Categories
Commentary

Daily Brief For January 24, 2022

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What Happened

Overnight, equity index futures auctioned sideways to lower while measures of implied volatility expanded, which suggests increased fear and demand for protection.

This is in the context of an environment wherein the equity market, in particular, is positioned for heightened volatility, albeit potential strength, after Friday’s large monthly options expiration.

Ahead is data on Markit Manufacturing and Services PMI (9:45 AM ET).

Graphic updated 6:15 AM ET. Sentiment Risk-Off if expected /ES open is below 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

Fundamental: “The ratio of stocks hitting 52-week lows is at the highest since March 2020,” according to The Market Ear

In fact, in the face of a traditionally bullish period, seasonally, this is the worst January on record for the Nasdaq.

Graphic: Per Bloomberg, “Down almost 12% in January, the Nasdaq 100 is on course for its worst month since the 2008 global financial crisis. On any four-day basis, the current streak of 1% drops was the first since 2018.”

This weakness is in the context of months of divergent breadth by lesser weighted index constituents, geopolitical tensions, the prospects of reduced stimulus to combat high inflation, poor responses to earnings results, and disappointments in real demand and growth.

Graphic: @MacroAlf plots credit impulse as a percent of GDP and SPX year-over-year earnings.

The tone amongst retail participants is changing, too, with outflows starting for the first time since a major rush in account openings. When asked whether the selling is over, JPMorgan Chase & Co’s (NYSE: JPM) prime brokerage data suggests no.

This is in opposition to the typical trend into the start of the Federal Reserve (Fed) hiking cycles.

“U.S. equities have stumbled significantly on their way toward the first hike of this cycle, which is not the norm,” Jefferies Financial Group (NYSE: JEF) explained. “Performance tends to be poor immediately after the first hike, and can be worse if stocks are weakly into the first hike.”

Notwithstanding, Jefferies adds, “the SPX was higher in the 12 months that followed the start of each of the last 7 hike cycles.”

Graphic: S&P 500 performance before and after rate hikes.

With some of that context in mind, what is there to look forward to? The corporate buyback blackout window ended after the close of business, Friday, and equity inflows remain robust.

What is there to be wary of? 

Well, given that “risk is being repriced to fit the world where real rates are a lot higher, and the Fed put [is] much lower thanks to the Fed’s need to fight inflation,” this week’s Federal Open Market Committee (FOMC) meeting shall provide market participants more context as to the “timing and pace of QT” which may assuage fears unless the Fed is all out to “drop QE next week itself.”

The odds of that happening are low.

Graphic: Per Bloomberg, “As Savita Subramanian of Bank of America Corporation (NYSE: BAC) shows in the following chart, expected earnings are far less helpful in explaining market outcomes since 2010 than they were before. Meanwhile, changes in the Fed’s balance sheet, the amount of money it’s making available to markets, have become hugely important.”

As Bloomberg’s John Authers puts it well: “Despite many scares, money has stayed plentiful for the last decade, rates have fallen, and anyone who did much to protect themselves against the risk of a decline would have done badly by it.”

Graphic: As Goldman Sachs Group Inc (NYSE: GS) “shows in this chart, companies are becoming ever more profitable in a way that seems to be sustained.”

Positioning: The major broad market indices – the S&P 500, Nasdaq 100, and Russell 2000 – are in an environment characterized by negative gamma and heightened volumes. 

Graphic: Per Tom McClellan, “Persistently high volume late in QQQ is a sign of overly bearish sentiment worthy of a bottom. Key caveat: just because one notices a sentiment indication which should matter does not mean it has to matter right away.”

The negative gamma – in reference to the options counterparties reaction “when a position’s delta falls (rises) with stock or index price rises (falls)” – is what compounds the selling. 

With measures of implied volatility expanding, as is the case when there is heightened demand for downside put protection (a positive-delta trade for the dealers), protection is bid and the dealer’s exposure to positive delta rises, which solicits more selling in the underlying (addition of short-delta hedges).

Graphic: SqueezeMetrics details the implications of customer activity in the options market, on the underlying’s order book. For instance, in selling a put, customers add liquidity and stabilize the market. How? The market maker long the put will buy (sell) the underlying to neutralize directional risk as price falls (rises).

Moreover, in negative-gamma, dealers are selling weakness and buying strength, taking liquidity. 

That’s destabilizing but it appears that “Friday in the markets did not have abnormal liquidity across S&P500 stocks.”

Graphic: Per @HalfersPower on Twitter, liquidity rankings for S&P 500 components. 

High readings in indicators like the put/call volume ratio, which denotes heightened trade of puts, relative to calls, as well as how calm equity market volatility is relative to rate volatility, could be the result of adequate hedging into the monthly options expiration (OPEX) and this week’s FOMC meeting.

“A very nasty flush out on a key polarized psychological level (S&P 500 $4,500.00) on the highest negative gamma day on an OPEX,” said Kris Sidial of The Ambrus Group on the increased potential for relief as a result of aggressive dip-buying. 

“Aggressive shorts piling in on an already dismantled tech selloff, leading into FOMC meeting after an 8% decline in the market, and Apple Inc (NASDAQ: AAPL) reporting earnings.”

Sidial’s opinion that the market is due for a counter-trend rally, in the face of an environment in which “there does not seem to be a direct hazard,” is aligned with the expectation that removal of put-heavy exposure, post-OPEX, and a reduction in embedded event premiums tied to the approaching FOMC, opens up a window of strength, wherein dealers have less positive delta exposure to sell against.

Technical: As of 6:15 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the lower part of a balanced skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Gap Scenarios: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

In the best case, the S&P 500 trades higher; activity above the $4,381.50 regular trade low (RTH Low) puts in play the $4,449.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,486.75 RTH High and $4,526.25 high volume area (HVNode), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,381.50 RTH Low puts in play the $4,349.00 VPOC. Initiative trade beyond the $4,349.00 VPOC could reach as low as the $4,299.00 and $4,233.00 VPOC, or lower.

Considerations: The daily, weekly, and monthly charts are in alignment. 

The loss of trend across higher timeframes suggests a clear change in tone. This does not discount the potential for fast, but short-lived counter-trend rallies.

Click here to load today’s 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.

Definitions

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.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

About

After years of self-education, strategy development, mentorship, 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.

Capelj is also a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, FTX’s Sam Bankman-Fried, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor developing insights around impactful options market dynamics.

Disclaimer

Physik Invest does not carry the right to provide advice.

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 January 3, 2022

What Happened

Overnight, equity index futures auctioned higher. Ahead is data on Markit Manufacturing PMI (9:45 AM ET) and Construction Spending (10:00 AM ET).

Graphic updated 6:20 AM ET. Sentiment Risk-On if expected /ES open is above 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

Technicals: Given the Monday gap, the S&P 500, based on its relation to Thursday’s failed balance breakout and end-of-week liquidation, is positioned for sideways-to-higher.

To note, however, the persistence of responses to technical levels, weaker-handed participants (which seldom bear the wherewithal to defend retests) carry a heavier hand in recent discovery.

Via volume profile analysis, we see a plethora of low-volume pockets – voids – that likely hold virgin tests. Successful penetration often portends follow-through as the participants that were most active at those levels (quickly run for the exits when wrong).

Graphic: Weekly chart for the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). Technically, indices are still positioned for sideways or higher.

Fundamental: The aforementioned trade is happening in the context of higher valuations, interest rates, and tax rates, according to Morgan Stanley (NYSE: MS).

These themes serve as a headwind.

To elaborate, as Nordea recently explained, the Fed will “accelerate its tapering process, and is now set to conclude net purchases already by mid-March vs mid-June with the earlier pace.”

“The dot plot was revised significantly higher, and the plot now shows three hikes for next year, a further three for 2023 and another two for 2024.”

Graphic: The “annual rate of change in the Fed Funds rate” via topdowncharts.com.

At the same time, equity markets tend to rally into the first hike; Moody’s Corporation’s (NYSE: MCO) forecast aligns with that – “the Dow Jones Industrial Average increases this quarter and peaks in early 2022, … [followed by] steady decline through 2022.”

Graphic: S&P 500 performance before and after rate hikes.

Why? Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive.

“Our view is that 2022 will be the year of a full global recovery, an end of the global pandemic, and a return to normal conditions we had prior to the Covid-19 outbreak,” JPMorgan Chase & Co (NYSE: JPM) noted

“We believe this will produce a strong cyclical recovery, a return of global mobility, and strong growth in consumer and corporate spending, within the backdrop of still-easy monetary policy.”

Positioning: According to JPMorgan Chase & Co, “S&P 500 skew overprices downside and underprices upside probabilities relative to historical returns.”

Graphic: Via The Market Ear, JPMorgan’s analysis suggests downside protection is overpriced.

This is all the while the S&P 500’s implied volatility remains above pre-COVID levels.

“SPX implied volatility is well above its pre-Covid level across the term structure.” The compression of volatility lowers the counterparties’ exposure to the positive delta. This “vanna” flow may support higher prices.

Taken together (in the face of last week’s options expiration which reduced the level of positive sticky options gamma concentrated mostly at the $4,800.00 level in the S&P 500), current options positioning and buying pressure supports a seasonally-aligned price rise in January.

Explanation: As a position’s delta rises with underlying price rises, gamma (or how an option’s delta is expected to change given a change in the underlying) is added to the delta. Counterparties are to offset gamma by adding liquidity to the market (i.e., buy dips, sell rips).
Graphic: SpotGamma data suggests the pin heading into Friday’s options expiration is no more.

The continued compression of volatility will only serve to bolster any price rise as “hedging vanna and charm flows, and whatnot will push the markets higher.”

Should that thesis not pan out – meaning the removal of hedging pressures associated with “put-heavy” single stock options positions and an end to tax-loss harvesting, among other factors – indices likely succumb to the “stealth correction” of its lesser weighted constituents.

Were participants to reach for downside protection, the implications of this would be staggering. In such a case, markets will tend toward instability. At present, the metrics don’t point to this.

Graphic: Via The Market Ear, amidst heightened cash allocations that are likely to be redeployed, “January is the big inflow month but the seasonality from here is looking less exciting.”

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

Gap Scenarios: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

In the best case, the S&P 500 trades higher; activity above the $4,791.00 untested point of control (VPOC) puts in play the $4,799.75 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,805.00 and $4,815.00 extensions, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,791.00 VPOC puts in play the $4,781.75 high volume area (HVNode). Initiative trade beyond the HVNode could reach as low as the $4,767.00 VPOC and $4,750.75 overnight low (ONL), or lower.

Click here to load today’s 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.

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.

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.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

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.

About

After years of self-education, strategy development, mentorship, 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.

Capelj is also a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, FTX’s Sam Bankman-Fried, 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 carry the right to provide advice. 

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 December 29, 2021

Notice: Given travel commitments, commentaries will be suspended until January 3, 2022. 

As an aside, I’m sincerely honored to have you as a subscriber. 

This newsletter began as a tool to hold myself accountable for objectively assessing dominant narratives and market-generated information. 

Since launching, this commentary has grown. Content and engagement have improved.

Now, with many of the 200 or so of you that are reading this actively, I have spoken with via email, and the like, regarding trader development, among many other things.

When it comes to markets, at the end of the day, whether you’re at a bank (as some of you are) or at home, we’re all alone. The implications of this are staggering.

How are we to objectively assess and act on what the market is signaling to us with no framework or community to work off of?

That’s the problem and I hope to make a bigger impact, going forward.

Wishing you good health and success next year and beyond!

Best, 

Renato

What Happened

In the face of a “stealth correction,” and an “off-loading of risk” by professionals, the S&P 500 remains strong further bolstered by options selling and volatility compression.

This is as less heavily-weighted constituents remain volatile; with hedging pressures sticky at the index level, the only reconciliation can be a decline in correlation. 

As liquidity remains “holiday-thinned,” so to speak, coming into Friday’s weighty “Quarterlys” options expiration, positioning metrics suggest indices ought to stick at higher prices.

Thereafter, expect increased movement.

Moreover, ahead is data on trade in goods (8:30 AM ET) and pending home sales (10:00 AM ET).

Graphic updated 6:30 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

Given the persistence of responses to technical levels, weaker-handed participants (which seldom bear the wherewithal to defend retests) carry a heavier hand in recent price discovery.

Via volume profile analysis, we see a plethora of low-volume pockets – voids, if you will – that likely hold virgin tests. Successful penetration often portends follow-through as the participants that were most active at those levels (quickly run for the exits when wrong).

Context: In the face of market internals that look weaker than at any time since March of last year, the S&P 500 remains strong, relative to its counterparts.

As alluded to in a prior section, the commitment of capital on lower volatility is upping the dealers’ addition of liquidity, which supports high prices but may limit further price discovery.

Why? When a position’s delta rises with stock or index price rises, gamma – the expected change in delta given movement in the underlying – is added to delta. 

According to SpotGamma, “[a]s participants keep adding to their bets at $4,800.00, the dealer only takes on more exposure to positive gamma.”

Graphic: Via SpotGamma. “Based on the fact that we are at the S&P Call Wall and are approaching this large OPEX, we look for a pause and some consolidation in markets here.”

So, with liquidity “holiday-thinned,” so to speak, and participants’ concentration of activity in near-the-money options strikes, coming into this week’s “Quarterlys” options expiration, indices are to remain pinned.

After Friday, the market is more susceptible to fundamental forces as, according to SpotGamma, there will be “a decrease in sticky gamma hedging.”

Couple current options positioning and buying pressure – via short sales or liquidity provision on the market-making side – metrics suggest middling returns 1-month out, or so.

Graphic: Data SqueezeMetrics. Graph via Physik Invest.

Moreover, the expectation is that positive fundamental forces and dealers’ covering of hedges to remaining “put-heavy” positioning bolster seasonally-aligned price rise in January.

Graphic: Per The Market Ear, “January typically sees 134% of inflows (the rest of the 11 months -34%). And with every private wealth manager in the world right now pitching increased allocations into equities (out of cash and out of bonds), Goldman calculates that keeping 2021 pace, This would be $125BN worth of inflows quickly in January.”

In anticipation of higher prices, low cost, complex options structures like call-side calendars, butterflies, and ratio spreads are still top of mind. 

After a fast move higher over the past week or so, with positioning metrics as they are, it does not make sense to commit massive debits to static or variable long-delta trades. Cost matters.

Graphic: Via Banco Santander SA (NYSE: SAN) research, the return profile, at expiry, of a classic 1×2 (long 1, short 2 further away) ratio spread.

Expectations: As of 6:30 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 balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

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). 

The spike base is $4,776.00. Below bearish (change in tone). Above bullish (status quo).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,781.75 high volume area (HVNode) puts in play the $4,798.00 minimal excess. Initiative trade beyond the minimal excess could reach as high as the $4,805.50 and $4,815.00 extension, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,781.75 HVNode puts in play the $4,770.50 regular trade low (RTH Low). Initiative trade beyond the RTH Low could reach as low as the $4,732.50 HVNode and $4,717.25 low volume area (LVNode), or lower.

Click here to load today’s 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

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.

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.

Volume-Weighted Average Prices (VWAPs): 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.

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, helping develop insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not carry the right to provide advice. 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 December 27, 2021

Notice: Up to January 3, 2022, any commentaries published will be lighthearted and, generally, shorter in length.

What Happened

Overnight, equity index and bond futures were divergent while most commodities traded lower.

In the face of “holiday-thinned liquidity,” the CBOE Volatility Index (INDEX: VIX) rose ~1.15; this week, the expectation is (A) flatlined volatility or (B) ugly, headline-driven intraday moves.

Ahead, there is no data scheduled for release.

Graphic updated 5:45 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

Last week, on lackluster intraday breadth and market liquidity metrics, the best case outcome occurred via an expansion of range and separation of value, the levels at which participants found it most favorable to transact.

The aforementioned activity, which marks the continuation of a trend, is built on poor structure. 

That, ultimately, adds to technical instability.

Why? As explained, Thursday, given the persistence of mechanical responses to key technical levels, visually-driven, weaker-handed participants (which seldom bear the wherewithal to defend retests) carry a heavier hand in recent price discovery. 

Via volume profile analysis, we see a plethora of low-volume pockets – voids, if you will – that likely hold virgin tests. As stated, yesterday, successful penetration portends follow-through given the participants that were most active at those technical levels. Caution is still warranted.

Graphic: Divergent delta (i.e., non-committed buying and 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 may offer favorable entry/exit; the market is attempting to balance).

Context: In the face of a “stealth correction,” and an “off-loading of risk by professional speculators,” the S&P 500 closed beyond a visual resistance level, last week, on light volume.

Graphic: A multi-month divergence (and downtrend) in breadth metrics stabilize as participants attempt to discover higher prices in the S&P 500. 

This is as, according to Ryan Detrick of LPL Financial, the “official Santa Claus Rally starts this Monday (last 5 days of the year and the first two of the following year).”

Kai Volatility’s Cem Karsan echoes Detrick’s remarks.

“Since 1980, there have been 10 instances where the S&P 500 was up 20% or more going into the last stretch of trading, and in 9 of those years, it ended the final 6 days higher.”

Moreover, despite an eventual decline in fiscal support, negative adjustments to the EPS guidance of more index constituents, and revisions lower in growth forecasts, Morgan Stanley’s (NYSE: MS) saw flows shift in high-growth, rate-sensitive names – “flows have reversed in recent sessions as there have been small levels of net buying.”

The change in tone with respect to flows is seasonally-aligned, so to speak; per Goldman Sachs Group (NYSE: GS), January sees more inflows than all other months combined.

Graphic: Per The Market Ear, “January typically sees 134% of inflows (the rest of the 11 months -34%). And with every private wealth manager in the world right now pitching increased allocations into equities (out of cash and out of bonds), Goldman calculates that keeping 2021 pace, This would be $125BN worth of inflows quickly in January.”

Adding, in the face of this week’s weighty “Quarterlys” expiry, Goldman Sachs sees options selling attractive, near term; a commitment of capital on lower volatility likely results in counterparties to customer options trades taking on more exposure to sticky positive gamma. 

Note: As a position’s delta rises with stock or index price rises, gamma (or how an option’s delta is expected to change given a change in the underlying) is added to the delta.

This is while many products are in lower liquidity and short-gamma (wherein an options delta decreases with stock prices rises and increases when stock prices drop) in which moves are more erratic.

Therefore, coming into weighty options expiration, correlations may be off (as that is the only reconciliation in an environment where, at the index level, hedging pressures are sticky, whereas elsewhere they aren’t).

Thereafter, participants ought to monitor the sides and levels capital is committed for clues as to where we go next. 

Continued compression of volatility, as well as a commitment to options higher in prices and further out in time, supports upward price discovery.

Expectations: As of 5:45 AM ET, Monday’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.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,717.25 low volume area (LVNode) puts in play the $4,732.50 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,743.00 regular trade high (RTH High) and $4,767.00 extension, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,717.25 LVNode puts in play the $4,690.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,673.00 untested point of control (VPOC) and $4,647.25 HVNode, or lower.

Click here to load today’s 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

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.

Volume-Weighted Average Prices (VWAPs): 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.

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, helping develop insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not carry the right to provide advice. 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
Methodology

Theory Applied: Contextualizing Recent Market Volatility

With SpotGamma, Physik Invest’s Renato Leonard Capelj unpacks recent market movements from an options positioning perspective.

Coverage includes the following:

  • Definition and application of first and second order options greeks.
  • Implications of the November and December options expirations.
  • How current positioning may dictate trade in Q1 2022 and beyond.
  • Expert commentary and much more!

Click below to learn more!

Categories
Commentary

Daily Brief For December 21, 2021

What Happened

After Monday’s post-options expiration (OPEX) positioning reset, equity index futures traded higher alongside no impactful news developments.

The rate-sensitive and growth-heavy Russell 2000 and Nasdaq 100 led the advance, a change in tone. The S&P 500 was up nearly 1.00% in early trade while volatility came in, markedly, with the CBOE Volatility Index printing 21 versus 27, yesterday.

Ahead is data on the current account deficit (8:30 AM ET).

Graphic updated 6:40 AM ET. Sentiment Risk-On if expected /ES open is above 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 weak intraday breadth and divergent market liquidity metrics, the best case outcome occurred; responsive buyers surfaced at key areas of resting liquidity.

The response just so happened to coincide with the $4,523.00 /ES untested point of control (VPOC). This technically-sensitive trade seems to suggest that weaker-handed participants, which act on visual cues, are very much in control.

Moreover, the overnight follow-through on that buying resulted in a large gap that places the S&P 500 back in prior range, a clear rejection of Monday’s bearish price exploration.

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: Have to keep it short, today, sorry!

In recapping yesterday’s on-point write-up, the thesis is as follows: divergent breadth, and what remained of “put-heavy” positioning, coupled with recent fundamental developments, fed into lower index prices.

According to the options modeling and analysis service SpotGamma, the December 17 options expiration (OPEX) cleared quite a bit of negative delta (e.g., the ARK Innovation ETF [NYSE: ARKK] had $1.5 billion in notional put delta expire) which, in theory, should open a window of strength and realized volatility, wherein positive fundamental forces and dealers’ covering of hedges would bolster any recovery.

With breadth still to recover, early expansion of range, this week, placed major products at key visual support; to note, responsive buying by short-term, visual traders seldom are defended.

At the same time, presented were dynamics such as the eventual management of big S&P positions, and relentless, seasonally-aligned “passive buying support,” in the face of expectations there will be “the strongest quarterly nominal [economic] growth in more than three decades.”

Graphic: Positively skewed return distribution amidst “natural, passive buying,” and supportive positioning metrics. Data SqueezeMetrics. Graph via Physik Invest.

Data Trek made comments with respect to the path of earnings surprises, a factor behind the persistence of this year’s S&P 500 rally; “This week’s upward revisions should have the same ability to backstop equities as we wrap up the year. The operative word is ‘should’, of course, and we do expect further volatility this week.”

With participants flush with cash, so to speak, will FOMO (fear of missing out) sentiment appear?

Net flows into global equity funds, out of cash equivalents, is one indicator to watch.

Graphic: Via The Market Ear. “Net flows into global equity funds rebounded in the week ending December 15 (+$32bn vs +$11bn the prior week) due to a surge in demand for US-dedicated products. Money market fund assets declined by $40bn.”

Expectations: As of 6:40 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 positively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Gap Scenarios: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,590.00 regular trade low (RTH Low) puts in play the $4,623.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $4,647.25 and $4,674.25 high volume area (HVNode), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,590.00 RTH Low puts in play the $4,574.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as low as the $4,549.00 VPOC and $4,520.00 RTH Low, or lower.

Click here to load today’s 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

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.

Volume-Weighted Average Prices (VWAPs): 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.

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. To note, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive).

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, helping develop insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not carry the right to provide advice. 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 December 20, 2021

What Happened

Overnight, equity index futures auctioned sideways to lower with growth-heavy and rate-sensitive names bearing the brunt of the move.

This is as Goldman Sachs Group (NYSE: GS) economists reduced their U.S. economic growth expectations, Senator Joe Manchin rejected a $2 trillion tax-and-spending package, hawkish central bank pivots, and rising COVID-19 lockdown risks. 

Ahead is data on leading economic indicators (10:00 AM ET).

Graphic updated 6:40 AM ET. Sentiment Risk-Off if expected /ES open is below 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

Divergent breadth in less heavily-weighted constituents, and what remains of “put-heavy” positioning, coupled with recent fundamental developments, is feeding into lower index prices.

Graphic: Sentimentrader writes: “Fewer than 65% of NDX stocks are currently trading above their 200-day moving averages. That is a stark change from a year ago when internal trends improved as the NDX marched steadily higher.”

Though the December 17 options expiration (OPEX) cleared positive delta and quite a bit of negative delta (e.g., the ARK Innovation ETF [NYSE: ARKK] had $1.5 billion in notional put delta expire) which, in theory, should open a window of strength and realized volatility, wherein positive fundamental forces and dealers’ covering of hedges would bolster any recovery, the January 21 expiry still carries $1.7 billion in notional put delta.

Continued weakness and higher volatility, among other things, likely solicits dealer hedging of exposure to increasing positive delta; weakness has dealers selling against short-dated, increasingly sensitive negative gamma positioning.

With breadth still to recover, a clear expansion of range places the S&P 500 below its 20- and 50-day simple moving averages, the levels which solicited responsive buying by short-term, visual traders who often lack the wherewithal (both emotional and financial) to defend retests.

Graphic: Monthly charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), Dow Jones Industrial Average (bottom right). All indices come into major support areas.

Context: “The Fed is seen responding to the inflation fears stalking businesses by leaning toward an older playbook of prioritizing the fight against price pressures — even if that risks weaker growth over the longer term,” per Bloomberg.

Notwithstanding, per Nasdaq, “growth in earnings is so far stronger than the multiple compression caused by rising rates,” and that is what has helped support this year’s rally.

Couple that with the management of massive S&P positions, and relentless, seasonally-aligned “passive buying support,” in the face of expectations there will be “the strongest quarterly nominal [economic] growth in more than three decades,” weakness (especially in growth-heavy and rate-sensitive names) remains.

Graphic: Positively skewed return distribution amidst “natural, passive buying,” and supportive positioning metrics. Data SqueezeMetrics. Graph via Physik Invest.

That’s due in part to some of the dynamics discussed in an earlier section, coupled with some negative fundamental developments like the rejection of an economic stimulus package, cuts to Goldman Sachs Group’s GDP forecasts, among other things.

I end with a note from JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic who expects a year-end rally to be driven by stocks targeted by short-sellers. 

“For short-selling campaigns to succeed, there have to be positioning, liquidity and often systematic amplifiers of the selloff,” Kolanovic wrote. 

“We believe these conditions are not met, and hence this market episode may end up in a short squeeze and cyclical rally into year-end and January.” 

That aligns with light positioning, improving seasonality metrics, and data that suggests equity markets tend to rally into the first hike.

Graphic: S&P 500 performance before and after rate hikes.

Expectations: As of 6:40 AM ET, Monday’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, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Gap Scenarios: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,548.75 low volume area (LVNode) puts in play the $4,574.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,590.00 regular trade low (RTH Low) and $4,623.00 untested point of control (VPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,548.75 LVNode puts in play the $4,523.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,492.25 RTH Low and $4,471.00 VPOC, or lower.

Click here to load today’s 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.

Definitions

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.

Volume-Weighted Average Prices (VWAPs): 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.

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, helping develop insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not carry the right to provide advice. 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 December 16, 2021

What Happened

After the Federal Reserve (Fed) announced it would accelerate its taper to bond-buying, clearing the way for interest-rate hikes, the equity market rallied, broadly. 

With all major U.S. equity index futures trading higher, overnight, it appears that participants’ fears regarding monetary policy have been assuaged

As forecasted, a collapse in event-related implied volatility brought in positive flows that ought to support the market into this week’s weighty “quad-witching” derivatives expiry.

Ahead is data on jobless claims, building permits, housing starts, and manufacturing (8:30 AM ET). Then, there are releases on industrial production, capacity utilization (9:15 AM ET), as well as Markit manufacturing and services PMI (9:45 AM ET). 

Graphic updated 6:15 AM ET. Sentiment Risk-On if expected /ES open is above 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

Market hammered out a low, yesterday. 

This was after, to start the week, customers had been increasing their exposure to short-delta (call selling and put buying). The counterparty inventorying the opposite (long-delta) exposure sold (bought) futures into price discovery higher (lower).

Graphic: Customers increased their exposure to short-delta call exposure. “Last week was about selling index calls,” SpotGamma’s Brent Kochuba said on Twitter. “This is likely why the $SPX stopped at $4,700.00.”

This dynamic had the effect of pinning the market; was the S&P 500 to remain in consolidation, customers’ (dealers’) short-delta (long-delta) would have risen which would have made for even more pinning.

That didn’t happen, though.

Into Wednesday’s FOMC event, demand for protection expanded (as evidenced by a higher CBOE Volatility Index reading). That knocked most of the major indexes out of sideways trade.

However, as revealed Tuesday by SpotGamma’s (beta) Hedging Impact of Real-Time Options (HIRO) indicator, “participants saw lower prices as an opportunity to express their opinion of lower volatility into Wednesday’s Federal Open Market Committee (FOMC) update.”

From there on, as Ambrus Group’s Kris Sidial best explained, “vols were static in anticipation of the fed talk,” taking away from supportive flows (as a result of options sliding down their term structure [vanna]) and promoting sideways trade.

Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator, which is pink in color, was sideways to higher. This suggests positive options delta trades likely had dealers buying stock/futures into the close.

Context: Wednesday’s commentary really hit the nail on the head, so to speak. 

Therefore, I offer some light updates.

As expected, per Nordea, the Fed will “accelerate its tapering process, and is now set to conclude net purchases already by mid-March vs mid-June with the earlier pace.”

“The dot plot was revised significantly higher, and the plot now shows three hikes for next year, a further three for 2023 and another two for 2024.”

Graphic: “[T]he terminal rate being priced in by financial markets is closer to 1.5% vs. 2.5% for the Fed,” Nordea explained. “The market is now pricing that rate hikes could start already in the mid-March 2022 meeting.”

That said, today’s rates support validations better than in the ‘90s.

At the same time, equity markets tend to rally into the first hike; Moody’s Corporation’s (NYSE: MCO) forecast aligns with that – “the Dow Jones Industrial Average increases this quarter and peaks in early 2022, … [followed by] steady decline through 2022.”

Graphic: S&P 500 performance before and after rate hikes.

This positive take is in the face of what has been markedly divergent breadth and extreme relative weakness, especially in rate-sensitive names. 

Why? Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive. 

Graphic: As U.S. stocks’ inflation-adjusted earnings yield turns negative, as seen near the peak of the tech bubble, via Bloomberg, “Investors in the Nasdaq increasingly seem to think that only a few companies have much of a chance. With a growing possibility of more aggressive attempts to prosecute antitrust issues, that’s a riskier position than it appears.”

With the equity market moving higher, here, into the end of the week, we ought to not discount participants’ increasing exposure to leveraged products.

This increases the speed with which volatility is realized and was cited as a risk in one of Moody’s recent commentaries.

So, despite having seasonally-aligned “passive buying support” and supportive positioning metrics, as well as expectations of “the strongest quarterly nominal [economic] growth in more than three decades,” offsides positioning ought to exacerbate underlying price movements.

So what? As stated, yesterday, the market is in a positive-gamma environment wherein the counterparties to customer options trades add market liquidity and temper realized volatility.

With participants’ fears surrounding monetary policy assuaged, there are positive flows that ought to support the market into this week’s weighty “quad-witching” derivatives expiry.

Graphic: VIX term shifts inward; as short-dated protection quickly was monetized or expired, volatility collapsed and dealers’ exposure to positive delta declined which meant they would cover their short futures hedges. This “vanna” flow bolstered an SPX rally into the end-of-day.

Into the end of the week, the expectation is that participants continue to step in and commit increased capital on lower directional volatility (as they had into this week).

With activity concentrated in shorter-dated tenors, counterparties will take on more exposure to positive gamma which they will offset by supplying the market with more liquidity, thereby pressuring the price discovery process.

Graphic: Via SpotGamma data, the above model’s tilt suggests dealers will increasingly sell into strength and buy into weakness, pressuring any price discovery into the end of this week.

Moreover, the decrease in dealer supply (short delta) post-OPEX, via the covering of short stock/futures hedges to put-heavy positioning, ought to bolster any attempt higher.

Below: Though book depth “in isolation is not the correct method to gauge liquidity,” it can help in assessing participants’ demand/supply as volatility (and stress, by that token) increases.

Graphic: Analysis of book depth for the E-mini S&P 500 futures contract, via CME Group Inc’s (NASDAQ: CME) Liquidity Tool. For more on the implications of participants’ options positioning and dealer hedging, read here.

In anticipation of higher prices, low cost, complex options structures like call-side calendars, butterflies, and ratio spreads are top of mind.

Graphic: Via Banco Santander SA (NYSE: SAN) research, the return profile, at expiry, of a classic 1×2 (long 1, short 2 further away) ratio spread.

Expectations: As of 6:15 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a positively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Balance-Break + Gap Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) is occurring.

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. 

Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator. 

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 $4,712.00 balance area boundary (BAH) puts in play the $4,732.50 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,740.50 minimal excess high and $4,767.00 extension, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,712.00 BAH puts in play the $4,690.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,674.25 HVNode and $4,657.00 balance low (BAL), or lower.

Click here to load today’s 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.
Graphic: V-pattern recovery in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, portends continuation. The red, black, and yellow-colored lines are anchored volume-weighted average price levels (VWAPs), 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.

Definitions

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

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.

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.

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.

Price Discovery (One-Timeframe Or Trend): Elongation and range expansion denotes a market seeking new prices to establish value, or acceptance (i.e., more than 30-minutes of trade at a particular price level). 

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.

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, helping develop insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not carry the right to provide advice. 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 December 2021 FOMC

What Happened

Equity index futures are lower after Monday’s failed balance-area breakout in the S&P 500 had that index rotate to and through the opposite end of a multi-day consolidation, yesterday.

This trade is in the face of expectations the Federal Reserve (Fed) will accelerate the taper to bond-buying, clearing the way for interest-rate hikes

Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive

The ruling narrative, so to speak, has resulted in the selling of expensive areas of the market.

Ahead is retail sales, import prices, and Empire State Manufacturing Index (8:30 AM ET) data. 

Then there are releases on the NAHB Home Builders’ Index, business inventories, inventory-sales ratio (10:00 AM ET). Later is a Federal Open Market Committee (FOMC) announcement (2:00 PM ET) and press conference (2:30 PM ET).

Graphic updated 6:25 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

According to SpotGamma, into this week, participants had been increasing their short-delta exposure (via a lot of call selling and a bit of put buying). 

This resulted in dealers selling (buying) futures into strength (weakness), a dynamic that promotes consolidation.

Later, as participants positioned for the FOMC event, demand for protection expanded and the S&P 500 made it to and through the low-end of the consolidation against the $4,700.00 high activity options strike. 

The trade built out areas of high volume (HVNode) via the cave-fill process in locations where prior discovery left weak structure – gaps and p-shaped emotional, multiple distribution profile structures (i.e., old-money covering shorts).

As evidenced by the divergent delta, below, responsive buyers surfaced at a key volume-weighted average price (VWAP) level (near $4,600.00 S&P 500), at which liquidity algorithms are benchmarked and programmed to buy and sell.

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 attempting in balance).

At the same time, as SpotGamma (beta) Hedging Impact of Real-Time Options (HIRO) indicator suggested “participants saw lower prices as an opportunity to express their opinion of lower volatility into Wednesday’s Federal Open Market Committee (FOMC) update.”

Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator, which is pink in color, was sideways to higher. This suggests positive options delta trades likely had dealers buying stock/futures into the close.

Context: Today, we get clarity from the Fed.

The expectation is that the asset purchases are scaled back by $30 billion per month versus the expected $15 billion. In doubling the pace of the taper to bond-buying, the odds of earlier rate hikes increase markedly.

“If the Fed does not address inflation soon, they risk long rates shooting much higher,” says Jim Bianco of Bianco Research.

“But if they follow the market’s lead in aggressively hiking rates, they risk hurting the economy. We understand the Fed’s paralysis given the massive uncertainty coming out of the pandemic. However, the longer they wait to address inflation, the worse this conundrum will become.”

Notwithstanding, today’s rates are supporting validations better than in the ‘90s.

At the same time, equity markets tend to rally into the first hike; Moody’s Corporation’s (NYSE: MCO) forecast aligns with that – “the Dow Jones Industrial Average increases this quarter and peaks in early 2022, … [followed by] steady decline through 2022.”

Graphic: S&P 500 performance before and after rate hikes.

Immediate risks, though, remain. 

There are growing pockets of weakness – as evidenced by divergent breadth – in the face of U.S. stocks’ inflation-adjusted earnings yield turning negative.

Similarly, participants are more exposed to leveraged products, among other things, which increases the speed with which volatility is realized.

“One potential catalyst would be an explosion in the value of margin accounts at brokers and dealers, which amounted to $595 billion in the second quarter, nearly double the pre-pandemic level. A drop in stock prices could trigger margin calls.”

So despite “natural, passive buying support” and positioning metrics flashing a buy, as well as expectations of “the strongest quarterly nominal [economic] growth in more than three decades,” offsides positioning may prompt a reaction that exacerbates underlying price movements.

So what? The market is in a positive-gamma environment wherein the counterparties to customer options trades add market liquidity and temper realized volatility.

If participants’ monetary policy fears are assuaged, a collapse in event-related implied volatility ought to bring positive flows as the long delta (from dealers’ exposure to short puts) decreases.

The decrease in dealer supply (short delta) post-FOMC and -OPEX, via the covering of short stock/futures hedges to put-heavy positioning, ought to bolster any attempt higher.

That’s not to say that some of the vulnerabilities like participants’ large exposure to leveraged products (which increases the speed with which volatility is realized) couldn’t prompt a round of destabilizing demand for downside protection.

Graphic: The “Biggest tail risk to SPX isn’t any macro data/virus/war but its own options market.”

Though order book depth “in isolation is not the correct method to gauge liquidity,” it can help in roughly assessing participants’ demand/supply as volatility (and stress, by that token) increases.

Graphic: Analysis of book depth for the E-mini S&P 500 futures contract, via CME Group Inc’s (NASDAQ: CME) Liquidity Tool. For more on the implications of participants’ options positioning and dealer hedging, read here.

Already, according to Bloomberg, some participants are positioning for “a seasonably favorable period for stocks” in 2021; “someone purchase[d] roughly 20,000 call spreads that are linked to the S&P 500 and expire right before the Christmas holiday. The transaction involved selling calls with a strike price at 4,750 to fund bullish options exercisable at 4,650.”

Graphic: S&P 500 finds support in area between the 20- and 50-day simple moving average. The aforementioned bullish “call spread” trade expiring before the Christmas holiday is included.

Expectations: As of 6:25 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 balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,618.75 high volume area (HVNode) puts in play the $4,647.25 HVNode. Initiative trade beyond the latter could reach as high as the $4,657.00 balance area low (BAL) and $4,674.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,618.75 HVNode puts in play the $4,596.25 regular trade low (RTH Low). Initiative trade beyond the RTH Low could reach as low as the $4,581.00 and $4,523.00 untested point of control (VPOC), or lower.

Click here to load today’s 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

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.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

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, helping develop insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not carry the right to provide advice. 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 December 14, 2021

What Happened

Overnight, equity index futures were mixed after Monday’s failed balance-area breakout in the S&P 500 had that index rotate to and through the opposite end of a multi-day consolidation.

This is as market participants await clarity on monetary policy from the Federal Reserve and the weighty “quad-witching” derivatives expiry, late this week. 

Ahead is data on the producer price index (8:30 AM ET).

Graphic updated 6:40 AM ET. Sentiment Risk-Off if expected /ES open is below 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

A change in the market was occurring, yesterday, as participants sought to break the S&P 500 out of a multi-day balance area and discover higher prices.

Shortly after the U.S. cash open, however, there was no follow-through; the index liquidated to the opposite end of the balance with sellers turning aggressive into the close.

Selling carried-forward, overnight, as the S&P 500 made it through the low-end of balance before finding responsive buyers at an anchored volume-weighted average price (VWAP) level, at which liquidity algorithms are benchmarked and programmed to buy and sell.

As noted many sessions ago, prior discovery left gaps and p-shaped emotional, multiple-distribution profile structures (i.e., old-money covering shorts).

Participants are now revisiting, repairing, and strengthening – building out areas of high volume (HVNodes) via the cave-fill process – these areas of low volume (LVNodes).

Graphic: Supportive delta (i.e., committed selling into end-of-day 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. Though initial readings were supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit), selling turned aggressive with the S&P 500 breaking its multi-day consolidation low, overnight.

Context: The S&P 500 can’t seem to crack the pin beneath $4,700.00.

This pin is the result of customers committing capital to bets on low volatility into this week’s Federal Open Market Committee (FOMC) meeting and Friday’s large derivatives expiry.

Graphic: Customers increased their exposure to short-delta call exposure. “Last week was about selling index calls,” SpotGamma’s Brent Kochuba said on Twitter. “This is likely why the $SPX stopped at $4,700.00.”

According to SpotGamma, participants are increasing their short-delta exposure (via a lot of call selling and a bit of put buying). 

In hedging their rising (declining) long-delta exposure, the dealer or counterparty to this positioning will sell (buy) futures into strength (weakness)

This forces the market into a consolidation

This trend ought to continue until (A) there’s a collapse in event-related implied volatility which would bring in positive flows as dealers cover static hedges, (B) the poor breadth and single-stock weakness feeds into feverishly destabilizing demand for downside protection, or (C) participants commit more capital to calls further out in time and higher in price.

We talk about the implications of options positioning mainly because it is a growing market that provides a clear indication of how participants (no matter how large) are positioned. 

Also, with FOMC approaching, the “other” timeframe participant (e.g., the hedge funds and institutions behind impactful buy/sell programs) is likely awaiting policy clarity to reposition.

As Mind Over Markets author James Dalton best explained: “Market participants balance their positions in expectation of the market’s reaction to the external stimuli – there is simply no activity. Trade is not being facilitated in any direction, for there is little participation and no confidence.”

Notwithstanding, last night, we broke a multi-session balance area. Based on profile theory, a new trend may begin. Context, though, suggests otherwise. 

Participants (large in size) are seeking clarity and, given the market’s responsiveness to technical levels, weaker, less well-capitalized short-term participants are in control

Therefore, we ought to discount (give less weight to) what happens in the coming days.

If later this week, participants are assuaged of their fears surrounding monetary policy, a collapse in event-related implied volatility ought to bring in positive flows as the long delta (from dealers’ exposure to short puts) decreases.

The decrease in dealer supply (short delta), via covering of short stock/futures hedges, would bolster any attempt higher

According to SpotGamma, if “interest in call options was to grow (evidenced by a shift higher in the Call Wall), a rally into (and beyond) end-of-year is further affirmed.”

That’s not to say that some of the vulnerabilities like participants’ large exposure to leveraged products (which increases the speed with which volatility is realized) couldn’t prompt a round of destabilizing demand for downside protection.

So, the question is whether the few companies leading this year’s rally can continue to lead? 

Or, in light of recent exuberance in heavy-weights like Apple Inc (NASDAQ: AAPL), in which participants are underexposed to downside protection, post-FOMC demand for protection bids volatility and results in a destabilizing, reflexive reaction on the part of dealers.

Graphic: As U.S. stocks’ inflation-adjusted earnings yield turns negative, as seen near the peak of the tech bubble, via Bloomberg, “Investors in the Nasdaq increasingly seem to think that only a few companies have much of a chance. With a growing possibility of more aggressive attempts to prosecute antitrust issues, that’s a riskier position than it appears.”

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

Balance-Break + Gap Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) is occurring.

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. 

Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator. 

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 HVNode puts in play the $4,657.00 balance area low (BAL). Initiative trade beyond the BAL could reach as high as the $4,674.25 HVNode and $4,690.25 micro composite point of control (MCPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,647.25 HVNode puts in play the $4,618.75 HVNode. Initiative trade beyond the latter could reach as low as the $4,581.00 and $4,523.00 untested point of control (VPOC), or lower.

Click here to load today’s 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.

Liquidation Breaks: The profile shape suggests participants were “too” long and had poor location.

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.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

Initiative Buying (Selling): Buying (selling) within or above (below) the previous day’s value area.

Responsive Buying (Selling): Buying (selling) in response to prices below (above) an area of recent price acceptance.

Price Discovery (One-Timeframe Or Trend): Elongation and range expansion denotes a market seeking new prices to establish value, or acceptance (i.e., more than 30-minutes of trade at a particular price level). 

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).

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.

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, helping develop insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not carry the right to provide advice. 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.