Categories
Commentary

Daily Brief For November 12, 2021

What Happened

Overnight, equity indices were flat-to-up while commodities and bonds were sideways to lower.

The prevailing narratives include the prospects of a Russian invasion of Ukraine, COVID-19 resurgence in the U.S., concerns over the pace of inflation and its impact on the economy, China developer debt payments, and the like. Your typical doom and gloom stuff!

Ahead is data on job openings, University of Michigan consumer sentiment, and five-year inflation expectations (10:00 AM ET).

Graphic updated 5:30 AM ET. Sentiment Neutral if expected /ES open is inside of 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 market liquidity metrics, the best case outcome occurred, evidenced by the balance and overlap of value areas in the S&P 500.

This activity, which suggests participants’ willingness to position for directional resolve, comes alongside the presence of poor structure, a dynamic that adds to technical instability.

Graphic: Divergent delta (i.e., non-committed selling 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 in balance).

Context: The aforementioned trade is happening in the context of a lot of big-picture dynamics such as the growth of derivatives exposure and tail risk, the heightened moneyness of nonmonetary assets, trends in seasonality, buybacks, earnings growth, inflation, and more.

Graphic: “Whenever the market has been up 20%+ YTD through to October (like e.g. THIS YEAR), it has *always* had an up month in November (albeit with a n=8). Basically I would say it speaks to the momentum in the market, which despite the September stumble seems pretty much alive and well.” – Callum Thomas

On the topic of inflation, the October consumer price index (CPI) is worrisome, according to some. 

“We think it is time to rethink positioning related to inflation,” Citigroup Inc (NYSE: C) strategists led by Scott Chronert wrote in a note. “A focus on sectors and industry groups negatively correlated to inflation provides a contrarian opportunity.” 

Citi sees value in consumer and health-care stocks, as a result of negative correlations to CPI.

Despite the hot prints, the CPI doesn’t paint the entire picture; it’s too soon to change rate-hike calculations, according to the Federal Reserve’s Mary Daly. 

Graphic: U.S. inflation, expected Fed rate increases via Bloomberg

That thinking brings me back to recent comments made by Ark Invest’s Cathie Wood.

Mainly, Wood feels that inflation is on its way out with a decline in the velocity of money and increased moneyness of nonmonetary assets.

A prime example of this is inflation in housing; “Ivy Zelman of Zelman Research came out this week. She made a fantastic call on the housing bubble and bust starting in 05-06, and she was right, just a little early. She is very concerned that the housing prices we’re seeing right now are not sustainable,” because of speculation, as well as iBuying and private equity. 

“This is unsustainable … and I’m wondering if even the housing market inflation is going to give way, here,” Wood added. 

For now, with more of the same – bullishness in the face of moderating monetary policy, strong retail participation, seasonality, and buybacks supporting the valuations we’re at, now – what other narratives are there to add (or roll forward)?

Given my interest in the options market – because option volumes are comparable to stock volumes and related hedging flows, as a result, represent an increased share of volume in underlying stocks – I’m in the camp of “the market is fragile, given current positioning.”

According to SpotGamma, single-stock exuberance of the past weeks fed into the S&P complex, itself, evidenced by a lack of interest in put options at lower strikes; the S&P 500 options strike with the largest negative gamma – delta sensitivity to underlying price – failed to roll higher, while the strike of the option with the largest positive gamma did. 

This came as investors marked the S&P 500 up to the $4,700.00 strike, at which positive gamma – delta sensitivity to underlying price – is highest. 

“As volatility continues to decline, the gamma of those options, which are now at the money, ought to increase, forcing counterparties to supply more liquidity,” SpotGamma explained.

Therefore, coming into this week, $4,700.00 was expected to be a magnet (or resistance) into that aforementioned pre-monthly options expiration (OPEX) weakness.

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. 

This was unless (1) volatility declined markedly, “a tailwind for the S&P complex as options slid[ing] down their term structure would cause dealers to continue covering their hedges in an asymmetric manner,” or (2) more capital was committed to options at higher strikes. 

Neither happened.

Instead, the CBOE Volatility Index (INDEX: VIX) was higher, with demand coming in across the front area of the VIX futures term structure. This suggested a demand for hedges and a reduction in the flows (e.g., vanna) that support sideways to higher trade. 

Pictured: SqueezeMetrics highlights implications of volatility, direction, and moneyness. The left orange marker is reflective of a basic reaction to call-buying (as observed during the rise of meme stocks). The right orange marker reflects a reaction to put-buying (as observed during the COVID-19 sell-off).

The implications of customers now covering their levered, long-delta exposure and demanding out-of-the-money hedges may have the effect of forcing counterparties to hedge in a manner that exacerbates underlying price movement to the downside (e.g., Tesla).

With that single-stock exuberance still reflected by positioning in the S&P, itself, as SpotGamma said: “This sets us up for what may be a volatile pre- and post-OPEX week.”
Graphic: S&P 500 (INDEX: SPX) options activity for Thursday, November 11, 2021. SHIFT shows increased volume of put options in strikes prices at and below current prices.

Expectations: As of 5:30 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a positively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Balance-Break Scenarios: A change in the market (i.e., transition from two-time frame trade, or balance, to one-time frame trade, or trend) ought to occur on a break of day-session balance.

We monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,647.25 high volume area (HVNode) puts in play the $4,673.00 untested point of control (VPOC)

Initiative trade beyond the VPOC could reach as high as the $4,695.25 micro composite point of control (MCPOC) and $4,711.75 regular trade high (RTH High), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,647.25 HVNode puts in play the $4,619.00 VPOC

Initiative trade beyond the VPOC could reach as low as $4,590.00, a prior balance area high (BAH), and $4,574.25 HVNode, or lower.

To note, a breach of Wednesday’s low likely puts the S&P 500 in a short-gamma environment.

Those participants that take the other side of options trades will hedge their exposure to risk by buying and selling the underlying. 

When dealers are short-gamma, they buy into strength and sell into weakness, exacerbating volatility. 

When dealers are long-gamma, they buy into weakness and sell into strength, calming volatility.

--

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.

What People Are Saying

Definitions

Cave-Fill Process: Widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

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.

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.

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.

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.

Categories
Commentary

Weekly Brief For September 12, 2021

Editor’s Note: Keeping it light today; the main takeaway is that we’re in a window of volatility and participants should maintain a cautiously bullish stance, for the time being. Skew makes it so we can hedge for little-to-no cost using complex spreads (more on this below).

Please note that levels in the below graphics should only be relied upon as rough areas of resistance and support due to the December contract roll. Updated levels to come later this week, after daily commentaries resume Thursday, September 16.

Thank you and take care!

Market Commentary

Equity index futures trade lower, last week, resolving a multi-week consolidation area.

  • Narratives around slower recovery rising.
  • Equity indices falling; SPX above 50-day.
  • Positioning risks mount case for volatility.
  • A couple trade ideas for the week ahead.

What Happened: U.S. stock index futures resolved lower, last week, alongside the evolution of some important dynamics with respect to the pace of the pandemic recovery and trend growth, non-seasonally aligned flows and positioning risks, as well as divergent sentiment. 

Of interest this week is data on the consumer price index, industrial production, retail sales, and some Fed manufacturing surveys. 

Graphic updated 12:00 PM ET Saturday. Sentiment Neutral if expected /ES open is inside of the prior day’s range. 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 approximation. 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: During the prior week’s regular trade, on weak intraday breadth and mostly divergent market liquidity metrics, the worst-case outcome occurred, evidenced by trade below a key micro-composite high volume area (HVNode). 

This activity resolved a multi-week consolidation area (ie., balance). 

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.

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).

To note, initially, participants had a tough time separating value and expanding range lower. 

This was evidenced by the minimal excess at Wednesday’s regular trade low (RTH Low), coupled with Thursday’s overnight response at the 20-day simple moving average (i.e., a visual level likely paid attention to by short-term, technically-driven market participants who generally are unable to defend retests). 

Graphic: S&P 500 loses the 20-day simple moving average. A loss of that level officially changes the tone; “We maintain a cautiously bullish stance.”

Given that action – the difficulty participants had in moving prices out and away from balance – the path of least resistance was not down; stronger sellers were not yet on board, I explained

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.

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.
Graphic: 30-minute profile chart of the Micro E-mini S&P 500 Futures and market liquidity, via Bookmap, for the SPDR S&P 500 ETF Trust (NYSE: SPY) coming into Thursday’s regular trade. Notice the cumulative volume delta (CVD) or buying and selling power as calculated by the difference in volume traded at the bid and offer. So, coming into Friday’s trade, stronger sellers were likely not yet on board.

The tone changed Friday when selling intensified; the 20-day simple moving average was lost and the S&P 500 closed the session on a spike lower, away from value.

Spike Rules In Play: 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, the aforementioned trade is happening in the context of peak growth and a moderation in the economic recovery, heightened valuations, the prospects of stimulus reduction, as well as non-seasonally aligned inflows, impactful options market dynamics, divergent sentiment, and fears of a mid-cycle transition.

The implications of these themes on price are contradictory

To elaborate, Morgan Stanley (NYSE: MS), Citigroup Inc (NYSE: C), and Goldman Sachs Group Inc (NYSE: GS) cautioned investors about equity outlooks. Of concern, in particular, is a rise in cases of the delta variant, tensions between inflation expectations and yields, as well as seasonality. 

Among other risks, as SpotGamma notes, “markets are fast approaching a window of volatility which could produce some pretty sharp volatility: 9/15 VIX expiration, 9/17 Quarterly OPEX and the 9/22 FOMC. This lineup is particularly interesting as we believe that expiration leads to a pickup in volatility.” Read more on SpotGamma’s perspectives, here

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. Based on his analysis, Pat sees that the “2 weeks prior to OPEX (e.g., 7/30/21 to 8/6/21 in this late-cycle) [have] been extremely bullish,” while “OPEX week returns peaked in 2016 and have trended lower since.”

SqueezeMetrics – which saw “the current combination of weak put flows and large customer vanna exposure” as fragile – echoes the risks of volatility adding “people are overexposed to changes in VIX, and will be hurt more than usual if VIX starts moving up. Historically, this means SPX down, VIX up.”

Moreover, for early trade next week, given an increased potential for heightened volatility and Friday’s end-of-day spike from value, participants may make use of the following framework.

If participants manage to find acceptance (i.e., spend multiple hours of trade) above the $4,467.00 spike base, then the odds of downside follow-through are lower. We’d look to maintain a cautiously bullish stance.

On the other hand, should participants have trouble maintaining prices above the $4,467.00 spike base, then the focus ought to be on big-picture risk management levels like the August 19, 2021 swing low and 50-day simple moving average.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 12:00 PM ET Saturday. Note that the roll to the December contract occurred on September 9, 2021. Therefore, levels in the above graphic should only be relied upon as rough areas of resistance and support. Updated levels to come Thursday, September 16, 2021.

Weekly Trade Idea

Please Note: In no way is the below a trade recommendation. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Options offer an efficient way to gain directional exposure. 

If an option buyer was short (long) stock, he or she could buy a call (put) to hedge upside (downside) exposure. Additionally, one can spread, or buy (+) and sell (-) options together, strategically.

Commonly discussed spreads include credit, debit, ratio, back, and calendar.

  • Credit: Sell -1 option closer to the money. Buy +1 option farther out of the money.
  • Debit: Buy +1 option closer to the money. Sell -1 option farther out of the money.
  • Ratio: Buy +1 option closer to the money. Sell -2 options farther out of the money. 
  • Back: Sell -1 option closer to the money. Buy +2 options farther out of the money.
  • Calendar: Sell -1 option. Buy +1 option farther out in time, at the same strike.

Typically, if bullish (bearish), sell at-the-money put (call) credit spread and/or buy a call (put) debit/ratio spread structured around target price. Alternatively, if the expected directional move is great (small), opt for a back spread (calendar spread). Also, if credit spread, capture 50-75% of the premium collected. If debit spread, capture 2-300% of the premium paid.

Be cognizant of risk exposure to direction (delta), time (theta), and volatility (vega). 

  • Negative (positive) delta = synthetic short (long). 
  • Negative (positive) theta = time decay hurts (helps).
  • Negative (positive) vega = volatility hurts (helps).

Trade Idea 1: SELL -1 1/2 BACKRATIO SPX 100 (Weeklys) 17 SEP 21 4350/4250 PUT @3.80 LMT

I’m neutral-to-bearish on the S&P 500 and I think the index may travel sideways to lower over the next week, past its key moving averages. I will structure a spread below the current index price, expiring in 1 week. I will buy the 4350 put option once (+1) and sell the 4250 put option twice (-2) for a $3.80 credit. Should the index not move to my target, I keep the $380 credit. Should it move to $4,250.00, past the 50-day simple moving average, I could make $10,380.00 at expiry. Should the index move past $4,150.00 or so, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the index moves lower.

If necessary, I will hedge the position by either (A) selling futures, (B) widening strikes, (C) buying a far out-of-the-money put option to cap downside in case of an unpredictable move lower, or (D) roll strikes down in price and out in time.

Trade Idea 2: SELL -1 1/2 BACKRATIO GOOGL 100 17 SEP 21 2775/2700 PUT @.90 LMT

I’m neutral-to-bearish on Alphabet Inc and I think the stock may travel sideways to lower over the next week, past its key moving averages. I will structure a spread below the current stock price, expiring in 1 week. I will buy the 2775 put option once (+1) and sell the 2700 put option twice (-2) for a $0.90 credit. Should the stock not move to my target, I keep the $90 credit. Should it move to $2,700.00, toward the 50-day simple moving average, I could make $7,500.00 at expiry. Should the stock move past $2,625.00 or so, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the stock moves lower.

If necessary, I will hedge the position by either (A) selling stock, (B) widening strikes, (C) buying a far out-of-the-money put option to cap downside in case of an unpredictable move lower, or (D) roll strikes down in price and out in time.

News And Analysis

Lenders continue to expect falling profits, refinancing demand.

Manchin seeing delay in Congress for vote on Biden’s agenda.

Massive decline in forbearances, down nearly 67% from peak. 

Oil prices continuing to fall as pandemic worries slow demand.

Moody’s: Democrats are at a fork in the road, may not take it.

COVID-19 and China risks won’t pass for years, some project.

Nasdaq talks market infrastructure, the real trends in volumes.

Bonds turning hot; European Central Bank redefines tapering.

What People Are Saying

Let’s Hang Out

Los Angeles, CA September 10-12

New York, NY September 12-15

Salt Lake City, UT September 28-30

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.

Categories
Commentary

Daily Brief For September 9, 2021

Editor’s Note: Daily market commentaries to pause until Thursday, September 16, 2021, due to travel commitments. A weekend commentary will be in your inbox earlier this week.

All the best, 

Renato

Market Commentary

Equity index futures trade lower with yields, dollar, and bitcoin. Most commodities were green.

  • Narratives around slower recovery rising.
  • Ahead is jobless claims data, Fed speak.
  • Positioning risks mounting case for lower.

What Happened: U.S. stock index futures auctioned lower overnight alongside narratives surrounding a slowed economic recovery and stimulus reductions. 

Ahead is data on jobless claims (8:30 AM ET), as well as Fed-speak by Bowman (1:00 PM ET) and Williams (2:00 PM ET).

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. 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 approximation. 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 6:30 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on weak intraday breadth and divergent market liquidity metrics, the best case outcome occurred, evidenced by sideways trade at the $4,510.00 pivot, the low end of a recent consolidation (i.e., balance) area. 

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).

To note, participants had a tough time separating value and expanding range lower.

This is evidenced by the minimal excess at yesterday’s regular trade low (RTH Low), coupled with an overnight response at the 20-day simple moving average (i.e., a visual level likely paid attention to by short-term, technically-driven market participants). 

In other words, we’re carrying forward the difficulty participants had, in days prior, to moving prices out and away from balance. The path of least resistance – at least in prior trade – was not down; stronger sellers are not yet on board.

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.

Value-Area Placement: Perception of value unchanged if value overlapping. Perception of value has changed if value not overlapping (i.e., outside day). Delay action in the former case.
Graphic: 30-minute profile chart of the Micro E-mini S&P 500 Futures and market liquidity, via Bookmap, for the SPDR S&P 500 ETF Trust (NYSE: SPY). Notice the volume delta (CVD) or buying and selling power as calculated by the difference in volume traded at the bid and offer.
Balance-Break Scenarios In Play: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) has occurred.

Though we expect sideways to lower trade – for the time being – we monitor for rejection (i.e., return inside of balance) which portends a move higher, to the opposite end of the balance.

Further, the aforementioned trade is happening in the context of peak growth and a moderation in the economic recovery, as well as non-seasonally aligned inflows, impactful options market dynamics, divergent sentiment, and fears of a mid-cycle transition.

The implications of these themes on price are contradictory

To elaborate, Morgan Stanley (NYSE: MS), Citigroup Inc (NYSE: C), and Goldman Sachs Group Inc (NYSE: GS) cautioned investors about equity outlooks. Of concern, in particular, is a rise in cases of the delta variant, tensions between inflation expectations and yields, as well as seasonality. 

Among other risks, as SqueezeMetrics summarizes, “[p]eople pretty much stopped buying S&P 500 puts [last] week. At the same time, people are overexposed to changes in VIX, and will be hurt more than usual if VIX starts moving up. Historically, this means SPX down, VIX up.”

Moreover, for today, given an increased potential for moderate volatility and responsive trade, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,495.00 high volume area (HVNode) pivot puts in play the $4,510.00 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,526.25 HVNode and $4,550.00 overnight high (ONH).

In the worst case, the S&P 500 trades lower; activity below the $4,495.00 HVNode puts in play the $4,481.75 HVNode. Initiative trade beyond the $4,481.75 HVNode could reach as low as the $4,454.25 LVNode and $4,427.00 untested point of control (VPOC).

Note the developing volume-weighted average price (VWAP) pinch. VWAP is 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. We look to buy above a flat/rising VWAP pinch. Sell below a flat/declining VWAP pinch.

Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

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 updated 6:30 AM ET. 

News And Analysis

Traders rush to dump China tech stocks as gaming targeted again.

Decision Guide: The ECB counts risks in setting bond-buying pace.

Aluminum notches fresh 13-year high on supply woes and demand.

China’s zero-COVID approach will aggravate rising corporate risks.

Fauci: We don’t even have “modestly good control” over COVID-19.

Coinbase threat shows there’s a new cryptocurrency sheriff in town.

White House eyeing increased hacking around the coming holidays.

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.

Categories
Commentary

Daily Brief For September 8, 2021

Abstract: Status quo briefly disrupted after equity index futures traded lower overnight. 

Alongside today’s light events calendar, participants ought to be most concerned with positioning risks and calls by large investment banks for cautiousness. A key pivot for today’s trade in the S&P 500 stands at $4,510.00.

Given the expected open, there may be limited potential for immediate directional opportunity.

Market Commentary

Equity index futures trade lower with yields, bitcoin, and copper. Gold, oil, bonds, VIX higher.

  • Big banks revised down growth forecasts.
  • Ahead: Job openings, Beige Book, credit.
  • Positioning risks mount case for volatility.

What Happened: U.S. stock index futures auctioned sideways to lower overnight alongside calls by large investment banks for cautiousness amidst outsized risks.

Ahead is data on job openings (10:00 AM ET), Beige Book (2:00 PM ET), and consumer credit (3:00 PM ET).

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

Adding, during the prior day’s regular trade, on weak intraday breadth and divergent market liquidity metrics, the worst-case outcome occurred, evidenced by trade to the low end of a recent consolidation area or balance. 

Overnight, despite the low end of that balance being briefly pierced, responsive buying surfaced pushing the S&P 500 back into Tuesday’s range. 

Balance-Break Scenarios In Play: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) may occur.

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

Further, the aforementioned trade is happening in the context of peak growth and a moderation in the economic recovery, as well as non-seasonally aligned inflows, impactful options market dynamics, divergent sentiment, and fears of a mid-cycle transition.

The implications of these themes on price are contradictory

To elaborate, Morgan Stanley (NYSE: MS) and Citigroup Inc (NYSE: C) – in addition to Goldman Sachs Group Inc (NYSE: GS), yesterday – are cautioning investors about equity outlooks. Of concern, in particular, is a rise in cases of the delta variant, tensions between inflation expectations and yields, as well as seasonality. 

Among other risks, as SqueezeMetrics summarizes, “[p]eople pretty much stopped buying S&P 500 puts [last] week. At the same time, people are overexposed to changes in VIX, and will be hurt more than usual if VIX starts moving up. Historically, this means SPX down, VIX up.”

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 $4,510.00 regular trade high (RTH High) puts in play $4,526.25, a prominent high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,550.00 overnight high (ONH) and $4,556.25 Fibonacci extension.

In the worst case, the S&P 500 trades lower; activity below the $4,510.00 RTH High puts in play the $4,495.00 HVNode. Initiative trade beyond the $4,495.00 HVNode could reach as low as the $4,481.75 HVNode and $4,454.25 LVNode.

We note that, as of 6:30 AM ET, prices are back in the most recent consolidation after finding responsive buyers at the overnight low (ONL) which corresponded with an anchored volume-weighted average price (AVWAP), 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. Losing that ONL changes the tone, obviously.

Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

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.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:15 AM ET.

News And Analysis

Ray Dalio says China opportunities can’t be neglected.

Delta variant is slowing reversal of some rating actions.

Rates stagnate; mortgage demand at lowest in months.

Investors should watch closely for peak in profit margin.

Weak jobs data could derail Fed’s bond tapering plans.

Coinbase fell after SEC plans to sue over new product.

Global mobility near post-pandemic high despite delta.

U.S. hits 75% of adults with at least one vaccine dose.

Evergrande dollar bonds fall after suspended payment.

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.

Categories
Commentary

‘Dualism’: Market Commentary For The Week Ahead

Key Takeaways:

  • Decline in cash levels is a sign of stretched sentiment. 
  • Positioning: Odds of sustained directional resolve low.
  • Potential confirmation of multi-month balance-break.

What Happened: During last week’s shortened holiday trade, U.S. index futures broke out to new all-time highs.

What Does It Mean: After Tuesday’s initiative upside drive alongside news that provided clarity on the election transition, participants rotated back over the $3,580 balance-area boundary, invalidating the prior week’s initiative selling activity. Thereafter, conviction disappeared and the market remained range-bound, as evidenced by a non-participatory delta (i.e., the non-presence of committed buying) and mechanical trade (i.e., low-excess at the edges of developing balance).

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

What To Expect: During Friday’s shortened holiday session, the S&P 500 remained in balance, further auctioning and accepting value into Tuesday’s excess high, which marked an end to the upside discovery process. 

Given that initiative buyers remained in control after auctioning into the micro-composite high-volume node at $3,631, the fairest price to do business after Tuesday’s upside drive, participants come into Monday’s session knowing the following: 

  1. The amount of cash investors are holding in their portfolios fell to levels last seen prior to the February sell-off. 
  2. Market sentiment, as represented by Citigroup Inc’s (NYSE: C) Panic/Euphoria Model, is historically stretched.
  3. Tuesday’s upside impulse, through the low-volume node at $3,580, was reminiscent of short-term, momentum-driven buying. 
  4. Holiday trade was dominated by low-volume and responsive participation, implying the non-presence of conviction and institutions (e.g., funds that transact at non-technical levels).
  5. Positioning suggests dealers are long gamma, meaning they sell into strength and buy into weakness, suppressing volatility and the potential for directional resolve.
Graphic by Spotgamma, taken from The Market Ear

Therefore, given the acceptance of higher prices, the following frameworks for next week’s trade apply.

If participants manage to spend time and build value above the $3,631 micro-composite high-volume node, then initiative buyers remain in control — nearest targets include the $3,655 and $3,668.75 rally highs.

Otherwise, the auction ought to find responsive buyers near the high-volume node. An initiative drive below that figure would put the rally on hold, and would target first $3,620, and then the node near $3,610.

Conclusion: Though sentiment and positioning imply limited potential for further upside, the market remains in a strong technical uptrend bolstered by factors including a divided government, vaccine administration, rebound in profits, low rates, and a small rise in the yield curve.

As of now, the S&P 500 is on the verge of confirming a multi-month balance-break.

Pictured: Daily candlestick chart of the cash S&P 500 Index

Levels Of Interest: Micro-composite HVN at $3,631, the $3,655 and $3,668.75 rally highs, as well as the nodes near $3,620 and $3,610.

Cover photo courtesy by cottonbro from Pexels.