Categories
Commentary

Market Commentary For 2/1/2021

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

What Happened: As investors looked to another round of earnings, amidst a popularized retail stock buying frenzy, U.S. index futures tested lower and returned violently into Friday’s regular trading range.

What Does It Mean: After signs of deleveraging, inversion of the VIX term structure, a shift into short-gamma, and a rise in purchases of downside protection with time, U.S. stock indexes are best positioned for downside discovery.

However, after the best case scenario — the S&P 500 taking back Friday’s liquidation and auctioning above the $3,727.75 high-volume area (HVNode) — was realized in overnight trade, participants can expect continued balance on supportive speculative flows and delta (e.g., committed buying as measured by volume delta).

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

As a result, participants ought to zoom out, and look for valuable areas to transact, such as those highlighted zones in Graphic 1 which denote 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, as they have in the week prior, then future discovery ought to be volatile and quick as participants look to areas of value for favorable entry or exit.

Graphic 1: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

In the best case, the market will initiate and find acceptance (in the form of rotational trade) above the $3,767.75 high-volume node.

In the worst case, responsive sellers appear and continue the downside discovery process. Any break that finds increased involvement (i.e., supportive flows and delta) below the $3,689.50 HVNode, would favor continuation as low as the $3,611.50 and $3,556.00 HVNodes.

The second to last HVNode corresponds with the $361 SPY put concentration, which may serve as a near-term target, or bottom, for this sell-off, given last week’s activity at that strike (Graphic 2).

Graphic 2: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust, for the week ending January 30, 2021.

The go/no-go for upside is the $3,770.50 regular-trade high. The go/no-go for downside is $3,685.50 regular-trade low. Anything in-between portends responsive, non-directional trade.

Levels Of Interest: $3,770.50 regular-trade high, $3,767.75 HVNode, $3,685.50 regular-trade low.

Categories
Commentary

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

Key Takeaways:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cover photo by Pixabay from Pexels.

Categories
Commentary

Market Commentary For 1/29/2021

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

What Happened: After a slew of the earnings reports by heavily weighted index constituents, U.S. index futures further accepted lower prices.

What Does It Mean: Earlier in the week, the S&P 500 failed to drum up initiative buying after an upside break of the $3,852.50 ledge. Participants sold the break, introducing excess (which forms after an auction has traveled too far in a particular direction and portends sustained reversal) and acceptance below the $3,824.00 – $3,763.75 balance-area. This invalidated last week’s break-out to new highs.

Since then, market participants were witness to violent two-sided trade, a result of the market moving into a short-gamma environment (graphic 1); in such cases dealers hedge their derivatives exposure by buying into strength and selling into weakness. This, alongside the presence of short-term traders in U.S. equities (as evidenced by selling that transpired at yesterday’s high, since institutions tend not to transact at exact technical levels) will exacerbate volatility.

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

Adding, it’s important to bring back yesterday’s graphics that showed a proxy for buying derived from short sales (i.e., liquidity provision on the market making side) decline and a substantial change in tone in terms of speculative derivatives activity.

Since posting graphics 2 and 3, the bearish thesis is still intact. This is due to the divergent speculative flows and delta (e.g., presence of non-committed buying or selling as measured by volume delta) during Thursday’s session, as can be viewed in Graphic 4. This information means that the short-covering rally that lasted much of yesterday’s regular trade was not supported; increased capital was not committed into yesterday’s highs.

Graphic 2: Speculative derivatives activity for January 27, 2021
Graphic 3: DIX by Squeeze Metrics suggests large divergence between price and buying
Graphic 4: Divergent Delta in the SPDR S&P 500 ETF (NYSE: SPY), the largest ETF that tracks the S&P 500

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

Given today’s month-end derivatives expiry and yesterday’s acceptance inside of the $3,824.00 – $3,763.75 balance-area, the odds of substantial downside during Friday’s session is low. Instead, participants should position themselves for two-sided, responsive trade.

Still, because the market initiated out of balance, lower, responsive sellers have been emboldened. As a result, participants ought to respond to probes into value. Therefore, as long as the S&P 500 remains below the $3,794.75 high-volume node (HVNode), an area that offers favorable entry and exit, the bearish narrative remains intact.

The go/no-go for upside is the $3,823.75 regular-trade high. The go/no-go for downside is $3,721.00 overnight low. Anything in-between portends responsive, non-directional trade.

Above $3,823.75 puts in play the $3,842.00 HVNode. Below $3,721.00 , participants ought will look to respond to the $3,611.50 and $3,556.00 HVNodes, in the worst case.

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

Levels Of Interest: $3,823.75 regular-trade high, $3,721.00 overnight low.

Categories
Commentary

Market Commentary For 1/28/2021

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

What Happened: Alongside the earnings of heavily weighted index constituents and news the Fed would maintain monetary stimulus amid a slowing recovery, U.S. index futures sold heavy Wednesday, and found acceptance at lower prices during the overnight session.

What Does It Mean: During Wednesday’s regular trade in the S&P 500, market participants were unable to maintain higher prices.

This came as the market failed to drum up initiative buying after an upside break of the $3,852.50 ledge, in addition to profile structures denoting the presence of excess (which forms after an auction has traveled too far in a particular direction and portends sustained reversal). Both of the prior occurrences provided increased confidence among responsive sellers.

Additionally, participants saw a proxy for buying derived from short sales (i.e., liquidity provision on the market making side) decline and a substantial change in tone in terms of speculative derivatives activity.

Graphic 1: Speculative derivatives activity for January 27, 2021
Graphic 2: DIX by Squeeze Metrics suggests large divergence between price and buying

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

Further, yesterday’s move through the $3,824.00 – $3,763.75 balance-area was the most negative outcome and portends further downside discovery.

Graphic 3: 15-minute chart of the Micro E-mini S&P 500 Futures show near-term damage to bullish thesis

Given that increased capital was not committed into yesterday’s lows, evidenced by a divergent delta (i.e., the difference between buying and selling pressure), participants can expect a near-term low, per graphic 4.

Graphic 4: Divergent delta in the SPDR S&P 500 ETF Trust (NYSE: SPY), the largest ETF that tracks the S&P 500

That said, because the market initiated out of balance, lower, responsive sellers have been emboldened. As a result, participants ought to respond to probes into value. Therefore, as long as the S&P 500 remains below the $3,794.75 high-volume node (HVNode), an area that offers favorable entry and exit, the bearish narrative remains intact.

The go/no-go for upside is the $3,806.50 regular-trade high. The go/no-go for downside is $3,703.25 overnight low. Anything in-between portends responsive, non-directional trade.

Above $3,806.50 puts in play the $3,842.00 HVNode. Below $3,703.25, participants ought to look to the $3,611.50 and $3,556.00 HVNodes.

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

Levels Of Interest: $3,806.50 regular-trade high, $3,703.25 overnight low.

Categories
Commentary

Market Commentary For 1/27/2021

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

What Happened: After a failure to resolve higher, ahead of the Federal Reserve’s policy decision and earning reports by mega-cap stocks, U.S. index futures sold heavy overnight.

What Does It Mean: During Tuesday’s regular trade in the S&P 500, market participants were unable to maintain prices above the $3,852.50 ledge, increasing confidence among responsive sellers.

Graphic 1: Internally, it appears that the market is running out of steam.

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

Given that the market failed to drum up initiative buying after an upside break of the $3,852.50 ledge, in addition to profile structures denoting the presence of excess (which forms after an auction has traveled too far in a particular direction and portends sustained reversal) participants can expect increased confidence among responsive sellers.

Therefore, attention moves to the $3,824.00 – $3,763.75 balance-area.

Balance-areas denote range-bound trade. The longer participants spend time transacting within a narrow range of prices, the more valuable those prices become. Should the market initiate out of balance and return, participants left out in the move will respond as the area offers favorable entry.

Re-entry into the balance-area may portend further downside participation, as low as the $3,763.75 boundary. Participants should keep in mind that the area is valuable and will be the site of responsive buying. The near-term bullish narrative remains intact, as long as participants maintain prices above the $3,763.75 boundary. Trade beneath $3,763.75 would be the most negative outcome and may portend further downside discovery, as low as the $3,727.75 high-volume node (HVNode), a favorable area to transact in the past.

The go/no-go for upside is the $3,824.00 balance-area boundary. The go/no-go for downside is $3,763.75 balance-area boundary.

Above $3,824.00 puts in play the $3,852.50 ledge. Below $3,763.75, participants ought to look to the $3,727.75 HVNode.

Levels Of Interest: $3,852.50 ledge, $3,824.00 balance-area high, $3,763.75 balance-area low, $3,727.75 HVNode.

Categories
Commentary

Market Commentary For 1/26/2021

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

What Happened: After a brief liquidation during Monday’s session, U.S. index futures traded flat overnight, with the S&P 500 rotating within an 8-session balance-area.

What Does It Mean: During Monday’s regular trade in the S&P 500, market participants were unable to break through to new highs; profile structures denoted a market that wasn’t paying longs that were late to the party.

Further, the Monday morning liquidation cleared the inventory of those participants that bought too much, repairing some poor structures left in the wake of last week’s upside discovery.

Given that the $3,824.25 balance-area high (BAH) was rejected, upside conviction remains intact (graphics 1 and 2 confirm this).

As a result, attention is drawn to the $3,852.50 ledge which has attracted responsive sellers numerous times over the past 8-sessions.

Graphic 1: Order flow in the SPDR S&P 500 ETF Trust (NYSE: SPY), the largest ETF that tracks the S&P 500
Graphic 2: Speculative derivatives activity for Monday, January 25

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

As stated earlier, participants have to contend with the $3,852.50 ledge. In today’s session, (1) a lack of upside continuation increases confidence among responsive sellers to transact below the ledge or (2) the level cracks, and initiative buying surfaces. In the latter case, the best outcome would include a test of the $3,859.75 overnight all-time high (there is a low probability that overnight all-time highs end the upside discovery process) and $3,884.75 price projection, or double the width of the balance-area, the typical target on a balance-area breakout.

The go/no-go for upside is the $3,852.50 ledge. The go/no-go for downside is $3.821.50 overnight low.

Levels Of Interest: $3,852.50 ledge, $3.821.50 overnight low.

Categories
Commentary

Market Commentary For 1/25/2021

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

What Happened: Ahead of a busy earnings week, U.S. index futures traded divergent overnight, with the S&P 500, in particular, auctioning primarily in prior-balance and -range.

What Does It Mean: After recovering a breakdown in the week prior, and breaking balance to the upside, market participants indicated a willingness to explore higher prices.

On Friday, after the S&P 500 found acceptance above the $3,813.50 ledge and $3,824.25 balance-area high (BAH), it encountered responsive selling near the $3,840.75 high-volume node (HVNode), the site of a downtrend line.

Since the selling transpired at a visual level, market participants know that technically-driven, short-term traders in control. In other words, institutions (e.g, funds) tend not to transact at exact technical levels.

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

Thereafter, participants can expect continued balance or initiative buying to take out the $3,859.75 overnight all-time high (there is a low probability that overnight all-time highs end the upside discovery process) and $3,884.75 price projection, or double the width of the balance-area, the typical target on a balance-area breakout.

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

The go/no-go for upside is the $3,854.00 regular trade high. The go/no-go for downside is $3,822.25 pullback low.

Levels Of Interest: $3,854.00 regular trade high, $3,822.25 pullback low.

Categories
Commentary

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

Key Takeaways:

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

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

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

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

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

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

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

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

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

Graphic 2: SpotGamma S&P 500 Gamma Levels

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

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

Graphic 3: SpotGamma plots opening option positions.

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

In the simplest way, high-volume areas can be thought of as building blocks. A structurally sound market will build on past areas of high-volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area which denotes directional conviction and ought to offer support on any test).

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

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

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

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

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

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

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

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

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

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

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

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

Cover photo by Jayant Kulkarni from Pexels.

Categories
Commentary

Market Commentary For 1/22/2021

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

What Happened: Alongside news of disappointing economic data and new pandemic restrictions, U.S. index futures auctioned back into prior balance.

What Does It Mean: Initiative buyers extended the S&P 500’s rally, breaking the index above its $3,824.25 balance-area high (BAH). After establishing acceptance (i.e., high-volume area, or HVNode) near the $3,850.00 price extension, an upside target, U.S. index futures auctioned back into range, repairing poor structures left in the wake of prior discovery.

In the simplest way, high-volume areas can be thought of as building blocks. A structurally sound market will build on past areas of high-volume. Should the market trend for long periods of time, it will lack sound structure. If participants were to auction and find acceptance into areas of prior low-volume, then future discovery ought to be volatile and quick as participants look to areas of value for favorable entry or exit.

What To Expect: Friday’s regular session (9:30 AM – 4:00 PM ET) will likely open outside of the prior day’s balance and range. The S&P 500, in particular, may open below the $3,824.25 BAH. Doing so, while not soliciting a response from responsive buyers, would negate the earlier rally, and put in play the $3,763.75 balance-area low (BAL).

Few dynamics to note: (1) poor structure in prior sessions, as evidenced by the low-volume areas (LVNodes) in the graphic above, is being repaired, (2) a new overnight all-time high (i.e., historically, there is a low probability that overnight all-time highs end the upside discovery process), (3) a break that finds acceptance outside of a larger balance-area portends continuation up to the 100% price projection, or double the width of the balance-area, (4) trading back into to the consolidation, thereby invalidating the break-out, would portend a move to the other end of balance, or the $3,763.75 BAL, (5) big picture uptrend remains intact.

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

In the best case, if responsive buying was to defend the BAH, then participants ought to target the $3,850.00 high-volume concentration.

Levels Of Interest: $3,824.25 BAH, $3,850.00 HVNode, $3,763.75 BAL.

Categories
Commentary

Market Commentary For 1/21/2021

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

What Happened: After a day of active discovery, U.S. index futures established a new all-time high in the overnight session, before backing off into prior-range and -value.

What Does It Mean: Initiative buyers extended the S&P 500’s rally, breaking the index above its $3,824.25 balance-area high (BAH). Later, market participants found acceptance near the $3,850.00 price extension, an upside target.

What To Expect: Thursday’s regular session (9:30 AM – 4:00 PM ET) will likely open close to prior-balance and -range, implying higher volatility at the open.

Few dynamics to note: (1) poor structure in prior sessions, as evidenced by the low-volume areas (LVNodes) in the graphic above, (2) a new overnight all-time high (i.e., historically, there is a low probability that overnight all-time highs end the upside discovery process), (3) a break that finds acceptance outside of a larger balance-area portends continuation up to the 100% price projection, or double the width of the balance-area.

In the best case, given that the open will occur after a day of active discovery, participants can expect overnight balancing activity to carry on. If initiative buying was to take out the $3,859.75 overnight high (ONH), then participants ought to target the $3,884.75 balance-break projection.

The go/no-go level for further upside is the $3,859.75 (ONH). The go/no-go level for downside is the $3,824.25 balance-area high (BAH). Anything in-between classifies as rotation, or the potential repair of poor structures left in the session prior.

Noting: Low-volume areas denote conviction and should hold against future probes. If a market was to break into a low-volume area, then odds favor discovery through the entire area, to the next high-volume concentration, or the market’s most recent perception of value.

Levels Of Interest: $3,824.25 BAH, $3,859.75 ONH, $3,884.75 projection.