Tag: Long Gamma – Buy Dip & Sell Rip

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Commentary

Daily Brief For November 9, 2021

What Happened

Overnight, equity index futures were divergent.

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

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

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

What To Expect

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

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

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

Context: The aforementioned trade is happening in the context of a lot of big-picture dynamics such as the growth of derivatives exposure and tail risk, the heightened moneyness of nonmonetary assets, trends in seasonality, buybacks, earnings surprises, and more.

The implications of these themes on price are contradictory.

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

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

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

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

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

The reason being?

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

I note those participants that take the other side of options trades will hedge their exposure to risk by buying and selling the underlying. 

When dealers are short-gamma (e.g., Tesla), they buy into strength and sell into weakness, exacerbating volatility. 

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

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

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

Less liquidity means more movement. 

More liquidity means less movement. 

Get it?

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

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

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

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

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

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

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

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

Charts To Watch

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

What People Are Saying

Definitions

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

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

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

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

About

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

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

Disclaimer

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

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Commentary

All You Need To Know For November 8, 2021

What Happened

Overnight, equity index futures auctioned sideways to higher alongside an absence in impactful fundamental developments and news catalysts.

Ahead, today, there are no major data releases scheduled.

In the following section, I unpack, in-depth, the fundamental and technical context shadowing recent trade. If you like what is said, consider sharing!
Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On supportive intraday breadth and lackluster market liquidity metrics, the best case outcome occurred, evidenced by a gap and hold of newly discovered S&P 500 prices.

This activity, which marks a potential willingness to continue the trend, coincides with poor structure, a dynamic that adds to technical instability.

Graphic: Divergent delta (i.e., 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). 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 interesting developments with respect to fiscal and monetary policy, as well as supply and demand imbalances.

To start, in regards to fiscal policy, ARK Invest’s Cathie Wood thinks that there will be no capital gains tax rate increases and an installment of a minimum corporate tax (about 15%). 

“I think that is one reason the market’s been rallying,” she said in an episode of In The Know. 

In sticking with Wood’s theses, why would the market be rallying if all that we (i.e., the market participants) see, in the news, is heavily focused around fears of inflation, so to speak? It wouldn’t; Wood feels that inflation is on its way out.

Major reasons? 

(1) Productivity increases will offset dented margins and therefore not lead to impactful price increases; (2) turmoil, with respect to China’s housing and financial sector, ought to depress commodity pricing further as “when China has caught a cold, commodity prices get pneumonia”; (3) at-home inventory build-ups may takeaway from consumption during the holidays (for which businesses are scrambling to increase inventories), and this ultimately should be reflected in commodity prices, given excess inventory; (4) disruptive innovation and declining cost curves.

“The markets are conflicting,” she explains. “You’ve got energy and financials at the top for the year, 54% and 35%, respectively. Those two sectors are associated with very strong boom time economies with a yield curve steepening, meaning long rates are rising faster than short rates.”

“That would be consistent with inflation, but the other two top-performing sectors are real estate and consumer discretionary, and those do not benefit from inflation. They benefit from inflation coming down and lower interest rates.”

The bond market, on the other hand, is in the lower inflation camp. At the same time, the dollar is going up alongside assets like bitcoin, often construed as an inflation hedge.

“Could this mean that the velocity of money is going down,” she asks. “Velocity of money has been coming down because people have been saving and putting money into assets.”

This dynamic is supported by disappointing GDP figures with growth coming mostly from inventories; “Real final sales were slightly negative. Could it be … that [millennials] would prefer not to spend on goods and services, but to invest?”

It seems that participants are increasingly extending moneyness to nonmonetary assets – given monetary policies and an environment of debt and leverage that ultimately cuts into asset price volatility – adding to the prevailing risks of carry when volatility does rise and the demand for money pushes deflation.

A great explainer on the growth of global carry is the book titled The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis.

“Ivy Zelman of Zelman Research came out this week. She made a fantastic call on the housing bubble and bust starting in 05-06, and she was right, just a little early. She is very concerned that the housing prices we’re seeing right now are not sustainable,” because of speculation, as well as iBuying and private equity participation. 

For instance, just last week, Zillow Group Inc (NASDAQ: Z), a major iBuyer, sought to raise liquidity, dumping properties en masse.

https://twitter.com/BillyMcFarlend/status/1456357784828715020?s=20

“This is unsustainable … and I’m wondering if even the housing market inflation is going to give way, here,” Wood added. 

That leads to the question: what effects will a taper and the eventual reduction in the Federal Reserve’s balance sheet – a removal of liquidity – have?

Thus far, given monetary frameworks and max liquidity, markets rallies have been enforced by some of the processes embedded within the volatility market. 

To quote Cem Karsan of Kai Volatility: “There’s this constant structural positioning that naturally drives markets higher as long as volatility is compressed, or there’s a supply of volatility.”

“As volatility is compressed, … the hedging vanna and charm flows, and whatnot will push the markets higher,” Karsan added in reference to options sliding down their term structure (vanna) and skew decaying (charm). Both dynamics have counterparties covering their hedges to the most dominant customer positioning in the market (i.e., short call, long put). 

With option volumes now comparable to stock volumes, related hedging flows can represent an increased share of volume in underlying stocks; “It’s not a coincidence that the mid-February to mid-March 2020 downturn literally started the day after February expiration and ended the day of March quarterly expiration. These derivatives are incredibly embedded in how the tail reacts and there’s not enough liquidity, given the leverage, if the Fed were to taper.”

Learn more about the implications of convexity, edge, and risk management, as well as Liquidity Cascades: The Coordinated Risk of Uncoordinated Market Participants.

Aside from a lot of these big picture dynamics – growing derivatives markets and tail risk, the heightened moneyness of nonmonetary assets, trends in seasonality, earnings surprises, and more – we have some more impactful near-term happenings to be aware of.

Graphic: “Whenever the market has been up 20%+ YTD through to October (like e.g. THIS YEAR), it has *always* had an up month in November (albeit with a n=8). Basically I would say it speaks to the momentum in the market, which despite the September stumble seems pretty much alive and well.” – Callum Thomas

The first is fragile positioning. The second is the monthly options expiration (OPEX). 

According to SqueezeMetrics analyses, “middling dark pool sentiment and middling gamma exposure [portends] … 1-month negative returns.”

Alongside that, according to data compiled and analyzed by Pat Hennessy, “2 weeks prior to OPEX (e.g., 7/30/21 to 8/6/21 in this late-cycle) [have] been extremely bullish,” while “OPEX week returns peaked in 2016 and have trended lower since.”

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. 

This comes as investors marked the S&P 500 up to the $4,700.00 strike, at which positive gamma – delta sensitivity to underlying price – is highest. 

In referencing a note I wrote for SpotGamma, “as volatility continues to decline, the gamma of those options, which are now at the money, ought to increase, forcing counterparties to supply more liquidity.”

Ultimately, $4,700.00 ought to be a magnet (or resistance) into that aforementioned pre-OPEX weakness.

This is unless (1) volatility declines markedly, “a tailwind for the S&P complex as options slid[ing] down their term structure would cause dealers to continue covering their hedges in an asymmetric manner,” or (2) more capital is committed to options at higher strikes. 

Graphic: SpotGamma shows large positive gamma at the $4,700.00 strike. “Large options strikes are considered to be support or resistance zones. The change in gamma at various levels over time can shed light on how traders are viewing the market (i.e., adding calls is bullish, puts bearish).”

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

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,674.75 visual low (likely paid attention to by short-term, technically driven market participants who seldom defend retests) puts in play the $4,711.75 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,722.00 and $4,735.00 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,674.75 visual low puts in play the $4,663.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as low as the $4,619.00 VPOC and $4,590.00 balance area boundary (BAH), or lower.

As an aside, the $4,674.75 visual low corresponds with the volume-weighted average price (VWAP) anchored at last week’s Federal Open Market Committee (FOMC) meeting. 

This is 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.

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

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.

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. In recent history, this reset in dealer positioning has been front-run; prior, there was an increase in volatility after the removal of large options positions and associated hedging.

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 5, 2021

Abstract

Equity index futures higher. Commodities were higher. Bonds mixed. Volatility compressed.

Ahead is a heavier day of economic releases, in the face of fundamental narratives and positioning metrics that may support intraday price stability.

What Happened

Overnight, equity index futures were marked up ahead of the House’s plan to vote on President Joe Biden’s economic package and infrastructure, as well as October jobs data.

Also, in the news, there were narratives surrounding China’s dollar surplus, a pandemic resurgence in Europe, Pfizer Inc’s (NYSE: PFE) development of a pill for COVID-19.

Ahead is data on payrolls, unemployment, and average hourly earnings (8:30 AM ET), as well as consumer credit (3:00 PM ET). I apologize as this is what I listed yesterday, mistakenly.

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

On weak intraday breadth and lackluster market liquidity metrics, the best case outcome occurred, evidenced by balanced trade at newly discovered S&P 500 prices.

As also evidenced by the separation of value, overnight, the gap out of yesterday’s range marks a potential willingness to continue the uptrend.

To note, poor structure left behind prior initiative trade adds to technical instability, a dynamic mentioned in prior commentaries. Participants will likely look to check old value (i.e., revisit, repair, and strengthen) pockets of low-volume, feverishly, on any breakdown of trend.

Graphic: Flat delta (i.e., non-committed buying/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), via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offered favorable entry and exit).

Context: The aforementioned trade is happening in the context of a slowdown in economic growth, increased clarity on the Federal Reserve’s (Fed) intent to moderate stimulus, as well as the prospects of renewed fiscal support.

The implications of these narratives on price are contradictory.

To elaborate, supply chain disruptions slowed the pace of economic growth, while participants saw both the Fed’s decision to taper and keep rates unchanged, as well as the potential passage of President Biden’s economic plan, today, as near-term positives.

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was lower, while supply came in across the VIX futures term structure. That, alongside the long-gamma environment and increased demand for options above current prices (i.e., bets on the upside), points to increased odds of near-term equity market stability.

To quote options analysis and data provider SpotGamma, “​​the term structure of IV (this is how high the IV is for longer-dated options) remains elevated. That suggests near term options could have more ‘bleed’ which could keep the SPX market price tailwind intact.”

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

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

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,663.00 untested point of control (VPOC) puts in play the $4,684.25 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,705.25 and $4,725.50 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,663.00 VPOC puts in play the $4,619.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,590.00 balance boundary and $4,574.25 high volume area (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.

Charts To Watch

Graphic: (NASDAQ: AMZN). (S~3403, R~3580). S is for support. R is for resistance. I am seeking to initiate short-duration call structures against the 3580 gap fill and prior all-time high. Will initiate for credit or finance with put structures.
Graphic: (NASDAQ: FB). (S~326.45, R~336.90). S is for support. R is for resistance. If the stock was to maintain prices above 336.90, there is a potential change in tone. In such a case, I’m targeting Fibonacci retracements with call structures financed with credits on the put side.
Graphic: (NASDAQ: GOOGL). (S~2900, R~3113). S is for support. R is for resistance. I’m targeting prices between 3000 and 3100 with call structures for low cost or credit.
Graphic: (NYSE: SHOP). (S~1482, R~1650). S is for support. R is for resistance. Potential break of trend, move to an all-time high.
Graphic: (NYSE: IWM). (S~234.53, R~241.96, 251.41). S is for support. R is for resistance. Russell 2000 breaks out of balance. In my opinion, upon acceptance, there are potential opportunities for long trades.

Other charts I’m watching include BABA (S~155.29), ZM (S~245.92), ARKK (S~120.15), PINS (S~42.06), Z (S~58.15), BBY (S~123.65), GOOS (S~40.91), CTSH (R~82.00), LYFT (S~44.41), TMUS (S~118.00), WDC (51.47). S is for support. R is for resistance. 

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.

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.

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.

Subscribe
Categories
Commentary

Daily Brief For November 3, 2021

Abstract

Equity index futures and commodities were mixed. Bonds sideways to higher. Volatility bid.

Ahead is a heavy day of economic releases, in the face of fundamental narratives and positioning metrics that may later support directional resolve.

What Happened

Overnight, equity index futures were flat as participants wait to initiate the next leg – higher or lower – until they are provided clarity on monetary policy frameworks, the pace of the economic recovery, and the like.

Ahead is ADP employment (8:15 AM ET), Markit services PMI (9:45 AM ET), ISM services index and factory orders (10:00 AM ET), as well as Federal Reserve statements (2:00 PM ET).

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Action: On lackluster breadth and market liquidity metrics, the best case outcome occurred, evidenced by participants’ exploration of new prices in the S&P 500.

Intent: The intraday excess high marks potential exhaustion (or willingness to end trend). Also, the rounding of the composite profile (i.e., developing ledge) suggests participants are either painting themselves into a corner or there is a lack of conviction to take price higher.

Validation: Sideways trade, above the $4,590.00 balance area high (BAH), and overlapping value areas, validates the market’s intent to pause ahead of new information.

Consideration: Poor structure left behind prior initiative trade (as evidenced by the presence of numerous gaps and p-shaped emotional, multiple-distribution profile structures which denote short-covering and a lack of material, new-money buying) adds to technical instability.

Should the market crack, participants will likely look to check old value (i.e., revisit, repair, and strengthen) these pockets of low-volume. This is called the “cave-fill” process, in volume profile terms.

Graphic: Flat 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).

Context: Federal Open Market Committee (FOMC) announcement later today.

The announcement will provide participants with color on the economic recovery and the Federal Reserve’s intent to continue supporting the economy, at the rate it has. 

Nordea’s Andreas Steno Larsen states: “Jay Powell will have to walk on eggshells to prevent an acceleration of the front-end of the USD yield curve. Arguments for the Fed to tighten policy keep piling up and hence we see a swift tapering process (30B a meeting) and a first hike in June.” 

“The combination of 1) even higher inflation prints during Q4 (with several extremely volatile base effects), 2) a removal of USD liquidity, 3) a historically weak credit impulse into 2022 (due to a massive credit expansion 20/21) sounds like the perfect flattener setup to us,” which may weigh on sentiment and long term investments.

Graphic: “Keep flattening the yield curve during tapering,” via Nordea.

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was a touch higher, while spreads across the VIX futures term structure widened with demand coming in at the front.

Such a situation, as touched on yesterday, in addition to the long-gamma environment (in which counterparties hedge their warehoused options risk by buying underlying into weakness and selling into strength), has the effect of making it difficult to resolve directionally.

The reasons are: (1) options will slide down their term structure (vanna) and (2) skew decays (charm). When this happens, we expect to see supportive flows as dealers cover their short equity/futures hedges. 

With volatility bid, the effect of vanna and charm is dulled. As a result, it is likely that participants see more movement after the FOMC announcement.

To note, the potential for upside resolve comes down to how participants take the FOMC announcement. We know that, according to SpotGamma, there is increased capital being committed to higher and higher options strikes, a development often seen as bullish.

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

Balance (Two-Timeframe Or Bracket) Is The Status Quo: Rotational trade that denotes current prices offer favorable entry and exit. Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,620.25 high volume area (HVNode) pivot puts in play the $4,628.50 Fibonacci extension. Initiative trade beyond $4,628.50 could reach the $4,639.00 and $4,664.75 Fibonacci levels, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,620.25 HVNode puts in play the $4,590.00 balance area high (BAH). Initiative trade beyond the BAH could reach as low as the $4,574.25 HVNode and $4,551.75 low volume area (LVNode), 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

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.

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.

Ledges: Flattened area on the profile which suggests responsive participants are in control, or initiative participants lack the 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).

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 2, 2021

Abstract

Equity index futures mixed. Commodities mixed. Bonds sideways to lower. Volatility expanded.

Ahead is a light day of economic releases, in the face of fundamental narratives and positioning metrics that support intraday price stability.

What Happened

Overnight, equity index futures auctioned sideways as participants sought to position themselves for guidance on monetary policy, later this week.

Ahead is data on homeownership rates (10:00 AM ET).

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Action: On divergent intraday breadth and supportive market liquidity metrics, the worst-case outcome occurred, evidenced by the S&P 500’s acceptance of prices within Friday’s late-day spike, out of balance.

Intent: As also evidenced by the overlap of value areas, the acceptance of prices, within Friday’s late-day spike, out of balance, marks a potential willingness to continue sideways.

Validation: Sideways trade, above the $4,590.00 balance area high (BAH), validates the market’s prevailing intent to base ahead of the Federal Open Market Committee (FOMC) decision, later this week.

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

To elaborate, for instance, Monday’s trade found responsive buyers at the $4,587.00 untested point of control (VPOC). This level likely was only known by participants who act on visual cues. 

These technically-driven participants are generally thought to not be able to defend retests. Therefore, these participants ought to quickly liquidate, if proven wrong, on a break of the BAH.

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

Context: Ample liquidity, peak growth, inflation, strong seasonality and buybacks, as well as monetary and fiscal policy uncertainties, and single-stock volatility.

Graphic: S&P 500 seasonality via The Market Ear.

Based on this context, Moody’s Corporation (NYSE: MCO) forecasts a peak; “The Dow Jones Industrial Average has peaked and will gradually decline during the next year. Risks are heavily weighted to the upside, but peak growth, inflation uncertainty around fiscal policy, and the Fed tapering could weigh on equity markets.”

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was higher, while demand came in across the VIX futures term structure, suggesting participants are inclined to hedge against near-term equity market instability.

Such a situation, in addition to the long-gamma environment (in which counterparties hedge their warehoused options risk by buying underlying into weakness and selling into strength), has the effect of making it difficult to resolve directionally.

The reason is, there are two knowns; as volatility contracts, (1) options will slide down their term structure (vanna) and (2) skew decays (charm). 

When this happens, we expect to see supportive flows when the dealers cover their short equity/futures hedges. With volatility bid, the effect of vanna and charm is dulled. It is likely that participants see more robust movement after the FOMC announcement, later this week.

In a separate note on volatility in stocks like Tesla Inc (NASDAQ: TSLA), SpotGamma says the following: “These rampant moves are appearing to be more widespread, and we believe this invokes instability that usually ends badly.”

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 top part of a negatively skewed overnight inventory, inside of prior-range and -value, 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) occurred.

We monitor for continued acceptance outside of the balance area. Rejection (i.e., a move below the balance area high) portends a move to the opposite end of the balance, lower.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,590.00 BAH puts in play the $4,619.50 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,639.00 and $4,664.75 Fibonacci figures, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,590.00 BAH 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/stephenharlinmd/status/1455285358388711434?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).

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.

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.

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.

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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Categories
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.

Subscribe
Categories
Commentary

Daily Brief For October 21, 2021

Market Commentary

In sync with bonds, equity index futures were sideways to lower. Commodities were mixed. Volatility expanded lightly.

  • Ahead is jobless claims data and more.
  • Many companies surpass expectations.
  • Positioned for sideways trade, balance.

What Happened: U.S. stock index futures auctioned sideways to lower overnight alongside news that among the S&P 500 companies that have disclosed their corporate results, 84% have posted earnings that surpassed expectations.

Ahead is jobless claims and Philadelphia Fed manufacturing (8:30 AM ET) data, Fed speak (9:00 AM ET), as well as existing home sales and leading economic indicators (10:00 AM ET) updates.

Graphic updated 6:45 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. 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: As of 6:30 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open on a light gap, just inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity. 

Adding, during the prior day’s regular trade, in the face of strong intraday breadth and divergent market liquidity metrics, equity indices – specifically the S&P 500 – had a tough time expanding the range to the upside, leaving a ledge, or flattened area on the intraday profile.

This activity comes after prior sessions left behind numerous gaps and emotional, multiple-distribution profile structures.

Thursday’s gap in range, below value, sets up indices for what is called the cave-fill process.

It’s highly likely that participants will look to revisit, repair, and strengthen areas of low volume (LVNodes).

Graphic: Divergent delta (i.e., mostly 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 or balance (i.e., rotational trade that suggests current prices offer favorable entry and exit).

Zooming out, we see that though the Nasdaq 100 firmed this week, it did not recover as much ground as its peers, the S&P 500 and Dow Jones Industrial Average.

Given where the indices are in relation to their anchored volume-weighted average price levels (VWAPs), the average buyer, since the all-time high, holds a winning position. 

Sideways-to-higher trade, above the upward sloping trendline, as well as the 50.00% and 61.8% retracements, keeps in play a recovery of the all-time high in the S&P 500, Nasdaq 100, and Russell 2000, like the Dow Jones Industrial Average.

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.

Further, the aforementioned trade is happening in the context of improving breadth amidst a seasonally bullish cycle of contributions, rebalancing, and earnings, as well as the risks associated with a taper in asset purchases and a hike in rates.

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was slightly higher, after the October 20 expiration, while the VIX futures term structure shows a bit of demand coming in at the front end of the curve. 

These conditions – coupled with the long-gamma environment and suppression in realized volatility as the S&P 500 trades around $4,510.00, a figure in the vicinity of what options modeling platform SpotGamma calls a Call Wall (i.e., level at which positive options gamma, essentially delta sensitivity to the underlying price, is highest) – point to increased odds of near-term equity market stability, and some potential for back-filling.

Should participants increase their interest in options strikes that are higher in price and further out in time, they may be able to overcome the stickiness of the $4,500.00 S&P 500 area (the direct result of associated hedging pressures, and the like).

Moreover, for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,510.00 low volume area (LVNode) pivot puts in play the $4,526.25 high volume area (HVNode). Initiative trade beyond the $4,526.25 HVNode could reach as high as the $4,550.00 overnight high (ONH) and $4,568.25 Fibonacci extension, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,510.00 LVNode puts in play the $4,495.75 HVNode. Initiative trade beyond the $4,495.75 HVNode could reach as low as the $4,471.00 untested point of control (VPOC) and $4,437.75 micro composite point of control (MCPOC), or lower.

Click here to load today’s updated real-time key levels into the web-based TradingView charting platform. Please note that all levels are derived using the 65-minute timeframe.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

Definitions

Cave-Fill Process: Widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

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.

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.

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).

Ledges: Flattened area on the profile which suggests responsive participants are in control, or initiative participants lack the 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 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.

News And Analysis

COVID-19 Impacts: A market-implied probability of default perspective.

The Pfizer-BioNTech booster shot restores full coronavirus protections.

Evergrande shares plunging as deal talks end, sales sink nearly 100%.

China’s common prosperity agenda is risky near-term, okay long-term.

Consumer gut on inflation is wrong. That’s a Federal Reserve problem.

What People Are Saying

https://twitter.com/VolQuant/status/1451059708706570242?s=20

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 October 20, 2021

Market Commentary

Mostly in sync with bonds and commodities, equity index futures were mixed. Volatility compressed, further.

  • Ahead: Fed speak and the Beige Book.
  • Monetary uncertainty. Earnings pick up.
  • Options positioning may support prices.

What Happened: The pace of markup in the equity indices slowed as participants await key earnings, as well as updates on monetary and fiscal policy. 

Ahead is Fed-speak by Evans, Bullard, Bostic, Kashkari, and Quarles (12:00 and 1:00 PM ET), as well as a release of the Beige Book (2:00 PM ET). Tonight, also, Fed President Daly speaks (8:35 PM ET).

Graphic updated 6:45 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. 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: As of 6:40 AM ET, Wednesday’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.

Status Quo Is Balance: Rotational trade that denotes current prices offering favorable entry and exit. Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break), coming into today’s session.

Adding, during the prior day’s regular trade, on supportive intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by initiative buying and separation of value.

Coupled with that dynamic, in carrying forward the narrative from days prior, is the sustained presence of numerous gaps and p-shaped emotional, multiple-distribution profile structures (i.e., old-money shorts covering).

Participants will likely look to revisit, repair, and strengthen – build out areas of high volume (HVNodes) via the cave-fill process – these areas of low volume (LVNodes), later.

Graphic: Supportive delta (i.e., committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of the initiative trade or markup in price.

Zooming out, we see the Nasdaq 100 trading strong, relative to its peers. 

Given where the S&P 500’s price is in relation to the yellow anchored volume-weighted average price (VWAP), below, the average buyer, since the all-time high, holds a winning position; sideways-to-higher trade, above the upward sloping trendline, as well as the 50.00% and 61.8% retracements, likely puts in play a recovery of the all-time high.

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.

Further, the aforementioned trade is happening in the context of improving breadth amidst a seasonally bullish cycle of contributions, rebalancing, and earnings, as well as the risks associated with a taper in asset purchases and a hike in rates.

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was lower, while the VIX futures term structure was unchanged; supply at the front end of the curve, alongside the long-gamma environment, signals a potential for near-term equity market stability.

With this decline in implied volatility (a dynamic that, at least in recent history, leads into increased call selling, more dealer hedging and liquidity, as well as further realized volatility suppression), the S&P 500 found itself marked up to the key $4,510.00 low volume area (LVNode). 

The $4,510.00 figure is in the vicinity of what options modeling platform SpotGamma calls a Call Wall (i.e., the level at which positive options gamma, essentially delta sensitivity to the underlying price, is highest), which is a near term magnet (and resistance) given associated hedging and a failure to see increased interest and activity in higher options strikes.

Moreover, we’re carrying forward yesterday’s price levels; for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,495.75 high volume area (HVNode) puts in play the $4,510.00 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,526.25 HVNode and $4,550.00 overnight high (ONH), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,495.75 HVNode puts in play the $4,471.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as low as the $4,437.75 micro composite point of control (MCPOC) and $4,393.75 HVNode, or lower.

Click here to load today’s updated real-time key levels into the web-based TradingView charting platform. Please note that all levels are derived using the 65-minute timeframe.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:40 AM ET.

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.

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.

More On 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.

News And Analysis

A combination of lower growth, higher inflation isn’t good.

Sentiment in neutral territory, supporting high index price.

Cryptocurrency versus gold – debating on store of value.

Who could be the winners and losers of the energy crisis?

Feeling the strain of supply chain issues and high prices.

Global oil refiners cranking up output as margins recover.

Democrats are looking to break stalemate on Biden plan.

Bitcoin futures ETF starts as second-highest traded fund.

What People Are Saying

https://twitter.com/VolQuant/status/1450656933250277379?s=20

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.

Subscribe
Categories
Commentary

Daily Brief For October 19, 2021

Market Commentary

Out sync with bonds, equity index futures and commodities traded higher. Volatility compressed.

  • Monetary uncertainty. Earnings pick up.
  • Options positioning may support prices.
  • Ahead: Building permits, housing starts.

What Happened: U.S. stock index futures auctioned sideways to higher overnight as participants sought to price in robust earnings against the backdrop of monetary uncertainty and increased pricing pressures. 

“The world is watching interest rates more closely than it has for some time — and rightly so, the moves have been emphatic, especially in the short-term maturities,” Chris Weston, head of research at Pepperstone Financial Pty, said. He added it’s “impressive how resilient and calm markets are in the face of the rates repricing.”

Ahead is data on building permits and housing starts (8:30 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. 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: As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

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

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

Adding, during the prior day’s regular trade, on non participatory intraday breadth and supportive market liquidity metrics, the best case outcome occurred, evidenced by a response at the $4,437.75 micro composite point of control (MCPOC), which carried into initiative buying, past the $4,469.75 overnight high (ONH).

Coupled with that dynamic is the sustained presence of numerous gaps and p-shaped emotional, multiple-distribution profile structures (i.e., old-money shorts covering); as a result, participants will likely look to revisit, repair, and strengthen – build out areas of high volume (HVNodes) via the cave-fill process – these areas of low volume (LVNodes).

Graphic: Mostly supportive delta (i.e., committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings support this recent leg of initiative trade.

Zooming out, we see the Nasdaq 100 trading relatively strong.

Given where the S&P 500’s price is in relation to the yellow anchored volume-weighted average price (VWAP), below, the average buyer, since the all-time high, holds a winning position; sideways-to-higher trade, above the upward sloping trendline, as well as the 50.00% and 61.8% retracements, likely puts in play a recovery of the all-time high.

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.

Further, the aforementioned trade is happening in the context of improving breadth amidst a seasonally bullish cycle of contributions, rebalancing, and earnings, as well as the risks associated with a taper in asset purchases and a hike in rates.

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was lower, while the VIX futures term structure remained in contango; supply at the front end of the curve, alongside the long-gamma environment, signals a potential for near-term equity market stability.

According to SpotGamma analyses, participants were likely selling puts into yesterday’s price rise; this dynamic may support sideways to higher trade.

In a barebones overview of some of the dynamics at play, here, if implied volatility were to rise, the counterparty to the aforementioned trade would purchase stock (long delta) to hedge their rising long put (short delta) exposure. If implied volatility were to decline, the counterparty would likely sell stock (short delta) as their long put (short delta) exposure declines.

Pictured: SqueezeMetrics highlights implications of volatility, direction, and moneyness.

Moreover, for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,495.75 high volume area (HVNode) puts in play the $4,510.00 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,526.25 HVNode and $4,550.00 overnight high (ONH), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,495.75 HVNode puts in play the $4,471.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as low as the $4,437.75 micro composite point of control (MCPOC) and $4,393.75 HVNode, or lower.

Click here to load today’s updated real-time key levels into the web-based TradingView charting platform. Please note that all levels are derived using the 65-minute timeframe.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:20 AM ET.

Definitions

Cave-Fill Process: Widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

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.

Short Covering: The profile shape suggests participants were “too” short and had poor location.

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.

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.

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.

News And Analysis

Nordea: Is permanent inflation now an alarming consensus?

Evergrande unit has remit funds to pay yuan bond coupon.

China’s central bank should cut RRR, one adviser suggests.

World facing fiscal problems much worse than from COVID.

Investing prosperously in light of China’s common prosperity.

Bitcoin pushes toward record before debut of ETF products.

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. 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.

Subscribe
Categories
Commentary

Daily Brief For October 18, 2021

Market Commentary

In sync with bonds, equity index futures were sideways to lower, overnight. Commodities were mixed. Volatility expanded.

  • More support for an EOY run-up.
  • Ahead is a light day for releases.
  • Positioned for sideways balance.

What Happened: U.S. stock index futures auctioned sideways to lower overnight alongside conflicting narratives.

Ahead is data on industrial production and capacity utilization (9:15 AM ET), as well as the National Association of Home Builders Index (10:00 AM ET).

Graphic updated 6:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. Sentiment Risk-On if expected /ES open is above the prior day’s range. 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. 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: As of 6:00 AM ET, Monday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 may open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on lackluster intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by an expansion of range above the $4,437.75 micro composite point of control (MCPOC), to a new overnight high (ONH) at $4,469.75.

Coupled with that dynamic is the presence of numerous gaps and p-shaped emotional, multiple-distribution profile structures (i.e., old-money shorts covering); participants will likely look to revisit, repair, and strengthen – build out areas of high volume (HVNodes) via the cave-fill process – these areas of low volume (LVNodes). 

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

Zooming out, we saw the Nasdaq 100 firming, relative to its peers, last week, a significant change in tone.

Given where the S&P 500’s price is in relation to the yellow anchored volume-weighted average price (VWAP), the average buyer, since the all-time high, holds a winning position; sideways-to-higher trade, above the upward sloping trendline, as well as the 50.00% and 61.8% retracements, likely puts in play a recovery of the all-time high.

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.

Further, the aforementioned trade is happening in the context of improving breadth amidst a seasonally bullish cycle of contributions, rebalancing, and earnings, as well as the risks associated with a taper in asset purchases and a hike in rates.

Graphic: S&P 500 seasonality via @topdowncharts. 

According to a TS Lombard note featured by The Market Ear, the odds are that a tightening in monetary policy should not douse the bullish narrative:

“Tightening monetary policy cycles have historically been positive for stocks. The exceptions were in the 1970s, when inflation was counter-cyclical and the Fed tightened despite slowing growth. In ‘regular’ cycles the Fed raises rates only when the economy (and corporate earnings) warrants a tighter policy stance. What is interesting is that positive returns happen despite falling P/E multiples. Higher rates tend to lead to falling valuations, but earnings growth is typically strong enough to compensate for the derating. Since multiples are still much higher than normal, favouring Growth (faster EPS growth) over Value (slower EPS growth) is a good strategy at this stage.”

Graphic: TS Lombard’s analysis of tightening cycles, via The Market Ear.

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was higher, overnight, while the VIX futures term structure was in contango; supply at the front end of the curve, alongside the long-gamma environment, signals a potential for near-term equity market stability.

To note, according to SpotGamma models, last week’s near-vertical price rise was responsively sold as dealers looked to hedge their increasing positive directional market exposure; going forward, hedging pressures may dampen volatility, potentially setting the market up for balance (i.e., sideways trade) as participants muster the conviction to initiate the next leg.

Moreover, for today, 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 MCPOC puts in play the $4,463.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,481.75 high volume area (HVNode) and $4,510.00 LVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,437.75 MCPOC puts in play the $4,425.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as low as the $4,393.75 HVNode and $4,349.00 VPOC, or lower.

Click here to load today’s updated real-time key levels into the web-based TradingView charting platform. Please note that all levels are derived using the 65-minute timeframe.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 5:15 AM ET.

Definitions

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

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.

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.

Inversion Of VIX Futures Term Structure: Longer-dated VIX expiries are less expensive; is a warning of elevated near-term risks for equity market stability.

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).

More On Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. To note, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive). In conjunction with the rapid recovery, lower rates may solicit hawkish commentary as policymakers look to inhibit inflation.

News And Analysis

Forbearances declining faster, plans drop by 10%.

Morgan Stanley CEO is calling for Fed rate hiking.

Analysts warn that 60/40 portfolio will be battered.

Moody’s: Fundamental siding with Fed on inflation.

S&P Global: Data on job gains has come up short.

Global energy turning to fossil fuels amid demand.

How the asset management industry got disrupted.

What People Are Saying

https://twitter.com/PArchambeau/status/1449064615946510338?s=20

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.

Subscribe