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Commentary

Market Commentary For The Week Ahead: ‘Euphoria Is The Status Quo’

Key Takeaways:

  • Higher-time frame breakouts remain intact.
  • Volatility rises; markets are a tad euphoric
  • Equity funds went all in at the top, literally
  • Corporate credit outlook enhanced greatly. 
  • Earnings could rise faster than anticipated. 
  • Blue wave implies more stimulus, spending.
  • The bull market broadens as sectors rotate
  • M2 and yields break out; the Fed could act.

What Happened: As investors looked beyond a weak jobs report and political uncertainty, to added economic stimulus and the coming earnings season, U.S. index futures hit new highs.

Graphic 1: Profile overlays on a 15-minute candlestick chart of the Micro E-mini S&P 500 Futures

What To Expect: Friday’s session in the S&P 500 found initiative buying surface after a test of $3,774.75, the lower boundary of the low-volume area left in the wake of Thursday’s opening drive.

The long-liquidation and subsequent recovery left the market with minimal excess (i.e., a proper end to discovery) at the highs, and a strong close, taking out the overnight stat at $3,817.75 (which had low odds of remaining, given that overnight all-time highs rarely end the upside discovery process).

Noting: Excess forms after an auction has traveled too far in a particular direction and portends a sustained reversal. The absence of excess, in the case of a high, suggests not enough conviction; in such case participants will liquidate (i.e., back off the high) and strengthen the market, before following through.

In light of the market’s search for an area to establish balanced, two-sided trade, participants will come into Monday’s session knowing the following: 

  1. The multi-month upside breakout targeting S&P 500 prices as high as $4,000.00 remains intact.
  2. Prices are above all major moving averages, including the year-to-date volume-weighted average price (VWAP). 
  3. After the resolution of last Monday’s long-liquidation, the market shifted into price discovery mode, evidenced by higher prices and value migration.
  4. For numerous sessions, profile structures denoted the presence of short-covering, the result of old, weak-handed business emotionally buying to cover short positions, causing swift movement followed by a stalled advance, or two-sided intraday trade.
  5. The week ending January 8 established a 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 the multi-month upside breakout target at $4,000.
  6. Unsupportive speculative flows and delta (e.g., commitment of buying or selling) in some instances, as can be viewed by order flow graphics 2 and 3 below. 
  7. Alongside the long gamma narrative, in which dealers buy dips and sell rips to hedge their exposure, record options activity, among other dynamics, the S&P 500 closed near $3,800, a high open interest strike. For sustained upside directional resolve, participants would look for this exposure to roll up. 
Pictured: Divergent delta in the iShares Russell 2000 ETF (NYSE: IWM), one of the largest ETFs that track the Russell 2000
Pictured: Order flow in the SPDR S&P 500 ETF Trust (NYSE: SPY), the largest ETF that tracks the S&P 500
Graphic 4: S&P 500 tests the $3,800 high open interest strike, per SpotGamma

Given the above dynamics, the following frameworks apply for next week’s trade.

In the best case, the S&P 500 remains above its $3,762.25 high-volume node (HVNode). Expectations thereafter include continued balance or a response followed by initiative buying to take out the price extension at $3,847.75. 

Noting: Any structure that denotes meaningful buying continuation, not short-covering, would feature elongated, upside range expansion on committed volumes, as well as the migration of value. 

In the worst case, the S&P 500 initiates below its $3,762.25 HVNode. Expectations thereafter include a test of the minimal excess low near $3,732.75 (a LVNode). A break of Monday’s regular session (9:30 AM – 4:00 PM ET) low would jeopardize the bullish thesis. 

Two go, no-go levels exist; trade that finds increased involvement above $3,824.25 and below $3,775.25 would suggest a change in conviction. Anything in-between favors responsive trade.

Conclusions: In a GMO article, Jeremy Grantham expressed his opinion on recent market activity.

I am long retired from the job of portfolio management but I am happy to give my opinion here: it is highly probable that we are in a major bubble event in the U.S. market, of the type we typically have every several decades and last had in the late 1990s. It will very probably end badly, although nothing is certain. I will also tell you my definition of success for a bear market call. It is simply that sooner or later there will come a time when an investor is pleased to have been out of the market. That is to say, he will have saved money by being out, and also have reduced risk or volatility on the round trip. This definition of success absolutely does not include precise timing. (Predicting when a bubble breaks is not about valuation. All prior bubble markets have been extremely overvalued, as is this one. Overvaluation is a necessary but not sufficient condition for their bursting.) Calling the week, month, or quarter of the top is all but impossible.

Continuing, in addition to market participants reckoning with the uneven recovery, stimulus, trade, inflation, among other risks, they must also worry about something that’s arguably more important: price and value.

As of now, all broad-market indices are in an uptrend, evidenced by higher prices and value. A break below $3,600.00 in the S&P 500 would denote a substantial change in tone.

Levels Of Interest: $3,762.25 HVNode, $3,732.75 LVNode, $3,824.25 rally high, as well as the $3,847.75 price extension.

Bonus: Some opportunities unfolding in the week ahead.

Photo by Valdemaras D. from Pexels.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Hello, Goodbye’

Key Takeaways:

What Happened: Coming into the extended holiday weekend, on tapering volumes, U.S. index futures balanced for four regular trading sessions (9:30 AM – 4:00 PM ET), before breaking out.

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

What To Expect: Thursday’s session found initiative buying surface above the $3,731.00 high-volume node (HVNode), the market’s most recent perception of value.

Given four-sessions worth of unchanged value, and the failure to fill the gap beneath a weak low (i.e., a visual level that attracts the business of short-term, technically-driven market participants) at $3,714.50, participants will come into Monday’s session knowing the following:

  1. Amid Thursday’s late-day buying, price diverged from value.
  2. The overnight rally high at $3,747.75 was recovered (i.e., based on historical trade, there were low odds that the overnight all-time high would end the upside discovery process).
  3. The multi-month upside breakout targeting S&P 500 prices as high as $4,000.00 remains intact.

In light of the above dynamics, the following frameworks apply for next week’s trade.

In the best case, the S&P 500 remains above its $3,731.00 HVNode. Expectations thereafter include continued balance, or a response followed by initiative buying to take out the price extension at $3,756.75.

In the worst case, the S&P 500 initiates below its $3,731.00 HVNode. Expectations thereafter include a test of the weak, minimal excess low at $3,714.50, and subsequent follow-through as low as the $3,691.00 break-point. 

Noting: Excess forms after an auction has traveled too far in a particular direction and portends a sustained reversal. Absence of excess, in the case of a low, suggests minimal conviction; participants will cover (i.e., back off the low) and weaken the market, before following through.

Two go, no-go levels exist; trade that finds increased involvement above $3,752.75 and below $3,714.50 would suggest a change in conviction. Anything in-between favors responsive trade.

Conclusion: From an uneven recovery, stimulus, elections, trade, and the like, it helps to boil it down to what actually matters: price and value. 

Though risks remain, markets are pricing in the odds of a continued rebound. All broad-market indices are in an uptrend. A break below $3,600.00 in the S&P 500 would denote a substantial change in tone.

Pictured: Retest of the upside breakpoint on a weekly candlestick chart of the cash S&P 500 Index

Levels Of Interest: $3,752.75 rally-high, $3,714.50 weak low, $3,731.00 HVNode, $3,756.75 price extension, $3,691.00 break-point.

Bonus: Here is a look at some of the opportunities unfolding.

Photo by Max Walter from Pexels.

Categories
Commentary

‘Rising Tide Lifts All Boats’: Market Commentary For The Week Ahead

Key Takeaways:

What Happened: U.S. index futures auctioned to new all-time highs before weakening into Friday’s derivative expiry.

What Does It Mean: After participants established a rally-high in the December 9 overnight session, the S&P 500 liquidated down to the balance-area boundary near $3,625.00.

After the December 14 gap open on COVID-19 coronavirus vaccine and stimulus progress, for the remainder of the week, indices negated prior selling, establishing a new all-time high. Friday’s trade managed to repair some structural deficiencies left in the aforementioned advance.

Pictured: Profile overlays on a 65-minute candlestick chart of the Micro E-mini S&P 500 Futures

What To Expect: Friday’s session found responsive buyers surface at the low-volume node (LVNode) near $3,680.00. Low-volume areas denote directional conviction and ought to resist future auction rotations. Auctioning through the LVNode would foreshadow further rotation and trade as low as the balance-area low.

Given that the higher-time frame breakout remains intact and selling appears non-committal, participants will come into Monday’s session knowing the following:

  1. Both sentiment and positioning are historically stretched, while the recovery remains uneven
  2. Inflation remains cool due to the profound influence of disruptive innovation.
  3. U.S. Congress reaches deal on COVID-19 aid package, plans votes for Monday. 
  4. The decline in realized correlation due to factor and sector rotation, as well as the return of systematic option selling strategies will push the long-gamma narrative in which volatility is suppressed and the market pins or slowly rises in a range-bound fashion.
  5. The S&P 500’s higher-time frame breakout remains intact (see chart below); JPMorgan Chase & Co. (NYSE: JPM) confirms equities will rally short-term with the S&P 500 auctioning as high as $4,000.
  6. Despite high CAPE ratios, stock-market valuations aren’t that absurd.

Therefore, the following frameworks for next week’s trade apply.

In the best case, buyers maintain conviction and hold the index above the $3,680.00 LVNode. Auctioning below said reference denotes a change in conviction. Participants would then look for a response near the $3,667.75 HVNode. Failure to remain above the HVNode would portend rotation, further balancing. 

In the worst case, participants initiate below the $3,625.00 balance-area low, jeopardizing the higher-time frame breakout.

Conclusion: As BlackRock Inc (NYSE: BLK) said, “a rising tide lifts all boats”; though financial markets have largely priced in positive news surrounding vaccines and stimulus, the rally remains intact, bolstered by a drive for yield — technical factors as a result of systemic and hedge fund strategies, among other things.

Pictured: Retest of the upside breakpoint on a daily candlestick chart of the cash S&P 500 Index

Levels Of Interest: $3,740.75 and $3773.75 price extensions, $3,724.25 all-time rally high, the micro-composite HVNode at $3,707.75, $3,691.00, and $3,667.75, as well as the $3,680 LVNode and poor structure near the $3,625.00 balance-area low.

Bonus: Here is a look at some of the opportunities unfolding.

Photo by Fede Roveda from Pexels.