pictured below), we can surmise that Monday’s recovery was responsively sold. 

Given the push and pull between the big indices, as well as lackluster breadth and market liquidity metrics, there is increased potential for sideways trade; participants are likely to base for a directional move in anticipation of new information in regards to dynamics like COVID-19, monetary policy evolution, and the like.

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is attempting to bracket/balance).

Context: Keeping it to the point, today.

There is less fear coming into Tuesday’s session than there was Friday. 

This dynamic is most clearly visualized with the VIX futures term structure which is much less flat, so to speak, than it was. 

Graphic: VIX term structure.

Though one could surmise that there is less risk of instability, as a result, rather, we should think about it as the demand for protection through time. The demand has cooled.

In building on that, we saw the market enter into a destabilizing environment characterized by counterparties to options trades selling into weakness and buying into strength. 

After a brief exit from that environment, Monday, an overnight liquidation has us on the cusp of re-entry. With options activity most concentrated in shorter-dated tenors where the sensitivity of options to direction is higher, if we will, then the expectation is that we realize more volatility.

That’s not to say that the market must trade lower. No. Instead, sideways trade as investors seek more information (in regards to COVID-19, monetary policy moderation, and the like) to base a directional move is just as likely. 

In that case, the short-dated, out-of-the-money protection that was demanded will quickly evaporate; associated hedging flows (i.e., the buy-back of short stock/futures hedges) ought to support the market. 

Should participants’ fears be assuaged, the aforementioned flows could play into a seasonally-aligned rally into Christmas. 

For that thesis to not play out, there would have to be increased participation below $4,600.00 in the S&P 500 (i.e., value, internals, market liquidity must support downside price discovery).

Graphic: Daily changes in the CBOE Volatility Index (INDEX: VIX) greater than 50% precede positive S&P 500 performance.

Expectations: As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the lower part of a negatively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate 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.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,618.75 high volume area (HVNode) puts in play the $4,647.25 HVNode. Initiative trade beyond the latter HVNode could reach as high as the $4,674.25 micro composite point of control (MCPOC) and $4,691.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,618.75 HVNode puts in play the $4,590.00 balance boundary (BAH). Initiative trade beyond the BAH could reach as low as the $4,574.25 HVNode and $4,551.75 LVNode, or lower.

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile.

Charts To Watch

Graphic: (NYSE: SPY). (S~$453, R~$465). S is for support. R is for resistance.

Definitions

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.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

Responsive Buying (Selling): Buying (selling) in response to prices below (above) an area of recent price acceptance.

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). 

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

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).

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 Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

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.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s