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Commentary

Market Commentary For 2/16/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: U.S. stock index futures auctioned higher, over the holiday weekend, as investors remained optimistic on the progress of coronavirus relief.

What Does It Mean: After a v-pattern recovery and sideways trade in the weeks prior, stock index futures auctioned out of prior-balance and -range, via Friday’s end-of-day spike.

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

Adding, the spike makes it easy to spot the shift from balance (i.e., the transition from two- to one-time frame trade). For the entirety of Friday’s session, prices rotated in the face of increased buying interest, as observed by volume delta. At the outset, buying pressure looked as thought it was absorbed by sellers. Eventually, the rise in delta was resolved when participants broke through a ledge of responsive selling, and established record highs.

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

What To Expect: Tuesday’s regular session (9:30 AM – 4:00 PM ET) will likely open outside of prior-balance and -range, suggesting the potential for immediate directional opportunity.

This comes alongside a resumption in trend and an overnight rally-high at $3,959.25.

More On Overnight Rally Highs: Typically, there is a low historical probability associated with overnight rally-highs ending the upside discovery process.

Given the spike, balance-break and subsequent resumption in trend, as well as the overnight high (ONH), participants are aware that favorable opportunities primarily rest on the long-side.

Thus, given the aforementioned dynamics, the following frameworks ought to be applied.

In the best case, the S&P 500 opens and remains above the $3,919.75 spike base, confirming last week’s higher prices. In the worst case, the S&P 500 auctions below the $3,919.75 spike base.

Trade below the spike base would be the most negative outcome and could trigger a new wave of downside discovery, repairing some of the poor structures left in the wake of the aforementioned advance.

Levels Of Interest: $3,919.75 spike base.

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Commentary

Market Commentary For The Week Ahead: ‘To The Moon’

Key Takeaways:

  • Positive earnings revisions nearing records
  • Equity mutual funds attract strong inflows.
  • Multi-asset funds raising equity allocations.

What Happened: U.S. stock indexes resolved a week-long trading range, Friday.

What Does It Mean: As the new administration looked to advance the status of coronavirus relief, U.S. stock index futures established record highs.

This comes as stock indexes, particularly the S&P 500, traded sideways after a rapid de-risking event associated with the GameStop Corporation (NYSE: GME) crisis, and subsequent v-pattern recovery.

More On The V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation.

As stated on Friday, the tight trading range is most likely attributable to the large February monthly options expiration (OPEX), after which, the interest at the $3,900.00 S&P 500 option strike will roll-off. 

Graphic 1: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week ending February 12, 2021. Activity in the option market was primarily concentrated in short-dated tenors near $390, a strike that corresponds with $3,900.00 in the cash-settled S&P 500 Index (INDEX: SPX).

Why’s this? Most funds are committed to holding long positions. In the interest of lower volatility returns, these funds will collar off their positions, selling calls to finance the purchase of downside put protection.

As a result of this activity, option dealers are long upside and short downside protection.

This exposure must be hedged; dealers will sell into strength as their call (put) positions gain (lose) value and buy into weakness as their call (put) positions lose (gain) value.

Now, unlike theory suggests, dealers will hedge call losses (gains) quicker (slower). This leads to “long-gamma,” a dynamic that crushes volatility and promotes momentum, observed by lengthy sprints, followed by rapid de-risking events as the market transitions into “short-gamma.”

If the interest near $3,900.00 S&P 500 is not rolled up in price and out in time, then option hedging requirements will change.

However, it is important to note that, in recent days, some exposure has been rolled up in price and out in time. This suggests an inclination by participants to maintain long exposure through OPEX, a day that would mark an end to pinning (which we’ve seen over the past weeks).

One such example can be seen below.

Graphic 4: Purchase of call positions higher in price and farther out in time in the cash-settled S&P 500 Index

What To Do: In coming sessions, participants will want to pay attention to the $3,919.75 spike base and $3,928.25 balance-area high.

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

Balance-areas make it easy to spot change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).

Given the spike out of balance, the following frameworks ought to be applied. 

In the best case, the S&P 500 opens and remains above the $3,919.75 spike base, confirming last week’s higher prices. In the worst case, the S&P 500 auctions below the $3,919.75 spike base.

Trade below the spike base would be the most negative outcome and may trigger a new wave of downside discovery, repairing some of the poor structures left in the wake of the aforementioned advance.

Graphic 5: Profile overlays on a 30-minute candlestick chart of the Micro E-mini S&P 500 Futures.

Conclusions: The go/no-go level for next week’s shortened holiday trade is $3,919.75. Trade below this level suggests markets are not yet ready to rally.

Levels Of Interest: $3,919.75 spike base.

Cover photo by Pixabay, from Pexels.

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Commentary

Market Commentary For 2/12/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: As the new administration pushes approval of a $1.9 trillion coronavirus relief plan, alongside the approval of another $14 billion for pandemic-hit airlines and signs of improve in the labor market, U.S. stock index futures traded sideways, in prior-balance and -range.

What Does It Mean: Market’s were range-bound after a rapid de-risking event associated with the GameStop Corporation (NYSE: GME) crisis, and subsequent v-pattern recovery.

Pictured: 4-hour profile chart of the Micro E-mini S&P 500 Futures

The tight trading range is most attributable to the large February monthly options expiration (OPEX), after which, the interest at the $3,900.00 S&P 500 option strike will roll-off. Why’s this? Most funds are committed to holding long positions. In the interest of lower volatility returns, these funds will collar off their positions, selling calls to finance the purchase of downside put protection.

As a result of this activity, option dealers are long upside and short downside protection.

The exposure must be hedged: dealers sell into strength as their call (put) positions gain (lose) value and buy into weakness as their call (put) positions lose (gain) value.

Now, unlike theory suggests, dealers will hedge call losses (gains) quicker (slower). This leads to “long-gamma,” a dynamic that crushes volatility and promotes momentum, observed by lengthy sprints, followed by rapid de-risking events as the market transitions into “short-gamma.”

If the interest near $3,900.00 S&P 500 is not rolled up in price and out in time, then option hedging requirements will change.

The absence of strong fundamentally-driven buying (as we’ve seen with such things as DIX), can have serious implications on price action.

More On DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market making side) — we can measure buying pressure.
Pictured: DIX by Squeeze Metrics

However, it is important to note that, in recent days, some exposure has been rolled up in price and out in time.

One such example can be seen below.

Pictured: Purchase of call positions higher in price and farther out in time in the cash-settled S&P 500 Index

What To Expect: Friday’s regular session (9:30 AM – 4:00 PM ET) will likely open inside of prior-balance and -range, suggesting limited potential for immediate directional opportunity.

Given dynamics discussed in the prior section, the odds of substantial change are low, so long as broad market indices, like the S&P 500, remain in balance (i.e., range-bound).

Also, trading in a prominent area of high-volume ($3,900.00) will likely make for a volatile session as such areas denote the market’s most recent perception of value and offer favorable entry and exit, hence the two-sided trade.

More On 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.

Going forward, participants will look to the overnight rally-high at $3,928.25, and low-volume structure beneath the $3,880.00 HVNode, which offered responsive buyers favorable entry during Wednesday’s intraday liquidation break.

More On Overnight Rally Highs: Typically, there is a low historical probability associated with overnight rally-highs ending the upside discovery process.

More On Liquidation Breaks: The profile shape in the S&P 500 suggests participants were “too” long and had poor location.

That said, the following frameworks apply.

In the best case, the S&P 500 remains rotational, at or above the $3,900.00 HVNode. In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below the $3,880.00 HVNode, would favor continuation as low as the $3,830.75 HVNode.

As stated yesterday, major change will be identified with trade above the $3,928.25 overnight rally-high, and below the $3,878.50 regular-trade low.

Levels Of Interest: $3,928.25 overnight rally-high, $3,900.00 HVNode, $3,878.50 regular-trade low.

Categories
Commentary

Market Commentary For 2/11/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: After a volatile Wednesday, U.S. stock index futures rose alongside fiscal stimulus and vaccine optimism, ahead of releases that would shine light on the labor market recovery.

What Does It Mean: After a gap open, participants sold stock indexes into prior value, yesterday.

This comes ahead of the large February monthly options expiration (OPEX), after which, the interest at the $3,900.00 S&P 500 option strike will roll-off. As a result, stickiness near the $3,900.00 high-volume area (HVNode) will likely cease in the absence of option hedging requirements.

More On 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. 
Pictured: Micro E-mini S&P 500 Future.

Further, we have numerous pieces of context to unpack prior to getting into today’s outlook on trade.

First, the v-pattern recovery after the recent de-risking event suggests room for higher. Second, the market is stuck in a long-gamma environment that favors less volatility (as witnessed during Wednesday’s muted intra-day sell-off and recovery). Third, the S&P 500 is trading just shy of $3,940.00, a primary upside target based on a multi-month balance-area projection.

More On The V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation. 

More On Gamma: Gamma is the sensitivity of an option to changes in underlying price. Dealers that take the other side of option trades hedge their exposure to risk 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.
Graphic 1: SpotGamma data suggests S&P 500 at or above “Long-Gamma” juncture.

What To Expect: Thursday’s regular session (9:30 AM – 4:00 PM ET) will likely open inside of prior-range, suggesting limited potential for immediate directional opportunity.

Adding, given dynamics discussed in the prior section, the odds of substantial change are low, so long as broad market indices, like the S&P 500, remain range bound. Also, trading in a prominent area of high-volume ($3,900.00) will likely make for a volatile session as such areas denote the market’s most recent perception of value and offer favorable entry and exit, hence the two-sided trade.

Going forward, participants will look to the overnight rally-high at $3,928.25, and low-volume structure beneath the $3,880.00 HVNode, which offered responsive buyers favorable entry during Wednesday’s intraday liquidation break.

More On Overnight Rally Highs: Typically, there is a low historical probability associated with overnight rally-highs ending the upside discovery process.

More On Liquidation Breaks: The profile shape in the S&P 500 suggests participants were “too” long and had poor location.

Knowing participants are doing a good job of defending their ~7% advance, a non-typical weekly trading range, after taking out the 127.20% price extension, a typical recovery target, and leaving minimal excess (i.e., a proper end to price discovery) at the high, odds point to the increased potential for higher trade or balance in the coming session(s).

That said, the following frameworks apply.

In the best case, the S&P 500 remains rotational, at or above the $3,900.00 HVNode. In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below the $3,880.00 HVNode, would favor continuation as low as the $3,830.75 HVNode.

Major change will be identified with trade above the $3,928.25 overnight rally-high, and below the $3,878.50 regular-trade low.

Levels Of Interest: $3,928.25 overnight rally-high, $3,900.00 HVNode, $3,878.50 regular-trade low.

Categories
Commentary

Market Commentary For 2/10/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: Alongside optimism around an economic rebound, U.S. stock index futures established record all-time highs, overnight, before trading back into range.

What Does It Mean: On the heels of a de-risking event and v-pattern recovery, indices, like the S&P 500, maintained higher prices.

This price action occurred in the face of bearish undercurrents, highlighted in past commentary.

Important to note, however, is a pick up in call-side activity in the SPDR S&P 500 ETF Trust (NYSE: SPY), the largest ETF that tracks the S&P 500. This comes alongside the S&P 500’s re-entry into long-gamma (Graphic 1) and rotation near the $3,900 high-open interest strike.

Further, the addition of derivative exposure at higher strikes (Graphic 2), farther out in time, suggests an inclination by participants to maintain long exposure through February’s monthly options expiration (OPEX), a day that often marks an end to pinning (which we’ve seen over the past week).

More On The V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation. 

More On Gamma: Gamma is the sensitivity of an option to changes in underlying price. Dealers that take the other side of option trades hedge their exposure to risk 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.
Graphic 1: SpotGamma data suggests S&P 500 at or above “Long-Gamma” juncture.
Graphic 2: Option Order Flow.

What To Expect: Wednesday’s regular session (9:30 AM – 4:00 PM ET) will likely open outside of prior-balance and -range, suggesting the potential for immediate directional opportunity.

This comes after participants traversed over 7%, a non-typical weekly trading range, taking out the 127.20% price extension, a typical recovery target.

Given how far the discovery process has come, attention is drawn to the overnight high. Typically, there is a low historical probability associated with overnight rally-highs ending the upside discovery process. Add on the fact that Tuesday’s regular trade left minimal excess (i.e., a proper end to price discovery) at the high, odds point to the increased potential for higher trade or balance in the coming session(s).

Given that reference, the following frameworks apply.

In the best case, the S&P 500 does some backfilling to repair poor structures left in the wake of strong initiative buying overnight. In such a case, participants would look for responsive buying to surface at or above the $3,912.25 regular-trade high.

In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below the $3,908.75 high-volume area (HVNode), would favor continuation as low as the $3,900.00 and $3,880.00 HVNodes.

More On 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.

Levels Of Interest: $3,908.75 HVNode.

Categories
Commentary

Market Commentary For 2/9/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: U.S. stock index futures established record all-time highs Monday before trading back into range.

What Does It Mean: On an end-of-day spike, U.S. stock index futures established new all-time highs.

This price action occurred on the heels of a quick de-risking event and v-pattern recovery, alongside non-participatory speculative flows, a divergence in the DIX, and the market’s re-entry into long-gamma.

More On The V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation. 

More On Speculative Flows: Participants looking to capitalize on either upside or downside through the purchase and sale of options, the right to buy or sell an asset at a later date and agreed upon price.

More On DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market making side) — we can measure buying pressure.

More On Gamma: Gamma is the sensitivity of an option to changes in underlying price. Dealers that take the other side of option trades hedge their exposure to risk 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.
Graphic 1: SpotGamma data suggests S&P 500 at or above “Long-Gamma” juncture.

Important to note: unlike in prior sessions, participants saw some change in the undercurrents. A divergence between price (lower) and cumulative volume delta (higher). This divergence resolved itself in the last hour of trade on Monday.

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

What To Expect: Tuesday’s regular session (9:30 AM – 4:00 PM ET) will likely open inside a spike, within prior-balance and -range, suggesting minimal directional opportunity. This comes after participants traversed nearly 7%, a non-typical weekly trading range.

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

Further, given how far the discovery process has come, attention is drawn to a few key references.

The first is the end-of-day spike. Trade below the $3,899.00 spike base would be the most negative outcome and may trigger a new wave of downside discovery that would repair some of the poor structures left in the wake of the aforementioned advance.

The second key reference is the overnight high. Typically, there is a low historical probability associated with overnight rally-highs ending the upside discovery process. Add on the fact that Monday’s regular trade left minimal excess (i.e., a proper end to price discovery) at the high, odds point to the potential to trade higher in the coming session(s).

Given those key references, the following frameworks apply.

In the best case, the S&P 500 does some backfilling to repair poor structures left in the wake of strong initiative buying. In such a case, participants would look for responsive buying to surface at or above the $3,880.00 high-volume area (HVNode). 

In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below the $3,880.00 HVNode, would favor continuation as low as the $3,794.75 and $3,727.75 HVNodes.

More On 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.

Today’s go/no-go level is the $3,899.00 spike base. Below, would portend downside discovery and structural repair. At or above denotes balance or continued upside discovery.

Levels Of Interest: $3,899.00 spike base.

Categories
Commentary

Market Commentary For 2/8/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: U.S. stock index futures established record all-time highs overnight, alongside hopes of a speedy economic recovery, as a result of pandemic relief efforts.

What Does It Mean: After a quick de-risking event and v-pattern recovery, U.S. stock indexes are positioned for further upside, as high as the 100% price projection, which happens to be above $4,000.00, a primary target in the S&P 500. According to The Market Ear, similar risk rallies have happened after hedge fund de-grossing events; now, “Equities are rising along higher yields, dollar and [volatility], and the magic word here is discounting inflation.”

Important to note also is the persistent presence of bearish undercurrents, as evidenced by non-participatory speculative flows and delta, as well as a divergence in the DIX.

More On The V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation. 

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

More On DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market making side) — we can measure buying pressure.

More On Speculative Flows: Participants looking to capitalize on either upside or downside through the purchase and sale of options, the right to buy or sell an asset at a later date and agreed upon price.

What To Expect: Monday’s regular session (9:30 AM – 4:00 PM ET) will likely open on a gap, outside of prior-balance and -range, which — in normal circumstances — suggests the potential for immediate directional opportunity. However, market participants must not discount how far the discovery process has come.

Over 11 sessions (overnight and regular-trade), participants traversed nearly 7%, a non-typical weekly trading range. Adding, the S&P 500 took out its $3,900.00 price extension (i.e., a typical recovery price target) overnight, before leaving minimal excess at the high (i.e., a proper end to price discovery).

Now, in light of the low historical probability associated with overnight rally-highs ending the upside discovery process, the odds favor (1) backfilling or (2) balance before a participants restart the upside discovery process.

So, in the best case, the S&P 500 does some backfilling to repair poor structures left in the wake of strong initiative buying. In such a case, participants would look for responsive buying to surface at or above the $3,840.00 high-volume area (HVNode). In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below the $3,840.00 HVNode, would favor continuation as low as the $3,794.75 and $3,727.75 HVNodes.

More On 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.

Today’s go/no-go level is the $3,880.00 HVNode. Below, would portend downside discovery and structural repair. At or above denotes balance, a sign that the market is awaiting new information to make its next move.

Levels Of Interest: $3,880.00 HVNode.

Bonus: It’s very tough to read the market at this juncture.

Buying has run out (as evidenced by the aforementioned bearish undercurrents) and it’s as if market risks are not being priced in correctly, an opinion shared by Nomura’s Charlie McElligott.

According to McElligott, crash and tail risk is holding back dealers from supplying volatility amid “a near-endless need for skew/forward vol/convexity from hedgers.” In an environment in which true fundamental buying is absent, flows as a result of activity in the derivatives market become increasingly impactful.

Adding, as the Heisenberg Report states, “markets are increasingly susceptible to the self-referential, flows-volatility-liquidity feedback loop (colloquially: the ‘doom loop’) and other manifestations of VaR shocks. Long periods of apparent calm hide an underlying fragility in true ‘stability breeds instability’ fashion.”

As a result of this new regime, as stated in the “What To Expect” section above, dealers have a difficult time taking the other side. Due to this, market participants see a persistent bid in volatility, a factor preventing many systematic and hedge fund strategies from going “all-in” on the long-side.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Ping-Pong’

Quote Of The Week: Excessive determinism is almost always the biggest enemy of stability. This seeming contradiction is behind the concept of metastability which captures the mode of market functioning in the last years. Metastability is what seems stable, but is not — a stable waiting for something to happen. [An] avalanche is a good example of metastability to keep in mind — a totally innocuous event can trigger a cataclysmic event (e.g., a skier’s scream, or simply continued snowfall until the snow cover is so massive that its own weight triggers an avalanche).

Quote by Aleksandar Kocic, Managing Director at Deutsche Bank AG (NYSE: DB), from Heisenberg Report.

Key Takeaways:

  • V-pattern recovery suggests higher prices.
  • Risks offset and funds looking to re-gross.
  • Dip presented a favorable buy opportunity.

What Happened: In light of a v-pattern recovery, after a quick de-risking event, U.S. stock indexes are positioned for further upside, as high as the 100% price projection, which happens to be above $4,000.00, a primary target in the S&P 500.

More On The V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation. 

What Does It Mean: This positive price action is happening in the context of bearish undercurrents, as evidenced by non-participatory speculative flows and delta, as well as a divergence in the DIX.

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

More On DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market making side) — we can measure buying pressure.

More On Speculative Flows: Participants looking to capitalize on either upside or downside through the purchase and sale of options, the right to buy or sell an asset at a later date and agreed upon price.

Adding, according to The Market Ear, similar risk rallies have happened after hedge fund de-grossing events; now, “Equities are rising along higher yields, dollar and [volatility], and the magic word here is discounting inflation.”

Further, since price pays, participants ought to discount the bearish undercurrents, and position themselves for upside. Hedge funds are doing so, as evidenced by an increase in gross exposures (Graphic 1), alongside other speculative participants that look to capitalize on their opinions through the options market (Graphic 2). 

Graphic 1: JPMorgan Chase & Co. (NYSE: JPM) data suggests normalization as “HFs add back to gross exposures.”
Graphic 2: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust, for the week ending February 6, 2021.

Last week, per Graphic 2, the SPDR S&P 500 ETF Trust, the largest ETF that tracks the S&P 500, saw a rise in purchases of short-dated call and put options. Given the tenor (i.e., the length of time remaining before contract expiration), there’s a lack of long-term commitment to direction.

Adding, early and late in the week, the purchase of put options dominated. This suggests participants were either looking to protect against or capitalize on downside. In the middle of the week, participants were looking to protect against or capitalize on upside. 

More On Options: If an option buyer was short (long) stock, he or she would buy a call (put) to hedge upside (downside) exposure. Option buyers can also use options as an efficient way to gain directional exposure.

The above, alongside the market’s re-entry into long-gamma (Graphic 3) and a normalization of the VIX futures term structure (see Graphic 4) in which longer-dated VIX expiries are more expensive, suggests the potential for less risk and volatility in equity markets.

More On Gamma: Gamma is the sensitivity of an option to changes in underlying price. Dealers that take the other side of option trades hedge their exposure to risk 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.

Graphic 3: SpotGamma suggests S&P 500 at or above “Long-Gamma” juncture.
Graphic 4: VIX Futures Term Structure per vixcentral.com.

What To Expect: U.S. stock indexes are best positioned for further balance or upside discovery.

Graphic 5: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

In Graphic 5, the highlighted zones denote high-volume areas (HVNodes), or valuable areas to transact.

More On 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.

Last Monday, participants found acceptance in prior low-volume. Thereafter, discovery was volatile and quick as participants looked to areas of high-volume for favorable entry and exit (e.g., where the market spent the majority of its time Tuesday through Thursday).

On Friday, the S&P 500 left the HVNode near $3,840.00. As stated, HVNodes can be thought of as building blocks — they also denote areas of supply and demand. In this case, $3,840.00 can now be thought of as an area of demand. The primary strategy is to respond to probes into these supply (i.e., selling responsively) and demand (i.e., buying responsively) areas as they offer favorable entry and exit.

What To Do: Participants will want to pay attention to last Thursday’s $3,855.00 Virgin Point Of Control, or VPOC (i.e., the fairest price to do business in a prior session), and end-of-day spike, as well as the $3,840.00 HVNode.

More On POCs: POCs (like HVNodes described above) 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.

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

Given the above references, the following frameworks ought to be applied.

In the best case, the S&P 500 does some backfilling to repair aforementioned poor structures. In such a case, participants would look for responsive buying to surface at or above the $3,840.00 HVNode

In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below the $3,840.00 HVNode, would favor continuation as low as the $3,794.75 and $3,727.75 HVNodes.

Note that the $3,727.75 HVNode corresponds with the $372 SPY put concentration, which may serve as a near-term target, or bottom, for a sell-off. 

Graphic 6: Profile overlays on a 15-minute candlestick chart of the Micro E-mini S&P 500 Futures.

Conclusions: Simplicity is key here.

Participants ought to look for favorable areas to transact, such as those high-volume areas in the S&P 500 featured in Graphic 5.

Levels Of Interest: $3,840.00 HVNode.

Photo by Josh Sorenson from Pexels.

Categories
Commentary

Market Commentary For 2/5/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: Ahead of data on employment, alongside the passage of a budget plan to advance $1.9 trillion in COVID aid, U.S. stock index futures rose overnight.

What Does It Mean: Given a v-pattern recovery, U.S. stock indexes are positioned for further upside, as high as the 100% price projection, which happens to be near $4,000.00 in the S&P 500.

This positive price action is happening in the context of bearish undercurrents as evidenced by non-participatory speculative flows, delta (i.e., non-committed buying as measured by volume delta), and a divergence in DIX, a proxy for buying derived from short sales (i.e., liquidity provision on the market making side).

Since price pays, participants ought to discount these undertones and position themselves for further upside discovery.

What To Expect: Friday’s regular session (9:30 AM – 4:00 PM ET) will likely open outside of prior-balance and -range, suggesting the potential for immediate directional opportunity.

Currently, the S&P 500 is rotating below the $3,884.75 projection, a typical target on a break from balance. Below current price lies Thursday’s $3,855.00 Virgin Point Of Control, or VPOC (i.e., the fairest price to do business in a prior session).

Noting: POCs (like HVNodes described below) 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.

Further below is a the $3,840.25 HVNode. As stated in prior sessions, HVNodes can be thought of as building blocks — they also denote areas of supply and demand. The primary strategy is to respond to probes into these supply (i.e., selling responsively) and demand (i.e., buying responsively) areas as they offer favorable entry and exit.

In the coming session, participants will want to pay attention to Thursday’s end-of-day spike and overnight all-time high (ONH).

Spike’s mark the beginning of a break from value and, in this case, would support the bullish thesis as long as participants, during regular trade, spend time above the spike base ($3,857.75). Adding, there is a low historical probability that overnight rally-highs end the upside discovery process.

For today, the following frameworks ought to be applied.

In the best case, the market will remain above, or find acceptance at (in the form of rotational trade) the $3,857.75 spike base. In the worst case, responsive sellers appear and restart the downside discovery process.

A break above the $3,886.25 ONH, participants may see discovery as high as $3,900.00, a balance-area extension (i.e., another balance-break target). A break below the prior RTH Low ($3,830.25), participants may see prices as low as the $3,799.00 balance-area low.

Levels Of Interest: $3,886.25 ONH, $3,857.75 spike base, $3,830.25 RTH Low.

Categories
Commentary

Market Commentary For 2/4/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: U.S. stock index futures balanced in prior-range, as evidenced by a lack of directional resolve.

What Does It Mean: After a rapid de-grossing and v-pattern recovery, stock indexes are nearing an important hurdle.

In particular, the S&P 500 has to contend with a transition into long-gamma.

Gamma is the sensitivity of an option to changes in underlying price. Dealers that take the other side of option trades hedge their exposure to risk 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.

Adding: Here’s a good explanation I wrote regarding the derivative market’s impact on the equity market.

Graphic 1: SpotGamma suggests S&P 500 nearing “Long-Gamma” territory.

Further, given the aforementioned v-pattern recovery, a price sequence that ought to be followed by further price discovery, as high as the 100% price projection, which happens to be near $4,000.00 in the S&P 500, market participants ought to also pay attention to divergences popping up across different indices.

To be more specific, Wednesday’s regular trade in the Nasdaq-100 showed weakness relative to the S&P 500. In the end, participants established a neutral-center day on S&P 500 and neutral-extreme down day in the Nasdaq-100.

On a neutral-center day, participants test both extremes before closing an index in range, suggesting minimal confidence and balance. On a neutral-extreme day, participants test both extremes before closing at on extreme, suggesting increased confidence and imbalance.

The profile shape in the S&P 500 confirms balance while in the Nasdaq-100 it’s likely that participants were “too” long and had poor location.

What To Expect: Thursday’s regular session (9:30 AM – 4:00 PM ET) will likely open inside of prior-balance and -range, suggesting limited directional opportunity and high volatility.

Currently, the S&P 500 is rotating at the $3,842.00 high-volume area (HVNode).

As stated, HVNodes can be thought of as building blocks — they also denote areas of supply and demand. In this case, $3,842.00 can be thought of as an area of supply. The primary strategy is to respond to probes into these supply (i.e., selling responsively) and demand (i.e., buying responsively) areas as they offer favorable entry and exit.

In the coming session, participants will want to pay attention to Tuesday’s overnight high ($3,483.50) and Monday’s regular-trade low ($3,799.00). The reason being, between those two references is a developing balance area. Balance-areas make it easy to spot change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).

Added Note: There is a low historical probability that overnight rally-highs end the upside discovery process.

From an order flow perspective, the absence of aggressive buying suggests more of the same — balance or downside to repair poor structures left in the wake of short-covering and initiative buying in the day’s prior.

In the simplest way, high-volume areas can be thought of as building blocks. 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. 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 value for favorable entry or exit.

For today, the following frameworks ought to be applied.

In the best case, the market will initiate above, or find acceptance at (in the form of rotational trade) the $3,842.00 HVNode. In the worst case, responsive sellers appear and restart the downside discovery process. Any break that finds increased involvement below the $3,799.00 regular-trade low, would favor continuation as low as the $3,727.75 HVNode.

The go/no-go for upside is the $3,843.50 overnight-trade high (ONH). The go/no-go for downside is $3,799.00 regular-trade low (RTH Low). Anything in-between portends responsive, non-directional trade.

A break above the ONH, participants may see discovery as high as $3,880.00, a balance-area projection (i.e., typical balance-break target). A break below the RTH Low, participants may see prices as low as $3,750.00, another balance-area projection.

Levels Of Interest: $3,843.50 ONH, $3,799.00 RTH Low.