What Happened: In spite of positive stimulus developments, U.S. index futures liquidated alongside news of emergency actions in Europe against a new strain of the COVID-19 coronavirus.
What Does It Mean: Friday’s session found responsive buyers at the low-volume node (LVNode) near $3,680.00. Low-volume areas denote directional conviction and ought to resist future auction rotations.
Overnight, the S&P 500 index future auctioned through the aforementioned LVNode — the worst outcome — before responsive buying surfaced near the balance-area low.
What To Expect: In light of the large overnight gap, the following frameworks apply for today’s trade.
In the best case, buyers respond and auction the index above the $3,667.75 high-volume node (HVNode). Holding said reference and trading into Friday’s range would negate much of the selling activity, the most positive outcome.
In the worst case, if the S&P 500 remains below the $3,667.75 HVNode, participants can expect further rotation and balance.
Auctioning below the $3,596.00 excess low would put the rally in question.
Levels Of Interest: The $3,667.75 high-volume node, as well as the excess low at $3,596.00.
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:
Inflation remains cool due to the profound influence of disruptive innovation.
U.S. Congress reaches deal on COVID-19 aid package, plans votes for Monday.
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.
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.
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.
Following a week-long, post-election rally, U.S. index futures extended their gains on news that a vaccine developed by Pfizer Inc (NYSE: PFE) and BioNTech SE (NASDAQ: BNTX) was more than 90% effective in preventing cases of the COVID-19 coronavirus. The response resulted in the upside break of a multi-month balance area.
As of now, on relatively poor structure, the S&P 500 index future is trading above the September and October rally high. Given the size of the advance, index products are extended and the odds of digestion, either through time or price, have increased substantially.
Furthermore, the aforementioned multi-month balance-break is a strongly bullish signal to be confirmed by acceptance above the September peak. That means, if prices spend time trading outside of the balance area, then the odds of a continuation to new highs increase substantially. If responsive participants were to auction prices back into the balance area, then odds favor rotational trade as low as the $3,200 boundary.
Levels of interest below current trade include the high-volume areas at $3,540, $3,500, $3445, and $3,400. Major upside references include the extension at $3,700 and projection at $3,800.
