Categories
Results

Case Study: Trading A Balance-Breakout Failure In NYMEX WTI Crude

What Happened: On April 20, 2021, market participants attempted to move NYMEX West Texas Intermediate (WTI) Crude Oil futures up and out from balance, an area of recent price acceptance.

Further, participants failed to find acceptance beyond the balance area, given WTI’s move back into the prior range. As a result, odds favored (1) sideways or (2) lower trade, as low as the balance area low (BAL) near $62.50, or so.

Adding, the breakdown happened in conjunction with fears that India, a large importer of oil, would impose restrictions as coronavirus infections and deaths soared in the country. Given this news, there was an increased potential to trade below the $62.50 BAL, into prior poor structures and low volume areas (LVNodes) that ought to offer little-to-no support.

In response, the following sequence analysis unpacks how Physik Invest traded options tied to the NYMEX West Texas Intermediate (WTI) Crude Oil futures (Future: /CL).

Note: Click here to view all transactions.

Sequence 1: On April 20, 2021, Physik Invest applied the balance-break and gap scenarios, monitoring for acceptance (i.e., more than 1-hour of trade) outside the balance area. 

Typical Balance-Break and/or Gap Scenarios: Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area.

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.

After a confirmed balance-breakout failure, given a bullish outlook on oil, Physik Invest opportunistically bought the following structure for a $1,410 debit. At this point, if all legs were to remain out of the money (i.e., expire worthless) by May 17, 2021, the maximum loss would have been $1,410.

  • 65.50+2/70.50C-4/75.50+2 /CL long call ratio spread

On April 27, 2021, for a $1,000 debit, the following position was added after participants found acceptance in the aforementioned LVNode.

  • 65.50+2/70.50C-4/75.50+2 /CL long call ratio spread

By 4/29/2021, all positions were closed for a $4,800 credit, a 99.17% return on the initial debit outlay.

The above call-side structures were initiated against the $68.00 rally-high. However, after 3-days of high-paced price discovery, Physik Invest removed all call-side structures on the first sign of responsive selling at $65.40, a minor 127.20% Fibonacci price extension.

Entry Checklist Recap:

  • Setup: Buy failed balance-area breakout liquidation for a move to new highs
  • Target: $68.00
  • Time Frame: 1 month
  • Risk: 2% of account
  • Strategy: Call debit (ratio) spread structured around target

Summary: After a failed balance-breakout setup presented itself, Physik Invest opportunistically bought call-side structures targeting a test of the prior rally-high, risking a standard risk unit in debit, over a time frame of less than one month.

In total, the sequence of trades net a $2,291.76 profit after commissions and fees.

The above strategies were employed in accordance with Physik Invest’s core edge: the trade of ratioed, multi-leg strategies that combine short and long positions to reduce risk and increase returns.

Reflection: The entry and exit were, unusually, well-timed. Though the spread did price higher, closer to expiration, it lost nearly half its value on the responsive selling that surfaced at $65.40, a minor 127.20% Fibonacci price extension.

The correct move would have (1) to narrow the width of the spreads at entry, and (2) cut the position in half at $65.40, the minor 127.20% Fibonacci price extension. Thereafter, spreads could have been added on the liquidation from $65.40.

In all, the target, time frame, and strategy were incorrect.

Expectations should have been tempered; given the time frame, odds of further discovery, up to the $70.50 short strike, were poor.

A better spread to open in size?

  • 64C+1, 66C-2, 68C+1 long call ratio spread
  • 64C+1, 68C-2 long call ratio spread
  • 65C+1, 70C-2 long call ratio spread

Additionally, to lower cost, puts could have been sold at and below the $57.00 support.

Categories
Commentary

Daily Brief For June 11, 2021

Market Commentary

Index futures in balance and divergent.

  • One Big Thing: Inflation temporary.
  • Ahead: UoM Consumer Sentiment.
  • Indices diverge and trade sideways.

What Happened: U.S. stock index futures auctioned within prior range, after recent economic releases increased confidence in the notion that inflation will be temporary. Adding, participants are attempting to price in, also, the potential passage of an infrastructure deal, corporate tax talk, and cryptocurrency scrutiny.

Noting, ahead is data on sentiment.

Graphic updated 7:37 AM ET.

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

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by a failed balance-area breakout.

After the release of the May 2021 CPI, participants attempted to initiate the S&P 500 up and out from balance. The attempt failed, confirmed by lackluster breadth, among other things. The minimal excess left at the 127.20% Fibonacci price extension suggests participants, which were likely short-term (i.e., technically-driven), either (1) lacked conviction or (2) were forced to liquidate because they were not getting paid.

Typical Balance-Break and/or Gap Scenarios: Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area.

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.

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.

The resulting profile structure, also, was p-shaped; profile structures denote short-covering as old business looks to cover short exposure. Such activity, contrary to popular belief, can weaken a market as it removes demand (or future demand) from the market (i.e., participants with no short exposure, do not have to buy-to-close an existing position). 

Further, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,227.00 high volume area (HVNode) puts in play the $4,249.00 minimal excess high. Initiative trade beyond that figure could reach as high as the $4,270.00 161.80% Fibonacci price extension. 

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

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

In the worst case, the S&P 500 trades lower; activity below the $4,227.00 HVNode confirms a failed balance-area breakout. In such a case, the $4,213.75 low volume area (LVNode) comes into play first. Thereafter, if lower, participants ought to look for responses at the $4,206.25, $4,198.75, and $4,177.25 HVNodes.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). Nasdaq is relatively strong.
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), yesterday. Activity in the options market was primarily concentrated in short-dated tenors, in put strikes as low as $420.
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), yesterday. Noting that, in regards to the NDX, this is a change in tone. In the days prior, longer-dated NDX calls saw more interest. The puts could be used to speculate or hedge a participant’s downside. 

News And Analysis

Markets | Citadel Securities settles with fund on secret algorithm. (BBG)

Economy | Though inflation hotter than expected, it is temporary. (CNBC)

FinTech | Basel suggests strictest risk weighting for cryptocurrency. (BD)

Travel | Uber, Lyft driver shortage is boosting business for taxis. (BBG)

Politics | President Biden to meet Merkel at White House July 15. (Axios)

Energy | Oil thirst projected to surpass pre-COVID by end of 2022. (Axios)

What People Are Saying

Innovation And Emerging Trends

Travel | Airlines are planning to plow billions into flying taxis. (BBG)

FinTech | Why buy-now-pay-later financing is so attractive. (Axios)

FinTech | Central banks are headed toward digital currency. (Axios)

FinTech | Online broker Webull considers $400M U.S. IPO. (BBG)

FinTech | Coinbase strikes deal to let you add crypto to 401K. (Fortune)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing 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, afforded him the perspective and know-how very few come by.

Having worked in engineering and majored in economics, Renato is very detailed and analytical. His approach to the markets isn’t built on hope or guessing. Instead, he leverages the unique dynamics of time and volatility to efficiently act on opportunity.

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.

Categories
Commentary

Daily Brief For June 9, 2021

Market Commentary

Index futures in balance.

  • Manufacturing, tech bill is passed.
  • Ahead: Wholesale inventory data.
  • Indexes trade sideways overnight.

What Happened: U.S. stock index futures traded sideways overnight alongside the passage of a bill that bolsters U.S. manufacturing and technology initiatives.

At the same time, so-called meme stocks, like Clover Health, rocketed amid speculative commentaries on platforms like Reddit. This comes as risk metrics flash warnings ahead of the Fed’s annual meeting in Jackson Hole which, as discussed in prior commentaries, may mark a shift in policy tone.

Ahead is data on wholesale inventories and policy decisions by the Bank of Canada. 

Graphic updated 8:02 AM ET.

What To Expect: 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. 

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by responsive buying below balance, at the $4,208.25 high volume area (HVNode). This is significant because it suggested lower prices did not solicit initiative selling.

Responsive Buying: Buying in response to prices below an area of recent price acceptance.

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).

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

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

Initiative Selling: Selling within or below the previous day’s value area.

Further, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,224.75 HVNode puts in play the $4,232.25 low volume area (LVNode) and $4,238.00 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,247.75 Fibonacci-derived price target.

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

In the worst case, the S&P 500 trades lower; activity below the $4,224.75 HVNode puts in play the $4,213.75 LVNode and $4,208.25 HVNode. If lower, participants ought to look for responses at the $4,198.75 and $4,177.25 HVNodes.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Future.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for Tuesday. Activity in the options market was primarily concentrated in short-dated tenors, in call strikes as high as $435.
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), Tuesday.

News And Analysis

Politics | Democratic, GOP House members pitch infrastructure. (BBG)

Energy | One password allowed hackers to disrupt Colonial Pipeline. (REU)

Politics | U.S. Senate passes sweeping bill to address China threat. (REU)

Economy | The World Bank sees the strongest rebound in 80 years. (BBG)

Economy | Surprise jump in U.S. wages gives inflation debate twist. (BBG)

Politics | Gig companies’ push for state worker laws faces division. (REU)

Economy | Delinquency rates inching closer to pre-COVID levels. (MND)

Politics | Hungary’s Orban calls global corporate tax plan absurd. (BBG)

COVID | Fauci urges U.S. vaccinations as harmful variant spreads. (BBG)

What People Are Saying

Innovation And Emerging Trends

Economy | Bottom 90% of Americans borrowing from the top 1%. (BBG)

FinTech | Man Group-Oxford quants say AI can predict stock moves. (BBG)

Technology | Price of batteries has declined by 97% over 30 years. (OWID)

Economy | Fed paying 0.00%. Such a deal. Depositors are flocking. (BBG)

Crypto | El Salvador passes a law to be 1st country to adopt BTC. (Axios)

Crypto | Hong Kong to explore digital currency, HKMA fintech plan. (SCMP)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing 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, afforded him the perspective and know-how very few come by.

Having worked in engineering and majored in economics, Renato is very detailed and analytical. His approach to the markets isn’t built on hope or guessing. Instead, he leverages the unique dynamics of time and volatility to efficiently act on opportunity.

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.

Categories
Commentary

Daily Brief For June 3, 2021

Quick Note: As I will be on a short trip, the daily newsletter will be off tomorrow, June 4, and Monday, June 7. 

If you will be in the Miami, Florida area this weekend and would like to network, please let me know.

Market Commentary

Index futures are in balance and attempting to discover lower prices.

  • Russia cutting DXY holding, taper talk.
  • Ahead: PMIs, ISM, Claims, Fed speak.
  • Stock indexes trade sideways to lower.

What Happened: U.S. stock index futures auctioned lower overnight ahead of weekly claims and payrolls data.

The alleged culprit? Geopolitical tensions and concerns over inflation.

Russia said it would eliminate the dollar (DXY) from its National Wellbeing Fund, President Biden announced plans to amend a U.S. ban on foreign investments, and Fed President Patrick Harker suggested the central bank should discuss time frames for taper.

Graphic updated 7:50 AM ET.

What To Expect: Thursday’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. 

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by sideways trade up to the low volume area (LVNode) at $4,215.75. This LVNode is significant because it marks an area on the profile where participants were likely acting out of emotion, triggering stops, and at-market orders. 

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

If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.
Graphic: SPDR S&P 500 ETF Trust (NYSE: SPY) market liquidity, via Bookmap. Note the divergent volume delta, a measure of buying and selling power as calculated by the difference in volume traded at the bid and offer. Such conditions favor more balance (two-timeframe, rotational, or bracket trade).

Further, the broad equity market has been consolidating now for more than a month. This comes as participants look to price in supply chain uncertainties and rising inflation, fiscal and monetary tightening, COVID-19 concerns, political risks, and the like.

There is a possibility that data on U.S. payrolls, this week, may shed a light on the Federal Reserve’s stimulus schedule. Most likely, though, indices chop, remain in range. 

Moreover, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,177.25 high volume area HVNode puts in play the $4,199.00 HVNode. Initiative trade beyond the $4,199.00 HVNode could reach as high as $4,209.00 point of control (POC). 

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

In the worst case, the S&P 500 trades lower; activity below $4,177.25 HVNode puts in play the $4,153.25 HVNode. Thereafter, if lower, attention is drawn to the HVNodes at $4,122.25 and $4,069.25.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for June 2. Activity in the options market was primarily concentrated in short-dated tenors, in put strikes below current prices.
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), yesterday. Noting, again, the interest in long-dated out-of-the-money Nasdaq calls.

News And Analysis

Economy | Demand back, supply lagging. Both to grow in coming months. (PIIE)

Politics | Russia cuts dollar holdings from a wealth fund amid sanctions. (BBG)

Recovery | COVID-19 cases hit lowest point in U.S. since pandemic start. (Axios)

Economy | Harker says Fed needs to start discussing tapering timeline. (BBG)

Economy | U.K.’s Sunak says U.S. plan to break tax deadlock could work. (REU)

Politics | Biden to amend Trump’s China blacklist, target key industries. (BBG)

Politics | Iran investigates a fire that sank one of its largest navy ships. (WSJ)

What People Are Saying

Innovation And Emerging Trends

Politics | U.S. plows cash into R&D as China triggers a ‘Sputnik Moment.’ (BBG)

FinTech | Crypto firms are failing to meet AML regulations, says watchdog. (BBG)

FinTech | DeFi helping fuel the cryptocurrency market boom and volatility. (WSJ)

Climate | Eight major companies unite to push climate change solutions. (Axios)

Technology | Media industry braces for post-COVID-19 pandemic reality. (Axios)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing 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, afforded him the perspective and know-how very few come by.

Having worked in engineering and majored in economics, Renato is very detailed and analytical. His approach to the markets isn’t built on hope or guessing. Instead, he leverages the unique dynamics of time and volatility to efficiently act on opportunity.

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.

Categories
Commentary

Weekly Brief For May 31, 2021

Market Commentary

Key Takeaways: Index futures in balance.

  • Best to assume the taper tantrum happened.
  • Ahead: Fed speak and data on employment.
  • Indices traded sideways-to-higher last week.

What Happened: Coming into the large May monthly options expiration (OPEX) and extended holiday weekend, U.S. stock index futures pinned, trading sideways-to-higher.

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.

Options Expiration (OPEX): 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 worthless) and the reduction dealer gamma exposure. 

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.

Furthermore, looking back, the movement in price was both volatile and mechanical.

After a short covering-like rally toward $4,200.00, the S&P 500 was responsively bought and sold at key visual references, suggesting a dominance by short-term participants.

Responsive Buying (Selling): Buying (selling) in response to prices below (above) areas of recent price acceptance.

The technically-driven trade denotes a lack of interest by institutional participants, at record highs; supply chain uncertainties and rising inflation, fiscal and monetary tightening, COVID-19 concerns, political risks, and the like, are some of the emerging concerns larger participants are looking to price in.

Of all the above risks, inflation remains the hottest topic.

Generally speaking, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive). With the rapid recovery, though, market participants fear that rates will rise to protect the economy from overheating.

Higher rates have the potential to reduce the present value of future earnings, making stocks, especially those that are high growth, less attractive. 

To note, however, rates remain range-bound; rates on the 10 Year T-Note sit below their March high and are likely to continue higher, which the market may absorb

How may the market absorb a rise in rates? During the so-called Taper Tantrum, in the early 2010s, rates settled in a wide range, and equities rallied big. Adding, some strategists, like Kit Juckes of Societe Generale SA (OTC: SCGLY) suggest it may be best to assume a tantrum has already happened.

“U.S. 10-year yields rose from a low of 1.4% in 2012 to 3% during their tantrum. In this cycle, the rise has been from 0.5% to a high just below 1.8%. That’s comparable in relative terms. The eventual peak in U.S. yields in 2018 was 3.25%. Can’t we accept that the taper tantrum has already happened? The important difference is that in the tantrum cycle, core CPI never got above 2 ½%. A bet on further bond weakness is a bet on inflation proving to be stickier than the Fed can cope with.”

Adding, research by JPMorgan Chase & Co (NYSE: JPM), as well as Goldman Sachs Group Inc (NYSE: GS), suggests equities may be getting cheap with reflationary themes being the go-to play. This sentiment would help explain the increased interest in S&P 500 and Nasdaq 100 call options.

Graphic: Equity valuations at their cheapest, relative to the macro in March 2009 and in the depth of the 1982 recession, according to Goldman Sachs Group Inc (NYSE: GS), via The Market Ear.
Graphic: SHIFT search suggests participants were becoming more interested in call strikes at and above current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), last week.
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week prior. Activity in the options market was primarily concentrated in short-dated tenors, in strikes at and above $425.

Outlier risks remain, though; aside from the seasonally weak period, S&P 500 skew – a measure of perceived tail risk and the chances of a black swan event – rose dramatically over the past few weeks. At the same time, sentiment cooled considerably, while individual stock volatility increased the potential for a repeat of the GameStop Corporation (NYSE: GME) de-risking event.

Graphic: Goldman Sachs Group Inc (NYSE: GS) unpacks outlier risks based on the implied volatility of S&P 500 out-of-the-money options, via The Market Ear.

What To Expect: In the coming sessions, participants will want to focus their attention on where the S&P 500 trades in relation to the $4,197.25 high volume area (HVNode).

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

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

That said, participants can trade from the following frameworks.

In the best case, the index trades sideways or higher; activity above $4,197.25 has the potential to reach the $4,227.00 point of control (POC). Initiative trade beyond the POC could reach as high as first the $4,238.00 overnight all-time high (ONH) and then, the $4,294.75 Fibonacci-derived price extension, a typical recovery target. 

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

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

In the worst case, the index trades lower; activity below the $4,177.25 HVNode puts in play the $4,153.25 HVNode, first. Thereafter, if lower, the $4,122.25 HVNode and $4,071.00 POC come into play. 

On a cross through the $4,050.75 low volume area (LVNode), long-biased traders should beware of a rapid liquidation, as low as first the $4,015.00 and $4,001.00 POCs. In such a liquidation, odds favor a test of ~$3,970.00 50.00% retracement, as well as the $3,918.00 61.80% retracement and HVNode.

Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Weekly candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). Nasdaq is primed for upside and has the potential to pull the S&P with it. 

News And Analysis

Trade | One of the world’s top ports expects delays on an outbreak. (BBG)

Markets | PBOC raises reserve ratio for foreign exchange holdings. (BBG)

Economy | Recovery solidifies in U.S., Europe, while EM faces risks. (Moody’s)

Markets | China bars banks from selling commodity-linked products. (REU)

Economy | Fed security purchases draw fire in hot U.S. housing market. (S&P)

Energy | Global oil demand is seen eclipsing India, Iran’s uncertainty. (S&P)

Economy | U.S. won’t experience stagflation over next few years. (Moody’s)

Economy | Non-government loans seeing a jump in forbearances. (MND)

Economy | U.S. speculative-grade corporate default rate to fall to 4%. (S&P)

Markets | Inflation, higher oil, stronger yuan point in same direction. (BBG)

Economy | U.S. retailers face headwinds from slowing sales, inflation. (S&P)

Markets | Everyone with bonds to liquidate had ample time to do so. (BBG)

What People Are Saying

Innovation And Emerging Trends

Markets | How recent growth in leveraged finance affects investors. (BZ)

Politics | Tech growth overshadowed by regulatory risks, challenges. (S&P)

Markets | Chamath: SPACs need more oversight and regulation. (BBG)

Politics | China moves to a three-child policy to boost its birthrate. (BBG)

Markets | Shakeout stirs debate over ether’s long-term potential. (BBG)

FinTech | Which banks are positioned for low rates, digital adoption. (S&P)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing 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, afforded him the perspective and know-how very few come by.

Having worked in engineering and majored in economics, Renato is very detailed and analytical. His approach to the markets isn’t built on hope or guessing. Instead, he leverages the unique dynamics of time and volatility to efficiently act on opportunity.

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.

Categories
Commentary

Weekly Brief For May 23, 2021

Editor’s Note: Happy Sunday, everyone!

A lot of new subscribers this week in light of Physik Invest’s webinar with Benzinga. If you want access to the slides presented, click here.

Additionally, I am honored for your decision to follow along and will do my best to provide an objective, “no fluff” view into the who, what, when, where, why, and how in finance and technology.

Quick note, from May 25 to May 28, the daily newsletter will be off as I will be on a trip. It would not be fair for me to provide lackluster content since I won’t have all the tools at my disposal.

That said, I’ll try to be objective and concise in today’s note to ensure you have the proper direction for the volatile trade ahead.

Market Commentary

Key Takeaways: Index futures in balance.

  • Bitcoin’s weekend crash churns stomachs.
  • Tone on adjusting monetary policy altered.
  • Indices were sideways-to-higher last week.

What Happened: Last week, U.S. stock index futures auctioned sideways-to-higher, as participants looked to price in emerging dynamics with respect to rising inflation, fiscal and monetary tightening, COVID-19 concerns, political risks, and the like. 

In pricing in these dynamics, the movement was both volatile and mechanical, halting short of key visual references suggesting the participants involved were short-term (i.e., technically driven) in nature.

Adding, amid this rotation, quite a bit of poor structure was cleaned up (i.e., low volume areas), but still, judging by a lack of excess at certain points on the composite volume profile, odds point to limited conviction and commitment.

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.

Holistically, equities are in a seasonally weak period. At the same time, inflation and uninspiring economic data are major worries investors are attempting to price in.

Just last week, the Federal Reserve’s minutes showed that some on the committee were interested in tapering discussions. 

“It was a surprise to hear the talk about Fed tapering,” Joyce Chang, JPMorgan’s chair of global research, said. “The market had been thinking there might be a couple of months before you really saw this particular issue come into focus.” 

Generally speaking, inflation and rates move inverse to each other. Low rates stimulate demand for loans (i.e., borrowing money more attractive). With the rapid recovery, though, market participants fear that rates will rise to protect the economy from overheating.

Higher rates have the potential to reduce the present value of future earnings, making stocks, especially those that are high growth, less attractive. To note, however, rates remain range-bound; rates on the 10 Year T-Note sit below their March high and are likely to continue higher, which the market may absorb.

Graphic: JPMorgan Chase & Co (NYSE: JPM) analysts believe yields on the 10-year note will stay rangebound before breaking higher this summer, via The Market Ear.

How may the market absorb a move higher in rates? Looking back, according to The Market Ear, during the so-called Taper Tantrum, in the early 2010s, rates settled in a wide range, and equities rallied big. Adding, research by JPMorgan Chase & Co (NYSE: JPM) suggests equities may be getting cheap with reflationary themes the go-to play, still.

In support, during the May 19 reversal, in the S&P 500 and Nasdaq 100, participants increased exposure to the upside with relatively cheap, longer-dated calls.

Still, overall, the flows point to a lot of opportunistic hedging (see graphic below).

Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), last week. To note, however, participants began paying up for longer-dated upside exposure (evidenced by call activity).

What To Expect: In the coming sessions, participants will want to focus their attention on where the S&P 500 trades in relation to its $4,177.25 composite high volume area (HVNode).

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

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

In the best case, the index trades sideways or higher; activity above the $4,177.25 HVNode puts in play the $4,227.00 point of control (POC). Initiative trade beyond the POC could reach as high as first the $4,238.00 overnight all-time high and then, the $4,294.75 Fibonacci-derived price extension, a typical recovery target.

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

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

In the worst case, the index trades lower; activity below the $4,122.25 HVNode puts in play the $4,071.00 POC. Thereafter, if lower, on a cross through the $4,050.75 low volume area (LVNode), long-biased traders should beware of a rapid liquidation, as low as first the $4,015.00 and $4,001.00 POCs. In such a liquidation, odds favor a test of ~$3,970.00 50.00% retracement, as well as the $3,918.00 61.80% retracement and HVNode.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Weekly candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). Note Russell’s “toppy” rotation, and similar pullbacks to trend in the S&P 500 and Nasdaq. One last push, higher?
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for last week. Though activity in the options market was primarily concentrated in short-dated tenors, increased trade in farther-dated call-side strikes is observed as a commitment to higher prices.

News And Analysis

Markets | Rotation from growth into value strengthens bull market. (ARK)

Recovery | Two COVID shots effective against the India variant. (REU)

Economy | U.S. inflation is transitory and consistent with recovery. (S&P

Crypto | Google search volume for cryptocurrency breaks ATH. (Block)

Economy | PBOC will maintain its exchange rate basically stable. (BBG)

Markets | Global chip shortages cost automakers 5% of production. (Fitch)

Markets | JPMorgan cross-asset strategy head warns of drop. (BBG)

Markets | Nomura, UBS, UniCredit fined over bond trading cartel. (TT)

Recovery | CDC probes reports of myocarditis in the vaccinated. (Axios)

Economy | U.S. home prices push to record highs, buying slows. (WSJ)

What People Are Saying

Innovation And Emerging Trends

FinTech | How cryptocurrency fits into Brazil’s vision for banking. (Block)

FinTech | Major Asia-Pacific region banks upping their fintech bets. (S&P)

FinTech | U.S. Federal Reserve plans to publish a paper on CBDC. (Block)

Real Estate | Manhattan’s apartment vacancy rate stubbornly high. (WSJ)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing 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, afforded him the perspective and know-how very few come by.

Having worked in engineering and majored in economics, Renato is very detailed and analytical. His approach to the markets isn’t built on hope or guessing. Instead, he leverages the unique dynamics of time and volatility to efficiently act on opportunity.

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.

Categories
Results

Case Study: Trading A Balance-Breakout Failure In The Nasdaq 100

What Happened: On April 29, 2021, market participants attempted to move the Nasdaq 100 stock index from balance, an area of recent price acceptance, above a developing ledge, or flattened area on the composite volume profile.

Further, participants failed to find acceptance beyond the balance area, given the Nasdaq 100’s move back into the prior range. As a result, odds favored (1) sideways or (2) lower trade, as low as the balance area low (BAL) near $13,700.00.

Adding, a weak reaction by heavily-weighted index constituents to blowout earnings, as well as poor structure left behind prior price discovery, among other factors, such as the will to raise the Capital Gains Tax, suggested an increased potential to trade below the $13,700.00 BAL, into prior poor structures, or low volume areas (LVNodes), that ought to offer little-to-no support.

In response, the following sequence analysis unpacks how Physik Invest traded options tied to both the cash-settled Nasdaq 100 (INDEX: NDX) and Nasdaq 100 (CME: /NQ) future, leading up to the May 12, 2021 swing low. 

Note: Click here to view all transactions.

Sequence 1: On April 29, 2021, Physik Invest applied the balance-break and gap scenarios, monitoring for acceptance (i.e., more than 1-hour of trade) outside the balance area. 

To preface, gaps ought to fill quickly. 

Should they not, that’s a signal of weakness; 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.

After a confirmed balance-breakout failure, Physik Invest bought the following structures for a $203.00 debit. At this point, if all legs were to remain out of the money (i.e., expire worthless) by May 21, 2021, the maximum loss would have been $203.00, approximately 1/5 of a standard risk unit, or the debit risked in a typical position.

  • 13500+1/13300-2/13100+1 NDX long put ratio spread
  • 14100+3/14110-6/14140+3 NDX short call ratio spread
  • 14400-1 /NQ short call

By 5/10/2021, the aforementioned position was closed for a $1,855.00 credit, an 813.80% return on the initial debit outlay.

The above put-side structure was initiated against the $13,300 high volume area, also a prior balance area boundary. The reason being, a structurally sound market will build on past areas of high volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low volume area which denotes directional conviction and ought to offer support on any test). If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.

Summary: After a failed balance-breakout setup presented itself, Physik Invest financed long put-side structures targeting a test of $13,300, with short-call exposure, risking ⅕ of a standard risk unit in debit, over a timeframe of one month.

In total, the sequence of trades net a $1,621.71 profit after commissions and fees.

The above strategies were employed in accordance with Physik Invest’s core edge: the trade of ratioed, multi-leg strategies that combine short and long positions to reduce risk and increase returns.

Yes, in hindsight, one could have opted for static short exposure (e.g., selling stock to open a position). However, the risks tied to such strategies are immense in a regime characterized by increased volatility and uncertainty.

By leveraging the dynamics of time and volatility, through complex spreads, unwanted directional risks were reduced.

Reflection: Hindsight is 20/20.

Though the entry was perfectly timed, the exit was not; 1-day prior to expiry, the 13500/13300/13100 ratio spread – which was removed for a $21.11 credit – priced at nearly $90.00. 

The correct move would have been to initiate the position with up to four 13500/13300/13100 ratio spreads. Thereafter, as prices moved lower, the position would have been pared down enough to at least cover the cost of any remaining spreads.

Those remaining spreads would have been kept on as so-called “lottery tickets.”

Categories
Commentary

Daily Brief For May 20, 2021

Market Commentary

Index futures in balance.

  • Federal Reserve considers taper.
  • Ahead: Business outlook, claims.
  • Indexes in prior-range, sideways.

What Happened: U.S. stock index futures auctioned within prior-range, overnight, ahead of fundamental releases such as the Philadelphia Fed Business Outlook and claims data.

Graphic updated at 7:30 AM EST.

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

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by responsive trade above the $4,069.25 high volume area (HVNode), which is significant because that value marked the other end of a micro-composite low volume area.

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

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

Responsive Buying (Selling): Buying (selling) in response to prices below (above) area of recent price acceptance.

Further, this activity is happening in the context of concerns over rising inflation, which may prompt monetary authorities to ease back on stimulus. Yesterday, the Federal Reserve’s minutes showed that some on the committee were interested in tapering discussions. 

“It was a surprise to hear the talk about Fed tapering,” Joyce Chang, JPMorgan’s chair of global research, said. “The market had been thinking there might be a couple of months before you really saw this particular issue come into focus.”

Why is this – inflation – a concern? Generally speaking, inflation and rates move inverse to each other. Low rates stimulate demand for loans (i.e., borrowing money more attractive). With the rapid recovery, though, market participants fear that rates will rise to protect the economy from overheating.

Higher rates have the potential to reduce the present value of future earnings, making stocks, especially those that are high growth, less attractive. To note, however, rates are still rangebound; rates on the 10 Year T-Note sit below their March high and are likely to continue higher, which the market will likely absorb.

For today, beyond fundamental context, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,104.75 low volume area (LVNode) has the potential to reach up to the $4,122.25 HVNode. Initiative trade beyond the $4,122.25 HVNode could reach as high as the $4,134.00 spike base (a pivot on the composite profile; above = bullish, below = neutral-to-bearish). 

Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

In the worst case, the S&P 500 trades lower; activity below the $4,069.25 HVNode targets a repair of the minimal excess low at $4,055.75. Thereafter, on a failed response, prices may continue lower, below the $4,050.75 LVNode boundary. In such a situation, caution longs. The potential exists to trade to the POCs at $4,015.00 and $4,001.00, if not even lower.

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

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.
Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.
Graphic: 65-minute candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), May 19. To note, however, participants were paying up for longer-dated upside exposure (evidenced by call activity). Note the December calls trading in the NDX and June calls in SPX.

News And Analysis

Recovery | New COVID-19 coronavirus cases fell by 20% in the last week. (Axios)

Economy | Central bank taper timelines are now starting to come into focus. (Axios)

Recovery | Vaccine boosters could be necessary as soon as September. (Axios)

Technology | Cisco says shortages will disrupt supply chains for rest of year. (FT)

Economy | Recovery funds increase investment but long-term gains uncertain. (Moody’s)

Energy | China’s industrial commodities slide after warning of crackdowns. (REU)

Travel | The U.S. is weighing changes to pandemic air travel restrictions. (REU)

Economy | Refinance volumes increase for the second week despite rate bump. (MND)

Economy | Inflation surveys, market pricing consistent with what Fed wants. (Barrons)

What People Are Saying

Innovation And Emerging Trends

FinTech | New digitial exchange offers gold exposure and funding for miners. (REU)

Crypto | Sh*t coin billionaire: tales from the fringe of the cryptocurrency craze. (BBG)

Crypto | China deepens its fintech dominance with new digital currency. (Diplomat)

Crypto | Central bank digital currencies could disrupt financial systems. (Fitch)

FinTech | OCC chief signals new direction on bank supervision and fintech. (AB)

FinTech | Stripe betting on creator economy powered by likes of Clubhouse. (BI)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing 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, afforded him the perspective and know-how very few come by.

Having worked in engineering and majored in economics, Renato is very detailed and analytical. His approach to the markets isn’t built on hope or guessing. Instead, he leverages the unique dynamics of time and volatility to efficiently act on opportunity.

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.

Categories
Commentary

Daily Brief For May 19, 2021

Market Commentary

Index futures in price discovery.

  • Light calendar – Fed speak, minutes.
  • Indices lower. Potential for response.

What Happened: U.S. stock index futures auctioned lower, overnight, alongside fears of inflation and a COVID-19 resurgence in some parts of the world.

Today’s calendar is rather light. Of interest is Fed-speak, ahead of the publication of April minutes.

Graphic updated 7:05 AM EST.

What To Expect: Wednesday’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. 

Adding, during the prior day’s regular trade, after failing at the $4,177.25 developing ledge, the worst-case outcome occurred, evidenced by initiative trade below the $4,129.25 high volume area (HVNode), on an end-of-day spike.

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).

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

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

Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,069.25 HVNode has the potential to trade up into the $4,122.25 HVNode. Initiative trade beyond the $4,122.25 HVNode could reach as high as the $4,134.00 spike base, a major pivot (i.e., above = bullish, below = neutral-to-bearish) for today’s trade.

In the worst case, the S&P 500 trades lower; activity below the $4,069.25 HVNode targets the LVNode boundary at $4,050.75. Auctioning past that boundary puts in play the poor structure at $4,015.00 and $4,001.00. Ultimately, in case of lower prices, participants would look for responsive buying to appear at and below the $3,970.75 price projection.

Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.
Graphic: SHIFT search suggests participants were most interested in longer-dated put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), May 18.

News And Analysis

Markets | Bitcoin plunges to $38,000 as Elon Musk-fueled rally collapses. (BBG)

Markets | The U.S. dollar is not crashing no matter what the banks say. (BBG)

Recovery | Fully vaccinated people could need a yearly COVID booster shot. (CNBC)

Economy | Yellen pushes higher taxes, stronger unions to the U.S. chamber. (CNBC)

Economy | U.K. inflation more than doubles as post-lockdown climb begins. (REU)

Economy | Biden tax proposal will most likely have a limited effect on ratings. (S&P)

Economy | European Union plans to open borders to vaccinated travelers. (Axios)

Energy | U.S. shale firms are limiting their outputs despite rising prices. (BBG)

Markets | High yield default rate is at its lowest rate since October 2019. (Forbes)

Economy | Construction starts pulled back in April due to supply problems. (MND)

What People Are Saying

Innovation And Emerging Trends

Markets | Biggest risk in markets has shifted; concerns over Fed inaction. (BBG)

FinTech | Global trading platform Stake adds $30M from Tiger, DST Global. (BZ)

FinTech | Secfi secures investment for its stock option financing platform. (BZ)

Energy | Paper company wants to make a wooden rival to car batteries. (BBG)

Trading | Fidelity’s pitch to America’s teens: no-fee brokerage accounts. (WSJ)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing 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, afforded him the perspective and know-how very few come by.

Having worked in engineering and majored in economics, Renato is very detailed and analytical. His approach to the markets isn’t built on hope or guessing. Instead, he leverages the unique dynamics of time and volatility to efficiently act on opportunity.

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.

Categories
Commentary

Daily Brief For May 17, 2021

Market Commentary

Index futures in balance.

  • Themes: Inflation, COVID outbreaks.
  • Ahead: Manufacturing, housing data.
  • Indices are lower but holding up well.

What Happened: U.S. stock index futures auctioned lower, overnight, alongside a so-called flight to safety. Bonds and metals were higher while risk assets, like equities and cryptocurrencies, were down.

At the same time, supply-side disruptions continue with coronavirus outbreaks in Asia; Taiwan’s benchmark index fell nearly 4% during overnight trade.

In terms of releases, participants are looking forward to Empire Manufacturing and the NAHB housing market index for May. Also, an Atlanta Fed conference begins, today.

Graphic updated at 7:00 AM EST.

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

Adding, during Friday’s regular trade, the best case outcome occurred, evidenced by initiative trade up to the $4,177.25 high volume area (HVNode). This is significant because that level marks a major pivot on the composite profile (i.e., above = bullish, below = bearish-to-neutral). To note, however, participants were unable to introduce meaningful excess at the recovery high.

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

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

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.

It is important to touch on the push-pull dynamic in markets, over the past few weeks. 

Historically speaking, equities are in a seasonally weak period. At the same time, inflation and uninspiring economic data are major worries investors are attempting to price in. Despite these emerging themes, JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic, in a CNBC appearance, said that the market is a little oversold, and his S&P 500 target of $4,400.00 remains in play.

“I think market is now actually getting cheap, in some sense,” Kolanovic said. “I think we’re at the end of this upset. I think the market is going to go higher here. That said, we do still again prefer reflationary themes.”

Given the brief fundamental context, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,177.25 HVNode pivot may reach as high as the $4,227.00 POC. Initiative trade beyond the POC targets the $4,238.00 overnight high (ONH).

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

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

In the worst case, the S&P 500 trades lower; activity below $4,177.25 has the potential to reach down, through the $4,129.25 and $4,069.25 HVNodes, to the $4,050.75 low volume area (LVNode). 

Trading beyond the LVNode, caution longs. The S&P 500 may rapidly discover lower prices, repairing the poor, low-volume structure down to the $3,979.50 Fibonacci retracement. Closeby is the $3,953.25 HVNode and $3,908.25 composite HVNode (a key response area).

Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), last week. It appears that participants were positioning themselves in strikes across further-dated expiries (e.g., June 18, 2021) suggesting more commitment.

News And Analysis

Trade | Surging corporate demand is upending global supply chains. (BBG)

Credit | Fiscal stimulus, borrower discipline behind loan asset quality. (Moody’s)

Economy | Households and most U.S. children to get monthly stimulus. (REU)

Travel | United to add more than 400 daily flights in July amid demand. (REU)

Trade | EU agrees to a partial truce with the U.S. over old Trump tariffs. (REU)

Markets | Companies flush with cash, ready to pad shareholder pockets. (WSJ)

What People Are Saying

Innovation And Emerging Trends

Travel | Bankers flee Wall Street, head home to virus-free Australia. (BBG)

FinTech | Crypto, blockchain must accept problems, lead in sustainability. (TC)

Energy | The electrification of everything: what you need to know. (WSJ)

FinTech | How you can build a DIY robot-advisor using Passiv. (BZ)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing 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, afforded him the perspective and know-how very few come by.

Having worked in engineering and majored in economics, Renato is very detailed and analytical. His approach to the markets isn’t built on hope or guessing. Instead, he leverages the unique dynamics of time and volatility to efficiently act on opportunity.

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.