Market Commentary For 12/4/2020

What Happened: After news that Pfizer Inc (NYSE: PFE) would slash its 2020 vaccine production target caused U.S. stock index futures to liquidate Thursday afternoon, prices have since recovered, suggesting the news was immaterial.

The S&P 500, in particular, remains in balance and range, further accepting Monday’s upside break.

What Does It Mean: During Thursday’s regular trading in the S&P 500, short-term participants were not able to muster the conviction to break through to new highs, as evidenced by a lack of value separation and excess.

Moreover, the afternoon long-liquidation on Pfizer news brought the S&P 500 back into an area that’s reflective of its most recent perception of value (i.e., HVNode). Responsive buyers surfaced on the news event, returning the market back to its highs after the lower prices offered favorable entry.

It’s important to note that the pullback halted at key technical level (i.e., LVNode near $3,655). This activity confirms that participation in the market is overwhelmingly short-term. Institutions do not transact at exact technical levels.

Further, the lack of excess at the high end of the 3-day balance area suggests the upside discovery process is likely not over. Adding to that, the market is stuck in a long-gamma environment; in such an environment, dealers hedge their exposure by selling into strength and buying into weakness. As a result, volatility is suppressed and the market pins or slowly rises in a range-bound fashion, as we’re seeing.

So, given that the market lacks breadth, technical forces (e.g., dealer hedging) will have a much greater impact on price action than most fundamental events, such as Thursday’s Pfizer news.

What To Expect: Going into today’s session, participants know that (1) the S&P 500 is trading within a three-day balance area above the $3,640 ledge, (2) technical forces take precedence over fundamentals, (3) and there is minimal excess at the highs. As a result, participants should default to trading responsively, unless either the all-time rally high ($3682.00) or low-volume ledge ($3,640) is broken.

Trading beyond either balance boundary may portend continued directional resolve. Breaking lower, participants should look for a response at the $3,630 high-volume area and $3,600 five-day balance boundary. Breaking higher, participants should look for continued upside as high as the $3,700 strike, the site of multiple price projections.

Levels Of Interest:  $3,682 and $3,640 balance area boundary.


‘Dualism’: Market Commentary For The Week Ahead

Key Takeaways:

  • Decline in cash levels is a sign of stretched sentiment. 
  • Positioning: Odds of sustained directional resolve low.
  • Potential confirmation of multi-month balance-break.

What Happened: During last week’s shortened holiday trade, U.S. index futures broke out to new all-time highs.

What Does It Mean: After Tuesday’s initiative upside drive alongside news that provided clarity on the election transition, participants rotated back over the $3,580 balance-area boundary, invalidating the prior week’s initiative selling activity. Thereafter, conviction disappeared and the market remained range-bound, as evidenced by a non-participatory delta (i.e., the non-presence of committed buying) and mechanical trade (i.e., low-excess at the edges of developing balance).

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

What To Expect: During Friday’s shortened holiday session, the S&P 500 remained in balance, further auctioning and accepting value into Tuesday’s excess high, which marked an end to the upside discovery process. 

Given that initiative buyers remained in control after auctioning into the micro-composite high-volume node at $3,631, the fairest price to do business after Tuesday’s upside drive, participants come into Monday’s session knowing the following: 

  1. The amount of cash investors are holding in their portfolios fell to levels last seen prior to the February sell-off. 
  2. Market sentiment, as represented by Citigroup Inc’s (NYSE: C) Panic/Euphoria Model, is historically stretched.
  3. Tuesday’s upside impulse, through the low-volume node at $3,580, was reminiscent of short-term, momentum-driven buying. 
  4. Holiday trade was dominated by low-volume and responsive participation, implying the non-presence of conviction and institutions (e.g., funds that transact at non-technical levels).
  5. Positioning suggests dealers are long gamma, meaning they sell into strength and buy into weakness, suppressing volatility and the potential for directional resolve.
Graphic by Spotgamma, taken from The Market Ear

Therefore, given the acceptance of higher prices, the following frameworks for next week’s trade apply.

If participants manage to spend time and build value above the $3,631 micro-composite high-volume node, then initiative buyers remain in control — nearest targets include the $3,655 and $3,668.75 rally highs.

Otherwise, the auction ought to find responsive buyers near the high-volume node. An initiative drive below that figure would put the rally on hold, and would target first $3,620, and then the node near $3,610.

Conclusion: Though sentiment and positioning imply limited potential for further upside, the market remains in a strong technical uptrend bolstered by factors including a divided government, vaccine administration, rebound in profits, low rates, and a small rise in the yield curve.

As of now, the S&P 500 is on the verge of confirming a multi-month balance-break.

Pictured: Daily candlestick chart of the cash S&P 500 Index

Levels Of Interest: Micro-composite HVN at $3,631, the $3,655 and $3,668.75 rally highs, as well as the nodes near $3,620 and $3,610.

Cover photo courtesy by cottonbro from Pexels.