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Commentary

Market Commentary For 3/16/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: U.S. stock index futures auctioned higher ahead of releases on retail sales, industrial production, and a Federal Reserve policy meeting.

What Does It Mean: Alongside positive news concerning vaccines, stimulus, and improved economic data, U.S. index futures recovered from their most recent swing low.

As stated yesterday, given the speed and distance of the S&P 500’s recovery since March 4, the potential for balance, or two-sided trade is high as participants look for more information to base their next move on.

In support of this thesis are market liquidity metrics which suggested (1) buying pressure was leveling out and/or (2) buyers were absorbing resting liquidity (opportunistic selling or selling into strength), while speculative options activity appeared muted.

Graphic: Market liquidity for the SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index.

What To Expect: Tuesday’s regular session (9:30 AM – 4:00 PM ET) will likely open just outside of prior-range, suggesting the potential for immediate directional opportunity.

During Monday’s trade, participants rallied the S&P 500 into the close, leaving another end-of-day spike.

More On 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).

For today, participants can trade from the following frameworks.

In the best case, the S&P 500 finds acceptance (i.e., resolves higher or sideways), above the $3,947.74 spike base. In the worst case, the S&P 500 finds acceptance (i.e., resolves lower or sideways) below the $3,947.74 spike base.

In case of higher prices, participants may look to auction as high as the $3,947.25 price extension, a typical recovery target.

In case of lower prices, participants would look for responses at the $3,931.00 Virgin Point Of Control (VPOC) and $3,898.25 high-volume area (HVNode).

More On 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.

More On POCs: POCs (like HVNodes described above) 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.

Levels Of Interest: $3,947.74 spike base.

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

Market Commentary For 3/11/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: After a report on U.S. consumer prices helped calm fear around rising inflation, U.S. stock index futures auctioned higher.

What Does It Mean: On a relative basis, the Nasdaq-100 is weaker, while the S&P 500Russell 2000, and Dow Jones Industrial Average are stronger. This push-pull dynamic, in prior sessions, made it hard for participants to resolve directionally, evidenced by volatility.

Now, it appears that relative strength could be shifting back to the Nasdaq-100, evidenced by supportive market liquidity and option activity dynamics, over the last few sessions.

Important to note is the tenor of the speculative derivatives activity, dominance of put side open interest, and divergent delta in the the S&P 500 and Russell 2000.

These dynamics suggest near-term conviction. In other words, participants with a short-term outlook are dominating recent trade. This is also evidenced by the mechanical trade (e.g., flat highs during Tuesday’s session in the S&P 500, and subsequent end-of-day liquidation that was taken back during Wednesday’s trade).

More On Liquidation Breaks: The profile shape in the S&P 500 suggests participants were “too” long and had poor location.

More On Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

More On 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.

What To Expect: Thursday’s regular session (9:30 AM – 4:00 PM ET) will likely open outside of prior-range and -value, suggesting the potential for immediate directional opportunity.

During Wednesday’s trade, the best case outcome occurred, evidenced by initiative trade that retook the $3,891.00 spike base.

For today, participants can trade from the following frameworks.

In the best case, the S&P 500 trades sideways or higher, as high as the $3,934.25 ledge. Auctioning above the ledge may portend a fast move to the $3,959.25 overnight rally high (ONH).

More On Ledges: Flattened area on the profile which suggests responsive participants are in control, or initiative participants lack confidence to continue the discovery process. The ledge will either hold and force participants to liquidate (cover) their positions, or crack and offer support (resistance).

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

In the worst case, participants lack the conviction to maintain higher prices, evidenced by trade below the $3,907.25 high-volume area (HVNode). Any trade below the $3,861.25 low-volume area (LVNode) would put in question this most recent 4-day recovery.

More On 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.

Levels Of Interest: $3,959.25 ONH, $3,934.25 ledge, $3,907.25 HVNode, $3,861.25 LVNode.

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Commentary

Market Commentary For 3/10/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: U.S. stock index futures rotated within prior range, ahead of the approval of $1.9 trillion in COVID-19 relief.

What Does It Mean: Potential for higher, given a clear break in the S&P 500’s technical downtrend, during Tuesday’s regular trade.

That said, participants ought to watch out for volatility, given key economic releases, as well as the passage of a stimulus bill.

In regards to recent market liquidity metrics, speculative derivatives activity, as well as the inventory positioning of market participants, caution is warranted.

What To Expect: Wednesday’s regular session (9:30 AM – 4:00 PM ET) will likely open within the prior day’s spike liquidation, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

During Tuesday’s trade, the best case outcome occurred, evidenced by the S&P 500’s resolve of a multi-session consolidation and initiative trade above the $3,861.26 LVNode.

More On 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.

For today, participants can trade from the following frameworks.

In the best case, the S&P 500 resolves higher, evidenced by initiative trade that takes out the $3,891.00 spike base. In the worst case, the S&P 500 resolves lower, evidenced by initiative trade that finds increased participation below the $3,855.00 RTH Low.

More On 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).

In case of upside (downside) resolve, participants may target the $3,959.25 overnight rally high ($3,839.25).

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

Levels Of Interest: $3,891.00 spike base (Upside Go/No-Go Level).

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Commentary

Market Commentary For 2/17/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: U.S. stock index futures auctioned lower as investors turned cautious ahead of economic releases.

What Does It Mean: After a v-pattern recovery and sideways trade in the weeks prior, stock index futures auctioned out of prior-balance and -range, via Friday’s end-of-day spike.

More On 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).

The spike and shift from balance (i.e., the transition from two- to one-time frame trade) was accepted, despite Tuesday’s liquidation break.

More On Liquidation Breaks: The profile shape in the S&P 500 suggests participants were “too” long and had poor location.

Adding, for the entirety of Tuesday’s session, prices rotated lower in the face of increased buying interest, as observed by volume delta and option activity.

Given that the market is technically positioned for higher, it will be interesting to see whether on not Tuesday’s interest (as measured by volume delta) leads to upside resolve.

More On Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

What To Expect: Wednesday’s regular session (9:30 AM – 4:00 PM ET) will likely open inside of prior-balance and -range, suggesting the limited potential for immediate directional opportunity.

This comes alongside a resumption in trend, acceptance of higher prices (above a prominent high-volume area), and an overnight rally-high at $3,959.25.

More On Overnight Rally Highs: Typically, there is a low historical probability associated with overnight rally-highs ending the upside discovery process.

More On 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.

Thus, given the above dynamics, the following frameworks ought to be applied.

In the best case, the S&P 500 opens and remains above the $3,919.75 spike base, further confirming last week’s higher prices. In the worst case, the S&P 500 auctions below the $3,919.75 spike base.

Trade below the spike base would be the most negative outcome.

Why? Beneath the spike base is a high-volume concentration which offers favorable entry and exit for initiative buyers and responsive sellers. Should the market auction beneath the spike base (and aforementioned high-volume area), then participants may see a new wave of downside discovery.

Levels Of Interest: $3,919.75 spike base.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Ping-Pong’

Quote Of The Week: Excessive determinism is almost always the biggest enemy of stability. This seeming contradiction is behind the concept of metastability which captures the mode of market functioning in the last years. Metastability is what seems stable, but is not — a stable waiting for something to happen. [An] avalanche is a good example of metastability to keep in mind — a totally innocuous event can trigger a cataclysmic event (e.g., a skier’s scream, or simply continued snowfall until the snow cover is so massive that its own weight triggers an avalanche).

Quote by Aleksandar Kocic, Managing Director at Deutsche Bank AG (NYSE: DB), from Heisenberg Report.

Key Takeaways:

  • V-pattern recovery suggests higher prices.
  • Risks offset and funds looking to re-gross.
  • Dip presented a favorable buy opportunity.

What Happened: In light of a v-pattern recovery, after a quick de-risking event, U.S. stock indexes are positioned for further upside, as high as the 100% price projection, which happens to be above $4,000.00, a primary target in the S&P 500.

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

What Does It Mean: This positive price action is happening in the context of bearish undercurrents, as evidenced by non-participatory speculative flows and delta, as well as a divergence in the DIX.

More On Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

More On DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market making side) — we can measure buying pressure.

More On Speculative Flows: Participants looking to capitalize on either upside or downside through the purchase and sale of options, the right to buy or sell an asset at a later date and agreed upon price.

Adding, according to The Market Ear, similar risk rallies have happened after hedge fund de-grossing events; now, “Equities are rising along higher yields, dollar and [volatility], and the magic word here is discounting inflation.”

Further, since price pays, participants ought to discount the bearish undercurrents, and position themselves for upside. Hedge funds are doing so, as evidenced by an increase in gross exposures (Graphic 1), alongside other speculative participants that look to capitalize on their opinions through the options market (Graphic 2). 

Graphic 1: JPMorgan Chase & Co. (NYSE: JPM) data suggests normalization as “HFs add back to gross exposures.”
Graphic 2: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust, for the week ending February 6, 2021.

Last week, per Graphic 2, the SPDR S&P 500 ETF Trust, the largest ETF that tracks the S&P 500, saw a rise in purchases of short-dated call and put options. Given the tenor (i.e., the length of time remaining before contract expiration), there’s a lack of long-term commitment to direction.

Adding, early and late in the week, the purchase of put options dominated. This suggests participants were either looking to protect against or capitalize on downside. In the middle of the week, participants were looking to protect against or capitalize on upside. 

More On 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.

The above, alongside the market’s re-entry into long-gamma (Graphic 3) and a normalization of the VIX futures term structure (see Graphic 4) in which longer-dated VIX expiries are more expensive, suggests the potential for less risk and volatility in equity markets.

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

Graphic 3: SpotGamma suggests S&P 500 at or above “Long-Gamma” juncture.
Graphic 4: VIX Futures Term Structure per vixcentral.com.

What To Expect: U.S. stock indexes are best positioned for further balance or upside discovery.

Graphic 5: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

In Graphic 5, the highlighted zones denote high-volume areas (HVNodes), or valuable areas to transact.

More On 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.

Last Monday, participants found acceptance in prior low-volume. Thereafter, discovery was volatile and quick as participants looked to areas of high-volume for favorable entry and exit (e.g., where the market spent the majority of its time Tuesday through Thursday).

On Friday, the S&P 500 left the HVNode near $3,840.00. As stated, HVNodes can be thought of as building blocks — they also denote areas of supply and demand. In this case, $3,840.00 can now be thought of as an area of demand. The primary strategy is to respond to probes into these supply (i.e., selling responsively) and demand (i.e., buying responsively) areas as they offer favorable entry and exit.

What To Do: Participants will want to pay attention to last Thursday’s $3,855.00 Virgin Point Of Control, or VPOC (i.e., the fairest price to do business in a prior session), and end-of-day spike, as well as the $3,840.00 HVNode.

More On POCs: POCs (like HVNodes described above) 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.

More On 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).

Given the above references, the following frameworks ought to be applied.

In the best case, the S&P 500 does some backfilling to repair aforementioned poor structures. In such a case, participants would look for responsive buying to surface at or above the $3,840.00 HVNode

In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below the $3,840.00 HVNode, would favor continuation as low as the $3,794.75 and $3,727.75 HVNodes.

Note that the $3,727.75 HVNode corresponds with the $372 SPY put concentration, which may serve as a near-term target, or bottom, for a sell-off. 

Graphic 6: Profile overlays on a 15-minute candlestick chart of the Micro E-mini S&P 500 Futures.

Conclusions: Simplicity is key here.

Participants ought to look for favorable areas to transact, such as those high-volume areas in the S&P 500 featured in Graphic 5.

Levels Of Interest: $3,840.00 HVNode.

Photo by Josh Sorenson from Pexels.

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Commentary

Market Commentary For The Week Ahead: ‘The Flow Won’

Key Takeaways:

What Happened: Amid a volatile, news-heavy week, after a slew of earnings reports by heavily weighted index constituents, and an FOMC meeting that made no change to existing monetary policy, financial markets experienced a rapid de-risking, similar to what transpired prior to the sell-off in February 2020.

What Does It Mean: After extending the S&P 500’s rally, as well as establishing acceptance near the $3,850.00 price extension, an upside target, and excess (i.e., a proper end to price discovery), participants auctioned back into range, repairing poor structures left in the wake of initiative buying.

The action found acceptance below the $3,824.00 – $3,763.75 balance-area, invalidating the prior week’s break-out to new highs.

Since then, market participants were witness to violent two-sided trade, a result of the market transitioning into a short-gamma environment (Graphic 1).

In such case dealers hedge derivatives exposure by buying into strength and selling into weakness. This, will exacerbate volatility.

Graphic 1: SpotGamma data suggests S&P 500 has entered short-gamma environment

In a conversation for a Benzinga article to be released this coming week, I spoke with Kris Sidial, co-chief investment officer at The Ambrus Group, a volatility arbitrage fund, regarding GameStop Corporation (NYSE: GME) share price volatility, market microstructure, and regulation.

According to Sidial, the dynamics that transpired in GameStop can be traced back to factors like Federal Reserve stabilization efforts, and low rates, which incentivize risk taking (see Graphic 2).

“The growth of structured products, passive investing, the regulatory standpoint that’s been implemented with Dodd-Frank and dealers needing to hedge off their risk more frequently, than not,” are all part of a regime change that’s affected the stability of markets, Sidial notes. 

“These dislocations happen quite frequently in small windows, and it offers the potential for large outlier events,” like the equity bust and boom during 2020. “Strength and fragility are two completely different components. The market could be strong, but fragile.”

The aforementioned regime change is one in which dealer exposure to direction and volatility promotes crash up and down dynamics. Last February, the market was heavily one-sided with participants, like target date funds (e.g., mutual funds), selling far out-of-the-money puts on the S&P 500 for passive yield, and investors buying-to-open put options in an increasing amount for downside exposure, thus exacerbating volatility. 

Graphic 2: Newfound Research unpacks market drivers, implications of liquidity.
Graphic 3: SqueezeMetrics highlights implications of volatility, direction, and moneyness.

Last week, per Graphic 4, the SPDR S&P 500 ETF Trust, the largest ETF that tracks the S&P 500, saw a rise in purchases of downside protection with time, which will likely lead to an increase in implied volatility and sensitivity of options to changes in underlying price.

These risks will be hedged off by dealers selling into weakness (see Graphic 3), thereby exacerbating downside volatility.

Graphic 4: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust, for the week ending January 30, 2021.

The activity was most concentrated in put options with a strike price of $361, corresponding with $3,610 in the cash-settled S&P 500 Index (INDEX: SPX). This, alongside the market’s entry into short gamma, and an inversion of the VIX futures term structure (see Graphic 5), in which longer-dated VIX expiries are less expensive, is a warning of elevated near-term risks for equity market stability.

Graphic 5: VIX Futures Term Structure per vixcentral.com.

What’s more? Aside from breaking technical trend (Graphic 6) is DIX, a proxy for buying derived from short sales (i.e., liquidity provision on the market making side) declining, and the presence of divergent speculative flows and delta (e.g., non-committed buying as measured by volume delta).

Graphic 6: Cash-settled S&P 500 Index experiences technical breakdown.
Graphic 7: DIX by SqueezeMetrics suggests large divergence between price and buying on January 27.
Graphic 8: Divergent Delta in the SPDR S&P 500 ETF (NYSE: SPY), the largest ETF that tracks the S&P 500.

What To Expect: In light of the technical breakdown U.S. stock indexes are best positioned for downside discovery.

As a result, participants ought to zoom out, and look for valuable areas to transact.

Graphic 9: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

In Graphic 9, the highlighted zones denote high-volume areas (HVNodes), which can be thought of as building blocks.

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, as they have in the week prior, then future discovery ought to be volatile and quick as participants look to areas of value for favorable entry or exit.

Additionally, it’s important to remember what the market’s long-term trajectory is: up.

Late last year, JPMorgan Chase & Co. (NYSE: JPM) strategist Marko Kolanovic suggested equities would rally short-term with the S&P 500 auctioning as high as $4,000 on the basis of low rates, improved fundamentals, buybacks, as well as systematic and hedge fund strategies. Since then, Kolanovic has downgraded growth and suggested the limited potential for further upside despite odds of a sustained economic recovery.

Note, Kolanovic has not called for an implosion in equity markets. Instead, the market is due for some downside discovery given a moderation in the recovery.

Given the above dynamics, the following frameworks apply for next week’s trade.

In the best case, the S&P 500 takes back Friday’s liquidation and auctions above the $3,727.75 HVNode. Expectations thereafter include continued balance.

In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below the $3,689.50 HVNode, would favor continuation as low as the $3,611.50 and $3,556.00 HVNodes. Note that the second to last HVNode corresponds with the $361 SPY put concentration, which may serve as a near-term target, or bottom, for this sell-off, given last week’s activity at that strike.

Graphic 10: Profile overlays on a 15-minute candlestick chart of the Micro E-mini S&P 500 Futures.

Conclusions: Participants ought to look for favorable areas to transact, such as those highlighted areas in the S&P 500, featured in Graphic 9.

Big picture, the sell-off ought to be bought, just not yet. Per Graphic 11, euphoria is still too high.

Graphic 11: Bank of America Corporation (NYSE: BAC) sentiment indicators.

Levels Of Interest: $3,727.75, $3,689.50, $3,611.50 and $3,556.00 HVNodes.

Cover photo by Pixabay from Pexels.

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Commentary

Market Commentary For The Week Ahead: ‘Follow The Flow’

Key Takeaways:

What Happened: After prices were advertised below balance in the week prior, responsive buyers in the S&P 500 began a rally that found acceptance back inside a larger balance-area, near the $3,800 high-open interest strike.

Thereafter, initiative buyers extended the S&P 500’s rally, breaking the index above its $3,824.25 balance-area high (BAH), before establishing acceptance near the $3,850.00 price extension, an upside target, and auctioning back into range, repairing poor structures left in the wake of discovery.

What Does It Mean: In light of a failed breakdown in the week prior, U.S. stock indexes were best positioned for further downside discovery. However, after what appears to be aggressive buying in response to prices below value, it was clear that was not the case.

This leads to the following question: why did selling stop on January 15? One answer, aside from a positive start to the earnings season and prospects for further stimulus, may be OPEX, the January 15 option expiry. On expiration days, delta and gamma exposures change — depending on how derivatives exposure is removed or rolled — which causes dealers to adjust hedges.

According to SpotGamma, the January 15 expiry “resulted in a ~50% reduction in single stock gamma … [which] creates volatility because, as large options positions expire[], are closed and/or rolled, dealers have large hedges they need to adjust. There is a trove of data to suggest that the bulk of single stock call activity is long calls, and based on that we believe dealers (who are short calls vs long stock) therefore have long stock positions to sell.”

Put more simply, the price action may have been attributable to the sale of long stock that hedged expiring short derivatives exposure above the market (i.e., call side).

Per the SpotGamma S&P 500 dealer hedging graphic for the January 15 expiry below, “The black line was the mark on Thursday evening, with the red line being the forecasted position on Tuesday. This red line being substantially lower than the black suggests that dealers had to reduce delta exposure as a result of expiration. Note there is a larger shift at overhead prices suggesting this was a ‘call heavy’ expiration.”

Graphic 1: SpotGamma S&P 500 dealer hedging graphic for the January 15 options expiry

After the VIX (i.e., CBOE’s Volatility Index) expiry on January 20, alongside the inauguration of President Joe Biden, the prospects for a rally improved as “event premium in IV dries up … [and] put values drop, which allows dealers (who are short puts) to buy back short hedges … [fueling] a quick rally up to the 3850SPX/385SPY level (green arrow).”

Graphic 2: SpotGamma S&P 500 Gamma Levels

Adding, the number of put options sold to open exceeded the number bought to open, per SpotGamma, suggesting increased confidence in higher prices as market participants look to options for income, and not insurance.

Historically, the returns after such developments are mixed — more often the appearance of strong initiative buying surfaces (e.g., August and January 2020) before a liquidation helps correct excess inventory, and bring sense back into the market.

Graphic 3: SpotGamma plots opening option positions.

What To Expect: During Friday’s session in the S&P 500, responsive buying surfaced after a test of the $3,818.25 High-Volume Node (HVNode), above the $3,813.50 ledge (below which is a pocket of low-volume).

In the simplest way, high-volume areas can be thought of as building blocks. 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 value for favorable entry or exit.

After the S&P 500 found acceptance above the $3,813.50 ledge and $3,824.25 BAH, it encountered responsive selling near the $3,840.75 HVNode, the site of a downtrend line. Since the selling transpired at a visual level, market participants know that technically-driven, short-term traders in control. In other words, institutions (e.g, funds) tend not to transact at exact technical levels.

Given the aforementioned dynamics, participants will come into Monday’s session knowing the following:

  1. The S&P 500’s higher-time frame breakout remains intact, per graphics 7, 8, and 9.
  2. Late last year, JPMorgan Chase & Co. (NYSE: JPM) strategist Marko Kolanovic suggested equities would rally with the S&P 500 auctioning as high as $4,000 on the basis of low rates, improved fundamentals, buybacks, as well as systematic and hedge fund strategies. Since then, Kolanovic downgraded growth and expressed the limited potential for further upside.
  3. The earnings of heavily weighted index constituents suggests participants discount improved speculative flows and delta (e.g., presence of committed buying or selling as measured by volume delta). Please see graphics 4, 5, and 6.
Graphic 4: Supportive order flow in the SPDR S&P 500 ETF Trust (NYSE: SPY), the largest ETF that tracks the S&P 500, on January 20 trend day.
Graphic 5: Supportive order flow in the SPDR S&P 500 ETF Trust (NYSE: SPY), the largest ETF that tracks the S&P 500, on January 22.
Graphic 6: Speculative derivatives activity for the week ending January 23, 2021.
Graphic 7: Daily candlestick chart of the cash S&P 500 Index

Given the above dynamics, the following frameworks apply for next week’s trade.

In the best case, the S&P 500 takes back Friday’s liquidation and auctions above the $3,840.75 HVNode. Expectations thereafter include continued balance or initiative buying to take out the $3,859.75 overnight all-time high (there is a low probability that overnight all-time highs end the upside discovery process). Thereafter buying continues as high as the $3,884.75 price projection, or double the width of the balance-area, the typical target on a balance-area breakout.

In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below $3,824.25 BAH, would favor continuation as low as the $3,763.75 BAL.

Graphic 8: Profile overlays on a 15-minute candlestick chart of the Micro E-mini S&P 500 Futures

Conclusions: Despite broad-market indices being in a longer-term uptrend, the odds of substantial upside resolve are low. Participants ought to look for favorable areas to transact, such as those high-volume areas in the S&P 500 featured in graphic 8.

All in all, the risk and reward dynamics, at these price levels, are poor.

Graphic 9: 4-hour profile chart of the Micro E-mini S&P 500 Futures

Levels Of Interest: $3,884.75, $3,859.75, $3,840.75 HVNode, $3,824.25 BAH, $3,763.75 BAL.

Cover photo by Jayant Kulkarni from Pexels.

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Commentary

Market Commentary For The Week Ahead: ‘Rally On Pause’

Key Takeaways:

What Happened:

Alongside mixed economic releases, plans for added fiscal stimulus, as well as a start to the Q4 earnings season, U.S. index futures broke balance and auctioned lower.

Given that Friday’s worst case scenario was realized, U.S. stock indexes are positioned for further downside discovery.

Graphic 1: Profile overlays on a 30-minute candlestick chart of the Micro E-mini S&P 500 Futures

What To Expect: Friday’s session in the S&P 500 found responsive buying surface after a test of the $3,741.25 Virgin Point of Control, or VPOC (i.e., the fairest price to do business in a prior session).

Noting: 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 simplest way, high-volume areas can be thought of as building blocks. 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. 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 value for favorable entry or exit.

Thereafter, buying pressure quickly disappeared, and the S&P 500 confirmed the balance-break. Now, in light of the market’s search for an area to establish balanced, two-sided trade, participants will come into Tuesday’s session knowing the following:

  1. Prior to a multi-session consolidation, profile structures denoted the presence of short-covering. This was the result of old, weak-handed business emotionally buying to cover short positions, causing swift movement, followed by a stalled advance, or two-sided trade.
  2. Unsupportive speculative flows and delta (e.g., non-presence of committed buying or selling) in some instances, as can be viewed by the order flow graphics 2 and 3 below.
  3. The multi-month upside breakout targeting S&P 500 prices as high as $4,000.00 remains intact, per graphic 4.
  4. After a v-pattern recovery, the S&P 500 consolidated near the $3,800 high-open interest strike, forming a balance-area. This structure was resolved with Friday’s balance-break. A break-out from balance is usually the start of a short-term auction. Therefore, placing trades in the direction of the break is the normal course of action. Trading back into the consolidation (above $3,763.75), thereby invalidating the break-out, may portend a move to the other end of balance ($3,824.25).
Graphic 2: Divergent delta in the iShares Russell 2000 ETF (NYSE: IWM), one of the largest ETFs that track the Russell 2000
Graphic 3: Order flow in the SPDR S&P 500 ETF Trust (NYSE: SPY), the largest ETF that tracks the S&P 500
Graphic 4: Daily candlestick chart of the cash S&P 500 Index

Given the above dynamics, the following frameworks apply for next week’s shortened holiday trade.

In the best case, the S&P 500 remains above its $3,763.75 balance-area low (BAL). Expectations thereafter include continued balance or initiative buying to take out the $3,824.25 balance-area high (BAH).

In the worst case, the S&P 500 remains below its $3,763.75 BAL. Expectations thereafter include a test of the low-volume node (LVNode) near $3,732.75. A break of the LVNode would portend a response near the $3,703.25 balance-break projection.

Conclusions: For now, despite a negative balance-break jeopardizing the bullish thesis, broad-market indices are in a longer-term uptrend. Participants ought to look for favorable areas to transact, such as those big-picture high-volume areas featured in graphic 5.

Graphic 5: 4-hour profile chart of the Micro E-mini S&P 500 Futures

Levels Of Interest: $3,763.75 BAL, $3,824.25 BAH, $3,732.75 LVNode, $3,703.25 balance-break projection.

Cover photo by Oleg Magni from Pexels.

Categories
Commentary

Market Commentary For 1/15/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: As earnings season kicks into gear, alongside a resurgence in COVID-19 across Europe, U.S. index futures auctioned into the developing balance-area low.

What Does It Mean: The S&P 500, after consolidating near the $3,800 high-open interest strike, is testing the extremes of balance, the bracket of overlapping value areas in the days prior, as participants position themselves for directional resolve.

What To Expect: Friday’s regular session (9:30 AM – 4:00 PM ET) will likely open outside of prior-balance and -range, suggesting the potential for immediate directional opportunity.

Given that the open will still be inside of a larger balance area ($3,824.25-$3,763.75), participants must monitor for responsive buying below value.

Re-entry into value (i.e., a cross through the $3,787.50 LVNode) portends continuation, at least until the $3,793.25 high-volume area, the market’s most recent perception of value.

Excess (e.g., buying tail) may denote an end to downside discovery. The absence of excess, or multiple periods of trade below value, may signal a shift in conviction. In such case, participants would monitor for supportive flows and delta (i.e., committed selling) on a break of the $3,763.75 balance low. If price is accepted (i.e., more than one-half hour of trade) below the balance area, then participants ought to trade in the direction of the new activity. Trading back into the consolidation, thereby invalidating the break-out, would portend a move to the other end of balance.

Noting: (1) The multi-month upside breakout targeting prices as high as $4,000 remains intact and (2) end-of-day positioning was accompanied by aggressive buying into the lows. If the market was to sell hard, aggressive buying would have not been present.

Pictured: Divergent delta in the SPDR S&P 500 ETF Trust (NYSE: SPY), the largest ETF that tracks the S&P 500

Levels Of Interest: $3,824.25 regular trade high, the $3,763.75 balance low, as well as the $3,787.50 LVNode.

Categories
Commentary

Market Commentary For 1/14/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: Market participants further digested higher prices, as evidenced by U.S. index futures balancing within prior range.

What Does It Mean: For ten sessions in a row, the S&P 500 has consolidated near the $3,800 high-open interest strike.

What To Expect: Thursday’s regular session (9:30 AM – 4:00 PM ET) will likely open in prior-balance and -range, suggesting no immediate directional opportunity, again.

Given the open inside of a developing balance area, participants can expect higher volatility. As a result, focus should be directed to price levels that, if broken, would denote a change in tone, as well as the following dynamics:

  1. The failure to resolve directionally points to the absence of larger, other time frame participants (i.e., institutions that don’t transact at technical levels). Still, all broad-market indices are in an uptrend, evidenced by higher prices and value. This recent pause is healthy; consolidation after trend allows prices to converge with value, forming high-volume areas. The prices in this area are valuable and offer favorable entry and exit.
  2. The minimal excess rally high at $3,824.25 remains intact. Excess forms after an auction has traveled too far in a particular direction and portends a sustained reversal. The absence of excess, in the case of a high, suggests not enough conviction; in such case participants will (1) liquidate (i.e., back off the high) and strengthen the market, before (2) following through. Participants have already accomplished the first reaction.
  3. The pinch and subsequent recovery of the volume-weighted average price, anchored from the Sunday evening open, suggests further upside resolve as the average participant, from the anchoring point, holds a profitable position.
  4. The week ending January 8 established a v-pattern recovery, a price sequence that ought to be followed by further price discovery, as high as the 100% price projection, which happens to be near the multi-month upside breakout target at $4,000.
  5. Unsupportive speculative flows and delta (e.g., commitment of buying or selling), as can be viewed by the order flow graphic below.
Pictured: Divergent delta in the SPDR S&P 500 ETF Trust (NYSE: SPY), the largest ETF that tracks the S&P 500

Moreover, in light of the above dynamics, the normal course of action is responsive trade. However, any break that finds increased involvement (i.e., supportive flows and delta) above $3,824.25 or below $3,763.75, in the S&P 500, would favor continuation.

Noting: In most cases, a break-out from balance is usually the start of a short-term auction. Therefore, placing trades in the direction of the break is the normal course of action. Trading back into the consolidation, thereby invalidating the break-out, would portend a move to the other end of balance.

Levels Of Interest: $3,824.25 regular trade high and $3,763.75 balance low.