Categories
Commentary

Daily Brief For November 24, 2021

What Happened

Overnight, equity index futures auctioned within the confines of Tuesday’s range, unable to follow through on attempts higher or lower. This comes as there was a clear validation of Monday’s knee-jerk selling.

This sideways-to-lower price action in the index products is happening alongside a sell-off in new issues and richly priced technology stocks. Part of the weakness may have something to do with investors booking capital losses to lower their capital gains. 

The other part of it, according to Bloomberg, is an exodus among professional investors who were counting on high-flyers to salvage their year. 

“There was a desire to kind of keep up with the broader index. And there was definitely a view that those are higher-beta assets and that’s a way to try and play a little bit of catch-up,” Barclays Plc’s (NYSE: BCS) Todd Sandoz said. “When the market turns and it’s not working, you need to take risks down. And everybody’s in those names, so you also probably have a view to try to cut things faster.”

With indices pinned and heavily weighted constituents sideways to higher, there is only one form of reconciliation – a decline in correlation. Nonetheless, fundamentals are no different; investors may be able to buy quality stocks at a discount amidst the market’s entry into a seasonally bullish period. 

Buybacks and increased retail engagement, resilient activity, and macro metrics, as well as excess liquidity, in the face of central bank cautiousness, suggest “dips should be bought,” according to Barclays.

Ahead is data on jobless claims, GDP, durable and core capital goods orders, and trade in goods (8:30 AM ET). Thereafter is data on personal and disposable income, consumer spending, core inflation, home sales, sentiment, and 5-year inflation expectations (10:00 AM ET). FOMC minutes come later (2:00 PM ET). 

Graphic updated 6:00 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 divergent intraday breadth and market liquidity metrics, the worst-case outcome occurred, evidenced by an acceptance of Monday’s knee-jerk, high-tempo selling.

Though this activity marks a potential willingness to start trending lower, the nature of Monday’s liquidation, as well as the failure to follow-through (i.e., expand the range to the downside) forces us to question whether participants have it in them to push indices lower. 

In light of the activity we’re seeing, it’s tough to pick a direction and stick with it; the higher odds play, in light of the divergences we’re seeing in breadth metrics between exchanges, as well as market liquidity (below), is to responsively buy dips and sell rips.

Key levels to trade against are the high volume areas (HVNodes) at $4,691.25 and $4,647.25. The latter level corresponds with the 20-day simple moving average.

These levels are the clearest ways to measure risk, given the mechanical responses in prior trade. Should participants manage to break past either level, then conditions have changed. Follow-through is likely. Reason being? Those visual levels are acted on by short-term, technically-driven market participants who generally are unable to defend retests.
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: Keeping this section very short.

We saw the CBOE Volatility Index (INDEX: VIX) end higher, yesterday. 

However, supply came in across the entire area of the VIX futures term structure. That, with the long-gamma environment (defined below), suggests participants are not reaching for hedges.

For the time being, that’s stabilizing, cognizant of the fact that exuberance in individual stocks, over the past weeks, fed into the stock indices themselves.

Further, the price action we’re seeing is likely the resolve of some of that weak breadth we were seeing, recently, in addition to some of the topics discussed at the beginning of this newsletter.

Graphic: Divergences in breadth. SPX versus % of SPX stocks above the 200-day average.

In short, however, should volatility continue to pick up, those participants (who were once exuberant) may reach for protection forcing dealers to reflexively hedge in a destabilizing manner.

Once that protection rolls off the table (expires and/or is monetized), dealers will reverse and support the market, buying-to-close existing stock/futures hedges to negative gamma positions. 

This flow is stabilizing and may support a seasonally-aligned rally into Christmas.

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

Spike Scenario In Play: A spike marks 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).

The spike may also be looked at as a pivot; in today’s case, the spike base is $4,697.50.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,691.25 high volume area (HVNode) puts in play the $4,711.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,740.50 minimal excess high and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,691.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,647.25 HVNode and $4,619.00 VPOC, or lower.

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

Charts To Watch

What People Are Saying

Definitions

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 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.

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options 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.

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.

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

Daily Brief For November 9, 2021

What Happened

Overnight, equity index futures were divergent.

The Nasdaq-100 led while the Russell 2000, which broke out of massive range, recently, slowed its pace of price discovery, trading relatively weak.

Ahead is data on the PPI (8:30 AM ET) and real household debt (11:00 AM ET).

Graphic updated 6:20 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 supportive market liquidity metrics, the best case outcome occurred, evidenced by the balance and overlap of value areas (i.e., where 70% of the prior day’s trade occurred, or +/- 1 standard deviation), at the current S&P 500 prices.

This activity, which marks a potential willingness to continue balance as participants seek new information to resolve on, is built on poor structure, a dynamic that adds to technical instability.

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

The implications of these themes on price are contradictory.

To elaborate, on one hand, seasonality, buybacks, and earnings surprises have bolstered (and will continue to bolster) the most recent price rise, since early October. 

Similarly, participants are seeing a trend of outperformance in the extended day, due in part to the front-running of increasingly impactful vanna and charm flows (both of which are tied to the hedging of options exposure), as a result of increased options activity (which, at least at this juncture, exposes customers to high leverage and risk). 

I say “high leverage and risk” as a result of short-term speculators’ record call buying and put selling over the past weeks.

As stated in a SpotGamma note, yesterday, “Should there be an adverse move, those short-term speculators are likely to cover (sell) their short put (long call) positions as they lack the wherewithal (capital) to maintain exposure.”

With exposure concentrated in shorter-dated expiries, the November 19 monthly options expiration (OPEX) is somewhat of a concern for us.

The reason being?

Presently, the S&P 500 is pinned near options strikes at which positive options gamma – delta sensitivity to underlying price – is highest. 

I note 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 (e.g., Tesla), they buy into strength and sell into weakness, exacerbating volatility. 

When long-gamma, counterparties buy into weakness and sell into strength, calming volatility.

Coming into OPEX, the forces that promote pinning turn stronger; counterparties supply more liquidity as their long gamma becomes longer (i.e., rises), so to speak. 

As OPEX is essentially a reset (or reduction) in dealer gamma exposure, participants ought to see an increase in realized volatility as a lot of the exposure that warranted dealers’ supply of liquidity comes off the table, thus necessitating less liquidity

Less liquidity means more movement

More liquidity means less movement

Get it?

With short-term speculators taking on the risks that we’re seeing them take on, and the prospects of a front-running of post-OPEX volatility – given that, according to Pat Hennessy, “OPEX week returns peaked in 2016 and have trended lower since” – there is a potential that adverse moves force those that are off-sides cover (sell) their short put (long call) positions, thereby exacerbating near-term volatility.

We see recent options activity reflected in a sideways to higher CBOE Volatility Index (INDEX: VIX) and shift up in the VIX futures term structure; both suggest a demand for hedges and a reduction in the flows (e.g., vanna) that support sideways to higher trade. 

“The moves have been large and the demand for upside in single stock land insatiable,” said Danny Kirsch of Cornerstone Macro LLC. “Single stock vols clearly feeding into the index.”

Expectations: As of 6:20 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Market Is In Balance: Current prices offer favorable entry and exit. Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,692.25 micro composite point of control (MCPOC) puts in play the $4,722.00 Fibonacci. Initiative trade beyond $4,722.00 could reach as high as the $4,735.00 and $4,772.50 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,692.25 MCPOC puts in play the $4,674.75 visual low. Initiative trade beyond the visual low (likely paid attention to by short-term, technically driven market participants who seldom defend retests) could reach as low as the $4,663.00 untested point of control (VPOC) and $4,619.00 VPOC, or lower.

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Notice Monday’s “Cave-Fill” or the act of increasing the area deemed favorable to transact at by participants. This is most obvious by observing where the bulk of Monday’s distribution sits, relative to the pocket of low-volume left behind Friday’s trade. This is a positive development. Learn about the profile.

Charts To Watch

Graphic: (NASDAQ: TSLA). (S~1108, R~1187 to 1195). S is for support. R is for resistance. Looking to buy/sell responsively. 
Graphic: (NYSE: CMG). (S~1680, R~1820). S is for support. R is for resistance. Looking to buy/sell responsively.
Graphic: (NYSE: SPY). (S~456, R~471). S is for support. R is for resistance. Looking to buy responsively.
Graphic: (NASDAQ: QQQ). (S~382, R~403). S is for support. R is for resistance. Looking to buy responsively.

What People Are Saying

Definitions

Vanna: The rate at which the delta of an option changes with respect to volatility.

Charm: The rate at which the delta of an option changes with respect to time.

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.

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

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

Market Commentary For The Week Ahead: ‘All In At The Top’

Key Takeaways:

  • Analysts extended 2021 S&P 500 targets.
  • Fear and greed are tugging at each other. 
  • Jefferies ups 2021 GDP forecast to 5.25%.
  • Net equity buying the largest in months.
  • Inflation is rising where you don’t want it.
  • Positioning suggests elevation of volatility.
  • The big picture breakouts remain intact.

What Happened: Coming into the extended holiday weekend, on tapering volumes, U.S. index futures balanced within prior range. 

This activity occurred in the context of a larger balance-area forming just beyond the $3,600.00 multi-month break-out point. Given the lack of range expansion, in addition to the aforementioned responsive, back-and-forth trade, participants are signaling a lack of conviction.

Though there is a lot of noise in the markets — an uneven recovery, stimulus, elections, trade, and the like — one key point remains: the multi-month upside breakout targeting S&P 500 prices as high as $4,000.00 remains intact. Add to this the recovery of Monday’s liquidation fueled by weak-handed, short-term buyers, and the fact that the all-time $3,724.25 rally-high was established in an overnight session, it is highly likely that the upside discovery process has yet to end.

Note: Historically, there is a low probability that overnight all-time highs end the upside discovery process. 

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

What To Expect: Friday’s session found responsive selling surface near the $3,691.00 profile level. Given that participants had difficulty in sustaining higher prices, alongside shortened holiday trade, the following frameworks apply for next week’s trade.

In the best case, the S&P 500 remains above its $3,667.75 HVNode, and continues to balance. As stated earlier, given the tapering volume and holiday, the odds of directional resolve are quite low. 

Two go, no-go levels exist; trade that finds increased involvement above $3,691.00 and below $3,667.75 would suggest a change in conviction. Anything in-between favors responsive trade.

Conclusion: Bank of America Corp’s (NYSE: BAC) Michael Hartnett summarized it best: “[T]he year of the virus, the lockdown, a crash, a recession, an epic policy panic, the greatest stock market rally of all-time, a V-shape economic recovery, and ending with a vaccine for COVID-19.”

Though risks remain, markets are pricing in the odds of a continued rebound. Unless some exogenous event were to transpire, technically speaking, all broad-market indices are in an uptrend. A move below $3,600.00 in the S&P 500 would denote a change in tone, increasing the likelihood of a failed breakout that would target prices as low as $3,200.00.

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

Levels Of Interest: The $3,691.00 boundary and $3,667.75 HVNode.

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

Photo by Raka Miftah from Pexels.

Categories
Commentary

Market Commentary For 12/23/2020

What Happened: After a day of balance, and a brief overnight liquidation alongside news that President Donald Trump would not sign a coronavirus relief bill until the size of stimulus checks is increased, U.S. index futures rebounded, with the S&P 500 returning to the $3,691.00 ledge, a level that’s repeatedly attracted responsive sellers.

What Does It Mean: During Tuesday’s session, participants accepted the prior day’s recovery, evidenced by the two-sided trade at prices where the most activity occurred during the prior day, or point of control (POC).

Given that participants deem the high end of Monday’s range fair to do business in, participants will come into Wednesday’s session knowing that the $3,691.00 high-volume ledge is a key upside reference. The aforementioned ledge denotes a pause in discovery, likely attributable to the declining participation ahead of the holiday weekend.

That said, below the ledge, responsive buyers continue to resurface at the $3,667.75 high-volume node (HVNode) on long liquidations (i.e., those events that are caused by overly committed short-term participants that trim positions in panic because they lack the wherewithal or conviction to follow-through).

Pictured: Visual of /MES $3,691.00 ledge.

What To Expect: In light of the overnight recovery and trade near the $3,691.00 ledge, the following frameworks apply for today’s trade.

In the best case, buyers hold the the index above its $3,667.75 HVNode. Holding said reference would be indicative of continued balance after Monday’s recovery; in such case, participants would look for signs of follow-through above the $3,691.00 ledge. Once the ledge cracks (i.e., participants initiate and accept, spend more than 15-minutes above the level), it ought to (1) offer support and (2) draw in buyers to continue the upside discovery process up to, at least, the $3,700.00 and $3,707.75 HVNodes.

Anything higher targets the $3,724.25 overnight rally high.

Levels Of Interest: The $3,691.00 ledge, $3,667.75, $3,700.00 and $3,707.75 HVNodes, as well as the $3,724.25 overnight high.

Bonus: Big-picture breakout remains intact. See below for opportunities unfolding.

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

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Commentary

Market Commentary For 12/17/2020

What Happened: After yesterday’s Federal Reserve policy decision, U.S. index futures auctioned higher overnight alongside hopes of added U.S. fiscal and monetary stimulus, as well as vaccine rollouts.

What Does It Mean: During Wednesday’s regular trade, the S&P 500 initiated up to the $3,691.25 high-volume node, a valuable price, before sellers responded, established excess, and extended lower into the close.

Given the response to yesterday’s Federal Reserve decision, as well as overnight activity, the S&P 500 remains in a tactically bullish position, confirming the higher-time frame upside breakout which targets prices as high as $4,000.

What To Expect: In light of the overnight gap higher, the following frameworks apply for today’s trade.

In the best case, buyers maintain conviction and hold the index above the $3,691.25 high-volume node. Thereafter, upside references include the high-volume node near $3,710.00, and then the $3,720.00 price extension.

In the worst case, if the S&P 500 is brought back into range, participants can expect further balancing. The current market environment supports the long-gamma narrative in which volatility is suppressed and the market pins or slowly rises in a range-bound fashion.

Adding, the market has initiated back through $3,680.00, a low-volume area. Such low-volume areas denote directional conviction and ought to offer support on any test. Penetrating the low-volume area would put in play the $3,667.75 high-volume node.

Levels Of Interest:  $3,680.00 low-volume node, the $3,710.00 and $3,667.75 high-volume nodes, as well as the $3,720.00 price extension.

Bonus: Opportunities unfolding.

Categories
Commentary

Market Commentary For 12/14/2020

What Happened: Alongside optimism surrounding the COVID-19 coronavirus vaccine and stimulus talks, U.S. index futures auctioned higher overnight.

What Does It Mean: During last week’s trade, U.S. index futures auctioned to new all-time highs, before moving back into balance.

For the remainder of the week, participants accepted lower prices until Friday’s session established minimal excess lows, broke into prior poor structure, and ended the technical downtrend. 

Since Friday’s session found responsive buying surface at a key technical level (i.e., the high-volume node near $3,630.00 and 20-day simple moving average), buyers extended range through the $3,667.75 high-volume node, the most positive outcome.

What To Expect: In light of the overnight gap higher, the following frameworks apply for today’s trade.

In the best case, the auction makes an attempt to repair some of the poor overnight structure. Thereafter, buyers regain conviction and initiate back through the $3,667.75 high-volume node before continuing to at least the next high-volume node at $3,690.75, and then the prior all-time rally high.

In the worst case, if the S&P 500 auctions below $3,667.75, participants would look to whether the S&P 500 resists Friday’s range. Accepting Friday’s range (i.e., spending more than one half-hour period) may put in play the minimal excess lows near $3,625.00.

Levels Of Interest:  $3,667.75 high-volume node is the go/no-go level.

Bonus: Opportunities unfolding.

Categories
Commentary

‘To Infinity And Beyond’: Market Commentary For The Week Ahead

Key Takeaways:

What Happened: During last week’s trade, U.S. index futures auctioned to new all-time highs, before moving back into balance.

What Does It Mean: After participants established an all-time rally high during Wednesday’s overnight session, the S&P 500 liquidated in regular trading, down to the micro-composite high-volume node near $3,667.75, a price level where participants spent a large amount of time in the past. The session ended in prior balance and range with poor profile structure denoting the presence of directional conviction.

For the remainder of the week, participants accepted lower prices until Friday’s session established minimal excess lows, broke into prior poor structure, and ended the technical downtrend. 

Given the mechanical trade (i.e., minimal excess at Friday’s lows) and poor structure (e.g., low-volume areas), it’s very likely that the selling range extension was the result of weak-handed, short-term momentum buyers liquidating positions in panic.

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 a key technical level (i.e., the high-volume node near $3,630.00 and 20-day simple moving average). The fact that there was a response at a technical reference confirms that participation in the market is overwhelmingly short-term; in other words, institutions (e.g, funds) tend not to transact at exact technical levels. 

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

  1. Both sentiment and positioning are historically stretched while the market has entered a short-gamma environment; in such cases, dealers hedge their derivatives exposure by buying into strength and selling into weakness. This, alongside the presence of short-term traders in U.S. equities, will exacerbate volatility in the coming week.
  2. Looking to 2021, the decline in realized correlation due to factor and sector rotation, as well as the return of systematic option selling strategies should push the long-gamma narrative in which volatility is suppressed and the market pins or slowly rises in a range-bound fashion.
  3. JPMorgan Chase & Co. (NYSE: JPM) strategist Marko Kolanovic suggests equities will rally short-term with the S&P 500 auctioning as high as $4,000 on the basis of low rates, improved fundamentals, buybacks, as well as systematic and hedge fund strategies.
  4. Despite high CAPE ratios, stock-market valuations aren’t that absurd.
  5. Prior trade points to the non-presence of committed selling; after Friday’s session saw a failure to range extend and establish excess, the technical down-trend was broken.

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

In the best case, buyers surface at the $3,654.75 low-volume node and extend range up to the high-volume node at $3,667.75. High-volume areas denote value and should slow prices allowing participants enough time to enter and exit trades. An initiative drive through this area would portend a test of the $3,690.75 high-volume node, and then the prior all-time rally high.

In the worst case, if the S&P 500 auctions below $3,630.00, participants would look to repair the poor structure just shy of $3,625.00. Finding acceptance (i.e., spending more than one half-hour of regular trade) below Friday’s range would be the most negative outcome.

Conclusion: Though sentiment and positioning imply limited potential for further upside, the S&P 500’s higher-time frame breakout remains intact.

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

Levels Of Interest: $3,720.00 extension, $3,715.00 all-time rally high, the micro-composite HVNode at $3,690.75, $3,667.75, and $3,630.00, as well as the $3,654.75 LVNode and poor structure near $3,625.00.

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

Spotify Technology SA (NYSE: SPOT) – Acceptance after higher-time frame balance-breakout. Potential remains for a push to the balance-area projection.

Apple Inc (NASDAQ: AAPL) – Acceptance after higher-time frame balance-breakout. Potential scenarios include (1) continued rotation, (2) upside continuation, or (3) failed breakout and a return to balance.

Advanced Micro Devices Inc (NASDAQ: AMD) – Acceptance after higher-time frame balance-breakout. Potential for upside continuation or failed breakout and return to balance.

Shopify Inc (NYSE: SHOP) – Balance just shy of channel boundary. Potential for upside breakout and continuation.

Chipotle Mexican Grill Inc (NYSE: CMG) – Just shy of balance-area high. Potential for upside breakout and continuation.

Tesla Inc (NASDAQ: TSLA) – Rejected prior week’s balance-area. Likelihood of continuation up to S&P 500 index inclusion intact on surging call volumes, dealer accumulation. $700 strike is the high-OI strike of interest.

Zoom Video Communications Inc (NASDAQ: ZM) – Just shy of long-term trend, anchored VWAP. Potential for responsive buying.

Summit Materials Inc (NYSE: SUM) – Failed breakout, but speculative call volumes surfaced on the return into balance. Potential exists for another attempt higher.

Nasdaq-100 (INDEXNASDAQ: NDX) – Retest of balance-area high. Higher time-frame breakout remains intact.

Cover photo by SpaceX from Pexels.