Tag: Divergent Breadth

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Daily Brief For December 2021 FOMC

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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.

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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.

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Categories
Commentary

Daily Brief For December 13, 2021

What Happened

Overnight, most equity, commodity, and bond futures were higher.

This comes ahead of the weighty December 17 options and futures expiration – “quad witching” – large portfolio rebalances, and an update to Federal Reserve (Fed) policy, December 15.

Ahead, today, there are no key economic releases scheduled.

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

On lackluster breadth and supportive market liquidity metrics, the best case outcome occurred, evidenced by an expansion of range, Friday, followed by a gap out of balance, Sunday.

Graphic: SpotGamma’s (beta) Hedging Impact of Real-Time Options (HIRO) indicator suggested participants were buying (or covering short) calls and selling put options, into the close. S&P 500 prices followed as dealers added to their long-delta hedges.

Context: As fears of a COVID-19 resurgence are assuaged, in the face of U.S. job growth that fell short of expectations, per Bloomberg, the Fed ought to move more quickly to “save itself from having to hike too far and make rates so expensive that they slow down the economy.”

The expectation is that the Fed scales asset purchases by $30 billion per month versus the expected $15 billion. In doubling the pace of the taper to bond-buying, the odds of a rate hike happening as early as next June 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.”

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.

Despite today’s rates supporting validations better than in the ‘90s, an intent to reduce stimulus serves as a headwind.

That said, equity markets typically rally into the first hike; Moody’s Corporation’s (NYSE: MCO) “forecast is 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, via The Market Ear.

Prevailing monetary frameworks and max liquidity promoted a large divergence in price from fundamentals; the growth of passive investing – the effect of increased moneyness among nonmonetary assets – and derivatives trading imply a lot of left-tail risks.

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.”

Adding, the Fed, too, is seeing vulnerabilities in asset prices.

“The decline in stock prices is forecast to be orderly but it could turn into something worse,” Moody’s explains. 

“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.”

Margin calls happen when customers owe money to their brokerage firm; “If there is no money, investors have to sell other assets.”

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

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

Short-term, however, aside from the presence of “natural, passive buying support,” the market is in a positive-gamma environment wherein the counterparties to customer options trades add market liquidity and temper realized volatility.

Graphic: “[N]atural, passive buying support,” coupled with strong put flows results in positive return distribution. Data via SqueezeMetrics. Graph via Physik Invest.

If participants are further assuaged of their fears at this week’s Federal Open Market Committee (FOMC) meeting, 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.

Expectations: 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 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 $4,717.25 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 $4,740.50 minimal excess 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 $4,705.25 LVNode. Initiative trade beyond the LVNode could reach as low as the $4,690.25 MCPOC and $4,674.25 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.

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.

Subscribe
Categories
Commentary

Daily Brief For December 2, 2021

What Happened

Overnight, equity index futures steadied at the prior day’s lows. 

There were signs of a shift in relative strength as the Russell 2000’s extended-day recovery outpaced that of the S&P 500 and (now) weaker Nasdaq 100. 

At the same time, yields on the ten-year rose while volatility came in. Still, the VIX futures term structure remained higher, a clear indication of stress, in the face of demand for protection.

Ahead is data on jobless claims (8:30 AM ET) with Fed-speak scattered throughout the day.

Graphic updated 6:40 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On nonparticipatory breadth and weak market liquidity metrics, the worst-case outcome occurred, evidenced by the S&P 500’s spike away from the value (i.e., the prices at which 70% of the day’s volume occurred).

The knee-jerk selling, which coincided with news that a COVID-19 variant was spotted in the U.S., broke the S&P 500 out of a short-term consolidation (i.e., balance) area. 

The developing balance was a result of participants looking for new information to base a directional move. With new information, participants chose downside price exploration.

Adding, the knee-jerk selling and associated price action left behind poor structure (i.e., participants will look to validate [or invalidate] the move, spending time below [or above] the ~$4,574.25 spike base). Caution is warranted on overnight validation of the spike. 

Graphic: Supportive delta (i.e., 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 initiative trade (i.e., directional trade that suggests current prices offer unfavorable entry and exit; the market is seeking balance).

Context: A resurgence in COVID-19, a change in tone with respect to monetary policy, and last-minute tax-selling, in the face of seasonally-bullish buybacks and new month inflows.

The implications of these themes on price are contradictory. 

As stated, yesterday, the Federal Reserve’s Jerome Powell unexpectedly changed his tone around inflation, becoming more open to a faster taper in bond-buying and rate hikes. 

This is as policymakers look to tame price readings without inhibiting economic growth; fears of the aforementioned change in tone were clearly spotted by the bond market’s pricing of risk, so to speak, diverging from that of the equity market, weeks before current volatility.

Graphic: “The ICE BofA MOVE Index, which measures implied volatility for Treasuries, is close to the steepest level since April 2020,” via Bloomberg.

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 to own.

As the market is a forward-looking mechanism, the implications of this are staggering. 

Prevailing monetary frameworks and max liquidity promoted a large divergence in price from fundamentals. The growth of passive investing – the effect of increased moneyness among nonmonetary assets – and derivatives trading imply a lot of left-tail risks.

Graphic: Via The Market Ear, “Bank of America estimates that corporate earnings used to explain half of equity market returns up to the financial crisis, but since then they only explain 21%. Meanwhile, changes to the Fed’s balance sheet explain 52% of market returns since 2010, it estimates. Buy what the FED buys. Sell what the FED stops buying.”

As Kai Volatility’s Cem Karsan once told me: “There’s this constant structural positioning that naturally drives markets higher as long as volatility is compressed,” or there is supply.

“At the end of the day, though, the higher you go, the further off the ground you are and the more tail risk.”

Eventually, the fear on the part of bond market participants fed into equity market positioning; breadth weakened for weeks into November’s large monthly options expiration, after which the absence of sticky and supportive hedging flows finally freed the market for directional resolve. 

Couple that with participants being “underexposed to downside put protection,” according to SpotGamma, there was an expectation that there could be a rough re-pricing of tail risk as participants, en masse, sought after highly “convex” downside options which had the counterparties to those trades exacerbating underlying price movement.

Per the VIX term structure graphic below, there is tons of movement in the front-end, a sign that participants are concentrating activity in shorter-dated tenors where the sensitivity of options to direction is higher.

Graphic: VIX term structure. 

So long as this dynamic remains, participants can expect instability.

In assuaging fears, however, Moody’s Corporation (NYSE: MCO) put out research that found “information about the variant and the policy actions taken to date do not yet support a material shift” in forecasts.

This is as S&P Global Inc (NYSE: SPGI), despite lowering growth forecasts a touch, expects GDP to reach a 37-year high in 2021. With odds that it will likely take the next few weeks to find out more with respect to the severity of new COVID-19 variants, attention moves to “cyclicals, commodities, and reopening themes,” according to JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic. 

Graphic: Via Bloomberg, “there is ‘plenty of liquidity available to drive stock prices higher as dip-buyers enter the market,’” strategists at Yardeni Research, wrote.

Expectations: As of 6:40 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the lower part of a positively skewed 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).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,551.75 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 $4,629.00 untested point of control (VPOC) and $4,674.25 micro composite point of control (MCPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,551.75 low volume area (LNVode) puts in play the $4,497.75 regular-trade low (RTH Low). Initiative trade beyond the RTH Low could reach as low as the $4,471.00 and $4,425.00 VPOC, or lower.

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

Charts To Watch

Graphic: (NYSE: SPY). (S~$448, $438 and R~$454, $460). S is for support. R is for resistance.

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.

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.

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).

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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Commentary

Daily Brief For November 24, 2021

What Happened

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

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

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

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

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

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

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

Graphic updated 6:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

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

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

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

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

These levels are the clearest ways to measure risk, given the mechanical responses in prior trade. Should participants manage to break past either level, then conditions have changed. Follow-through is likely. Reason being? Those visual levels are acted on by short-term, technically-driven market participants who generally are unable to defend retests.
Graphic: Divergent delta (i.e., non-committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: Keeping this section very short.

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

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

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

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

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

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

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

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

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

Spike Scenario In Play: A spike marks the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

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

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

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

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

Charts To Watch

What People Are Saying

Definitions

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

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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Commentary

Daily Brief For November 22, 2021

What Happened

Overnight, equity index futures were sideways alongside the narrative that a strengthening dollar and the need to counteract inflation may endanger the rally in risk assets.

Ahead is data on the Chicago Fed National Activity Index (8:30 AM ET) and Existing Home Sales (10:00 AM ET).

Graphic updated 6:20 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

To start, on weak intraday breadth and supportive market liquidity metrics, the best case outcome occurred, evidenced by the balance and overlap of value areas in the S&P 500.

Taken together, the activity of the past two weeks or so signals participants’ willingness to position for directional resolve (i.e., trend) in the face of new information, and the like. 

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

Context: The aforementioned trade is happening in the context of concerns over peak liquidity and prevailing monetary frameworks. 

Specifically, as Bloomberg’s John Authers put it, the abundance of global liquidity, that stoked one of the best stock market recoveries in history, is in peril by the strengthening of the dollar and the need to counter inflationary pressures. 

“Obstinately low real yields help to explain why the threat to liquidity has as yet had minimal effect on the stock market. Higher real yields are the shoe that hasn’t dropped this year; investors need a clear plan of evasive action for such an eventuality. For now, liquidity, liquidity, liquidity is still keeping stocks going up, up, up.”

Some of this fear around monetary evolution, so to speak, though, has yet to feed into the pricing of equity market risk. Fear in one market tends to feed into the fear of another.

Graphic: “The ICE BofA MOVE Index, which measures implied volatility for Treasuries, is close to the steepest level since April 2020,” via Bloomberg. This measure, on a relative basis, has diverged from the CBOE Volatility Index (VIX), which is a measure of implied volatility for equities, specifically the S&P 500. 

At the same time, we see a divergence in breadth.

Graphic: % of SPX stocks above their 200-Day Moving Average versus SPX, via indexindicators.com.

The takeaway here is that the SPX is sideways to higher while many of its constituents seem to not be participating in the most recent round of markup.

What factors are to blame for this? Two include an all-time high in buybacks, as well as extremes in speculation and upside volatility in heavily-weighted index constituents.

Adding, the S&P 500 closing last week pinned to the level at which dealers (i.e., those participants that take the other side of options trades and warehouse risk) exposure to positive options gamma was highest. 

Note that I talk about the implications options so much due to increased use and impact on underlying price, as a result of associated hedging. 

The aforementioned explains why the S&P can’t move; “If dealer hedging has suppressed index level volatility, but underlying components are still exhibiting idiosyncratic volatility, then the only reconciliation is a decline in correlation,” according to one paper by Newfound Research.

So trash breadth and a deceleration in equity inflows, coupled with exuberance (and upside volatility in heavily weighted index constituents) and clustered options positioning over the past weeks, is part of the reason why indices are sideways. Yes, to some extent.

Graphic: Per The Market Ear, “BofA points out the halt to inflows in market leaders such as tech, energy and financials. Basically, the “pillar of the pillar” of this market is fading. Do we still trust the seasonality pattern?”

The tone is to change, soon.

After OPEX, the absence of supportive vanna and charm flows (defined below), for which we can attribute some of the trends in extended day outperformance, alongside that sticky gamma hedging, so to speak, frees the market for directional resolve. 

According to SpotGamma, in light of recent exuberance, “participants are underexposed to downside put protection. Should these participants reach for long-gamma put exposures amidst volatility, there is a potential for a destabilizing, reflexive reaction on the part of dealers.”

The reason is, as volatility rises and customers demand out-of-the-money put protection, counterparties are to hedge by selling stock and futures into weakness. 

Cognizant of the risks, though, I end this section with the following. 

“[D]uring the 12-month period starting six months before and ending six months after a tightening cycle begins, the valuation of the S&P 500 has on average remained remarkably steady,” according to a post by The Market Ear.

At the same time, seasonality is great as, according to Callum Thomas, “Historically most of the time if the market closed up 20%+ for the year, the next year was also positive (84% of the time). As of writing, the market is up some 27% YTD (albeit, this year ain’t over yet!).”

Going forward, we shall monitor for the first signs of instability via spikes in the CBOE Volatility-Of-Volatility Index (INDEX: VVIX) and upward shifts in the VIX futures term structure.

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, inside of prior-range, suggesting a limited potential for immediate directional opportunity.

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

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

Given the passage of OPEX, we ought to give more weight to directional resolve (i.e., trend).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,692.25 high volume area (HVNode) puts in play the $4,723.50 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,735.25 and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,692.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,647.25 HVNode and $4,619.00 VPOC, or lower.

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

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.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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Commentary

Daily Brief For November 19, 2021

What Happened

Overnight, equity index futures diverged as the S&P 500 attempted a breakout, failed, and rotated back into range, leaving some signs of excess (i.e., a proper end to auction) on the composite volume profile. Learn about the profile.

This comes ahead of a weighty options expiration that ought to resolve this market of the dynamics that promoted sideways trade over the past couple of weeks. Attention, after today, shifts to weakening breadth, seasonality, emerging fundamental nuances, and the like, as a result.

Ahead is some Fed-speak and no major economic releases. 

Graphic updated 6:15 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

Yesterday, on nonparticipatory intraday breadth and market liquidity metrics, the best case outcome occurred; the S&P 500, after liquidating against a divergent volume delta (i.e., a metric that may reveal participants’ commitment to buying and selling as calculated by the difference in volume traded at the bid and offer) was responsively bought at its lows.

The low-of-day coincided with the $4,674.25 micro-composite point of control, the place at which two-sided trade was most prevalent over numerous day sessions, and the volume-weighted average price (i.e., the place at which liquidity algorithms are benchmarked and programmed to buy and sell) anchored from the Federal Open Market Committee (FOMC) event, weeks ago. 

The aforementioned activity left behind a double-distribution profile structure; participants initiated from one area of acceptance to another, closing just beyond what analysis provider SpotGamma sees is the options strike with the highest Absolute Gamma.

As discussed day after day, leading up to today’s monthly options expiration (OPEX), this cluster of options positioning was to restrain (i.e., make it difficult for) directional resolve.

The reason is, as OPEX nears and participants concentrate their activity on shorter-dated expiries (such as the one rolling off today), there’s an increased share who are willing to bet the market won’t move higher. In expressing this bet, participants opt to sell-to-open call exposure, for instance, leaving the counterparty/dealer warehousing exposure to positive options gamma. 

As this trend continues (and time to expiry narrows), dealers’ exposure to positive options gamma rises. In offsetting this risk, they sell to open (buy-to-open) the underlying as price rises (declines). This responsive buying and selling are what causes the market to balance (i.e., trade sideways) in a tight range. It ought to end after OPEX, as that options exposure rolls off. 

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance and not ready to break).

Context: The aforementioned trade is happening in the context of dynamics I touched on in weeks prior, as well as yesterday’s commentary. 

This is, specifically, the bond market’s pricing of risk.

According to Bloomberg, based on an “erratic … handling [of] large transfers of risk,” as evidenced by the Merrill Lynch Option Volatility Estimate (INDEX: MOVE), the bond market’s pricing of risk, so to speak, has diverged from the pricing of equity market risk, via the CBOE Volatility Index (INDEX: VIX).

Graphic: “The ICE BofA MOVE Index, which measures implied volatility for Treasuries, is close to the steepest level since April 2020,” via Bloomberg.

That said, fear in one market tends to feed into the fear of another; regardless of the cause, equity and bond market participants are not on the same page.

What is the fear all about? Well, at its core, the fear coincides with “broad uncertainty about the direction of the economy and monetary policy amid surging prices, labor shortages and yields that are holding well below the rate of inflation,” according to Bloomberg.

As asked, yesterday, in combating high inflation, policymakers ought to raise rates, right? 

That’s precisely what economists at institutions like JPMorgan Chase & Co (NYSE: JPM) believe may happen as soon as next September, earlier than once forecasted.

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 to own.

As the market is a forward-looking mechanism, the implications of this seem staggering. 

Prevailing monetary frameworks and max liquidity promoted a large divergence in price from fundamentals. The growth of passive investing – the effect of increased moneyness among nonmonetary assets – and derivatives trading imply a lot of left-tail risks.

As Kai Volatility’s Cem Karsan once told me: “There’s this constant structural positioning that naturally drives markets higher as long as volatility is compressed,” or there is supply.

“At the end of the day, though, the higher you go, the further off the ground you are and the more tail risk.”

Eventually, fear on the part of bond market participants may feed into equity market positioning.

In rounding out this section, I, again, want to mention the pinning in the broad market, as well as the performance of underlying constituents. If you’ve paid much of any attention, there is some bloodshed going on; breadth is divergent and the indices are sideways to higher, basically.

Graphic: Internally, the market is weak. Externally, via price, the market seems strong. 

The concern is that after OPEX, the absence of supportive vanna and charm flows (defined below), for which we can attribute some of the trends in extended day outperformance, alongside that sticky gamma hedging, so to speak, frees the market for directional resolve. 

Whether or not that resolve is up or down, we know that (as SpotGamma talks more about), participants are underexposed to downside protection. Should volatility pick up, these participants are likely to reach for that protection forcing dealers to reflexively hedge in a destabilizing manner. 

As volatility rises and customers demand out-of-the-money put protection, counterparties are to hedge by selling into weakness. The conditions worsen when much of the activity is in shorter-dated tenors where options gamma is more punchy if we will.

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

Expectations: As of 6:15 AM ET, Friday’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, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Balance-Break Failure: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) nearly occurred on a higher time frame.

In monitoring for acceptance (i.e., more than 1-hour of trade) outside of the balance area, we saw an overnight rejection (i.e., return inside of balance). This portends a move to the opposite end of the balance. 

Given OPEX, though, we ought to give more weight to continued balance (i.e., sideways trade).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,692.25 high volume area (HVNode) puts in play the $4,723.50 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,735.25 and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,692.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,647.25 HVNode and $4,619.00 VPOC, or lower.

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

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.

Options: If an option buyer was short (long) stock, he or she would buy a call (put) to hedge upside (downside) exposure. Option buyers can also use options as an efficient way to gain directional exposure.

VPOCs: 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, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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Commentary

Daily Brief For November 1, 2021

Abstract

Equity index futures higher. Commodities mixed. Bonds lower. Volatility expanded.

Ahead is a light day of economic releases, in the face of fundamental narratives and positioning metrics that promote less intraday volatility into FOMC.

What Happened

Overnight, equity index futures auctioned sideways to higher as participants seek clarity on the Federal Reserve’s intent to taper asset purchases and hike interest rates.

Ahead is data on Markit manufacturing PMI (9:45 AM ET), as well as the ISM manufacturing index and construction spending (10:00 AM ET).

Graphic updated 6:30 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

Action: On divergent intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by a spike away from value in the S&P 500 (INDEX: SPX) (ETF: SPY) (FUTURE: /ES).

Intent: The spike (and overnight gap, out of balance) mark a willingness to continue the trend.

Validation: Sideways to higher trade (above the $4,596.50 spike base) validates the market’s prevailing intent to markup prices ahead of impactful events like this week’s meeting of the Federal Open Market Committee (FOMC).

Consideration: Poor structure left behind prior initiative trade adds to technical instability.

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap.

Context: On no substantial change in volume and expansion of range, we see the Nasdaq 100 (INDEX: NDX) (ETF: QQQ) (FUTURE: /NQ) trading strong, relative to its peers.

Given where the S&P 500’s price is in relation to the yellow volume-weighted average price (VWAP) anchored from 9/2/2021, the average buyer, since that date, is in a winning position.

Generally speaking, sideways to higher trade, above the yellow VWAP, puts in play the Fibonacci resistances overhead.

Graphic: SPDR S&P 500 ETF (NYSE: SPY) top left, Invesco QQQ Trust Series 1 (NASDAQ: QQQ) top right, iShares Russell 2000 ETF (NYSE: IWM) bottom left, SPDR Dow Jones Industrial Average ETF Trust (NYSE: DIA) bottom right. The S&P 500, in particular, is out of balance on the daily, weekly, and monthly. Key levels – SPY (S~442.00, R~461.58), QQQ (S~369.66, R~391.52), IWM (S~222.58, R~234.53) where S is support and R is resistance.

Further, the aforementioned trade is happening in the context of peak growth, in the face of inflation, uncertainty around fiscal policy (with respect to dynamics like the debt ceiling), and increased prospects of tapering to Federal Reserve (Fed) asset purchases.

The implications of these themes on price are contradictory. 

To elaborate, Moody’s expects the Fed to taper its asset purchases in December by $15 billion. 

Every single month after, the Fed will continue to reduce purchases by $15 billion with the tapering process expected to be done by mid-2022. Proceeds from maturing assets will be reinvested to prevent balance sheet contraction and rate hikes ought to start in early 2023.

Moody’s notes: “Tapering won’t impact inflation. Though tapering won’t be disinflationary, it could help keep market-based measures of inflation expectations anchored, since tapering is the preamble to the Fed beginning to tighten monetary policy either by allowing its balance sheet to decline and/or by increasing the target range for the fed funds rate.”

In terms of positioning, according to SqueezeMetrics, “middling dark pool sentiment and middling gamma exposure [portends] … 1-month negative returns.”

At the same time, SpotGamma models forecast hedging (by dealers who warehouse options risk) may promote tighter ranges as dealers sell into strength, increasingly. Until event volatility leaves the market, post-FOMC, odds of directional resolve will continue to be limited as higher implied volatility takes away from important dynamics that bolster movement.

Couple that with the intent to normalize policy, the environment “creates a little bit of a challenge for [the] equity market because it does change the drivers of equity performance,” says HSBC Holdings Plc’s (NYSE: HSBC) Joseph Little.

Graphic: A “gentle reminder of the fact tapering matters,” via The Market Ear.

Expectations: As of 6:30 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. This suggests 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 $4,596.50 spike base puts in play the $4,618.50 Fibonacci resistance. Initiative trade beyond $4,618.50 could reach as high as the $4,639.00 and $4,664.75 Fibonacci resistances, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,596.50 spike base puts in play the $4,574.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as low as the $4,551.75 low volume area (LVNode) and $4,526.25 HVNode, or lower.

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

What People Are Saying

https://twitter.com/VolQuant/status/1454449320778948617?s=20

Definitions

Spikes: 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).

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.

Balance-Break 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. Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

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, developing insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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Commentary

Weekly Brief For September 19, 2021

Editor’s Note: Late today. So sorry! The main takeaway is that we’re in a window of volatility and participants should focus on leveraging rich skew and complex spreads to hedge or speculate on sideways to lower trade.

Market Commentary

  • SPX below balance, 50-day SMA.
  • Ahead is a 2-day FOMC meeting.
  • Concerns around the debt ceiling.
  • Rich skew makes hedging easier.
  • Post OPEX volatility likely in play.

What Happened: U.S. stock index futures auctioned lower, last week, into Friday’s quadruple witching derivatives expiry. 

Of interest this week is a meeting of the Federal Open Market Committee (FOMC).

Graphic updated 5:30 PM ET Sunday. 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. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: During the prior week’s trade, on weak breadth, the worst-case outcome occurred, evidenced by a balance-area breakout and separation of value below the S&P 500’s 50-day simple moving average (i.e., a visual level likely paid attention to by short-term, technically-driven market participants who generally are unable to defend retests).

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

We now monitor for rejection (i.e., return inside of balance) which portends a move to the opposite end of the balance.

Further, the aforementioned trade is happening in the context of a waning economic recovery, heightened valuations in the face of strong EPS expectations, the prospects of stimulus reduction, non-seasonally aligned flows, impactful options and equity market dynamics, divergent sentiment, as well as fears of a mid-cycle transition.

In a Goldman Sachs Group Inc (NYSE: GS) note posted by The Market Ear, analysts “believe it is a critical period for many investors and companies that manage performance to calendar year-end. Such pressures boost volumes and volatility as investors observe earnings reports, analyst days and managements’ guidance for the following year.”

At the same time, inflows into equities are exploding to the upside as JPMorgan Chase & Co (NYSE: JPM) technicians “do not see a pattern on the [S&P 500] chart or any cross-market dynamics that would suggest the market is set for a lasting bearish reversal. The late-Aug systematic sell signals lose statistical significance into next week and the seasonal trends improve into early-Oct.”

Graphic: Bank of America Corporation (NYSE: BAC) charts equity flows, via The Market Ear.

That said, we hone in on risks.

If concerns like the debt ceiling are not resolved, some economists argue, according to Bloomberg, “that an announcement on tapering is likely to be delayed to December, and that Treasury yields could fall further as a result.”

We note that – as Goldman Sachs writes – “The upcoming debt limit deadline is beginning to look as risky as the 2011 debt limit showdown that led to Standard & Poor’s downgrade of the US sovereign rating and eventually to budget sequestration, or the 2013 deadline that overlapped with a government shutdown.”

On the other hand, according to SqueezeMetrics, “the current combination of weak put flows and large customer vanna exposure” is fragile; “people are [still] overexposed to changes in VIX, and will be hurt more than usual if VIX starts moving up. Historically, this means SPX down, VIX up.”

Following SqueezeMetrics’ remarks, SpotGamma adds that “over 50% of stocks [had] their largest gamma position” roll-off Friday. This suggests an increased potential for volatility heading into the September 21-22 FOMC event.

In this post-quad-witching window of non-strength, we may, as a result, use the rich skew to hedge (see below Weekly Trade Idea section).

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,437.75 micro-composite point of control (MCPOC) puts in play the $4,481.75 high volume area (HVNode). Initiative trade beyond the $4,481.75 HVNode could reach as high as the $4,510.00 low volume area (LVNode) and $4,526.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,437.75 MCPOC puts in play the $4,393.75 HVNode. Initiative trade beyond the $4,393.75 HVNode could reach as low as the $4,365.25 LVNode and $4,341.00 untested point of control (VPOC), or lower.

We note that the $4,481.75 and $4,393.75 HVNodes intersect key anchored volume-weighted average price levels. These are metrics 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.

Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures updated 5:30 PM ET Sunday.

Key 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.

Weekly Trade Idea

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

Options offer an efficient way to gain directional exposure. 

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

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

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

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

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

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

Trade Idea: SELL -1 1/2 BACKRATIO SPX 100 (Weeklys) 29 SEP 21 4400/4300 PUT @.65 CREDIT LMT

I’m neutral to bearish on the S&P 500 and I think the index may slide toward $4,300. I will structure a spread below the current index price, expiring in about 2 weeks. I will buy the 4400 put option once (+1) and sell the 4300 put option twice (-2) for a $0.65 credit. Should the index not move to my target, I keep the $65 credit. Should it move to $4,300, I could make $10,065.00 at expiry. Should the index move past $4,200.00 or so, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the index moves lower. 

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

News And Analysis

An essay on why you keep losing money as a trader.

August retail sales reflect strong consumer demand.

UBS: Resist temptation to time market despite highs.

U.S. debt ceiling fight could cause markets to tumble.

Nasdaq on whether Rule 605 works better in dollars.

Rally driven less by reflation prospects; TINA to stock.

Higher U.S. CGT proposal spurs a PE and M&A rush.

If a CEO talks like Kant, think twice before investing.

New vehicle prices surge amid global chip shortages.

Active managers’ performance disappointing in 2021.

DeFi is disrupting but not derailing traditional finance.

OpenSea admitted recent incident as insider trading.

SEC looks to greater oversight of the crypto markets.

Central bank digital currency; cash for the digital age.

White House to put forward three CFTC nominations.

Some key lessons from NYC’s first SALT conference. 

Let’s Hang Out

Salt Lake City, UT September 28-30

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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Commentary

Daily Brief For July 16, 2021

Market Commentary

Equity index futures higher overnight.

  • Watching: Delta variant, HK warning.
  • Light day ahead: OPEX, retail sales.
  • Indices rotating, recover lost ground.

What Happened: U.S. stock index futures auctioned sideways to higher last night ahead of the Friday monthly options expiry (OPEX). 

Key developments include a bump in the consumer price index (CPI), expectations the Biden administration will issue an advisory about the risks of doing business in Hong Kong, and the spread of COVID-19 variants.

Today, participants get data on retail sales, Fed speak, and earnings.

Graphic updated 7:00 AM ET. Sentiment Neutral if /ES open is inside of the prior day’s range. Sentiment Risk-On if /ES open is above the prior day’s range. Sentiment Risk-Off if /ES open is below the prior day’s range. See here for more on the Dark Pool Index and Gamma. A positive Dark Pool Index reading is bullish. At the same time, the higher (lower) the gamma, the less (more) volatility. SHIFT Search data used for options activity. Note that options flow is sorted by the call premium spent; if green and more (less) positive then more (less) was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator.

What To Expect: Friday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by trade below the $4,357.75 low volume area (LVNode) pivot. This is significant because that pivot marked a break from a multi-session balance area. 

Volume Areas: A structurally sound market will build on past areas of high volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low volume area which denotes directional conviction and ought to offer support on any test). 

If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).

The downside resolve was the result of initiative sellers stepping in. For weeks, equity indices – particularly the S&P 500 and Nasdaq 100 – rose with tremendous speed, leaving behind low volume (poor) structures. Thereafter, responsive sellers surfaced, evidenced by sideways trade in the day’s prior. That said, weak breadth transpired into material price action with the Nasdaq 100 losing its relative strength – a deviation from prior trade – as it and the Russell 2000 sold into trend support. The S&P 500 and Dow Jones Industrial Average traded strong, in comparison, with the Dow positioned for a potential break higher. 

All of this push-pull and divergence comes ahead of the options expiration (OPEX) cycle which starts on the third Friday of each month (July 16). Associated hedging forces make it so there’s more liquidity and less movement. After OPEX, according to SpotGamma, “the market tends to experience its largest intraday volatility which corresponds to the reduction in large options positions, and the hedging associated with them.”

Graphic: SpotGamma’s EquityHub shows 30% of the S&P 500’s gamma expiring July 16 which, as SpotGamma has said in the past, “creates volatility because, as large options positions expire[], are closed and/or rolled, dealers have large hedges they need to adjust.”

Given the expectation for so-called unpinning in coming sessions, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,357.75 LVNode pivot puts in play the $4,371.00 untested Point of Control (POC). Thereafter, if higher, participants can look for responses at the $4,384.50 regular trade high (RTH High) and $4,398.50 Fibonacci price extension.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.

In the worst case, the S&P 500 trades lower; activity below $4,357.75 puts in play the $4,346.75 high volume area (HVNode). Trade beyond $4,346.75 could reach as low as the $4,332.25 LVNode and $4,314.75 HVNode.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Note the developing VWAP pinch. Buy above a flat/rising VWAP pinch. Sell below a flat/declining VWAP pinch.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). See the response to trend support in the Nasdaq 100 and Russell 2000. Also, note the Dow’s relative strength.

News And Analysis

Politics | U.S. warns investors on Hong Kong, citing China’s pressure. (BBG)

FinTech | Ethereum is the most important technology since the internet. (DDI)

Politics | Ocasio-Cortez warns progressives can ‘tank’ infrastructure bill. (BBG)

Markets | OPEC sees world oil demand reaching pre-pandemic levels. (REU)

Mobility | Biden looks into lifting Europe travel ban, a boost for airlines. (BBG)

Economy | Biden to reappoint Jerome Powell as Fed chair, some saying. (REU)

Markets | “Bad omen” for meme stocks as novice traders stop investing. (Axios)

What People Are Saying

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. Additionally, Capelj is a finance and technology reporter that’s interviewed leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, Canadian businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Subscribe