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.