Categories
Commentary

Weekly Brief For April 18, 2021

Happy Sunday! Though markets were relatively choppy, they ended higher last week. This came at a time of heightened public attention to the market.

The following commentary on U.S. broad market equity indices will discuss what happened, why it matters, what to expect, and how participants can position themselves for the coming week.

But first, here’s a quote from Sterling professor of economics at Yale, Robert J. Shiller:

“The current widespread fascination with the rising market accompanied by recent concern about a possible downward spiral and strained stock market valuations echo those of 100 years ago.”

Market Commentary

What Happened: The S&P 500, Nasdaq-100, and Dow Jones Industrial Average made new all-time highs before closing the week out with an attempt to balance and validate newly discovered prices.

  • Data suggests economic outlook improving.
  • Earnings pick up, add to clarity on recovery.
  • Risk, reward poor for new entries. Be picky.

Why It Matters: The price rise in U.S. broad market equity indices comes as the economic recovery from the COVID-19 coronavirus pandemic accelerated.

According to S&P Global, the recovery’s acceleration warranted a revision in the firm’s 2021 global GDP growth forecast to 5.5%, a 50 basis point change.

At the same time, it’s S&P’s belief that U.S. inflation fears are overblown. Traders began to price in that realization, last week. 

After a slew of economic releases, yields pulled back dramatically.

In a Bloomberg article, Barclays strategists, including Anshul Pradhan, noted a raising of the bar on reflation; the drop in yields “reflects the fact that expectations for growth, inflation and the hiking cycle have all been significantly revised higher.”

Further, participants saw the CBOE Volatility Index (INDEX: VIX), a measure of the stock market’s expectation of volatility based on S&P 500 (INDEX: SPX) options, continue a multi-week drop attracting the participation of systemic strategies and opportunistic hedging, as noted last week.

It is important to note that this most recent rally in equity indices, which coincides with a historically bullish period, came soon after Archegos Capital’s default on margin calls which triggered a fire sale by several big Wall Street banks.

SpotGamma, a source for actionable insights based on activity in the options market, in a commentary, attempted to unpack the narrative which suggests the mechanical bid across the broad market is tied to a “tangled web of counterparty risk and hedging,” among other factors.

Moving beyond speculations, a couple of things are true and must be accounted for in our narrative.

First, equity market inflows, over the past 5 months, exceeded inflows of the prior 12 years, total. Second, as the April monthly options expiration (OPEX) passes and the positioning of participants changes, the risks of a near-term pullback have increased substantially. 

Despite the stock market trading in a historically bullish period, as well as declining volatility attracting the participation of systematic strategies, increased put selling, and the like, downside protection is trading cheap relative to its upside counterpart.

Option 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.

Should the market turn and customers demand downside protection in an increasing fashion, dealers’ risk exposure to direction and volatility will cause violent crash dynamics to transpire.

An example of this is last year’s sell-off.

In a discussion on rising delta and volatility forcing dealers to sell into weakness to hedge a rapid move in prices, Kris Sidial, a former institutional trader and the co-chief investment officer of The Ambrus Group, a volatility arbitrage fund that looks to exploit changing market structure dynamics, said: “You have this dynamic in the derivatives market where there is a gamma squeeze when people are buying way far out-of-the-money [options], and dealers reflexively have to hedge off their risk,” Sidial said.

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

Putting it all together, despite markets being in a position to move higher, should there be a turn and spike in volatility, participants must be ready to accept the possibility of a violent liquidation.

As Market Ear puts it, hedge when you can, not when you must.

What To Expect: An increased potential to correct in time and price.

In addition, metrics, like DIX, market liquidity, and speculative derivatives activity, confirm participants’ bullishness and opportunistic hedging ahead of an acceleration in the global restart and a turn in flows, the result of consumers shifting their preferences from saving and investing to spending.

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 ending April 16. Activity in the options market was primarily concentrated in short-dated tenors, in strikes as low as $364, which corresponds with $3,640 in the cash-settled S&P 500 Index (INDEX: SPX).
Graphic: SHIFT search suggests participants are not as inclined to add call-side exposure, through the month of May, in the SPDR S&P 500 ETF Trust (NYSE: SPY).

What To Do: In the coming sessions, participants will want to pay attention to where the S&P 500 trades in relation to Friday’s open-high-low-close (OHLC). 

Any activity above Friday’s regular trade-low suggests participants are not yet done discovering higher prices. Trading below Friday’s low suggests an inclination by participants to (1) form a consolidation area that denotes acceptance of higher prices or (2) revert to the mean and repair some of the poor structure left behind prior discovery. 

It is important to take note of the minimal excess and cluster of price extensions at $4,200.00, a typical price target based on Fibonacci principles.

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.

So, in the best case, the S&P 500 makes an attempt to balance or discover prices as high as $4,200.00. In the worst case, participants look to auction the S&P 500 into prior poor structures and low-volume areas (LVNodes) that ought to offer little-to-no support.

More On Volume Areas: A structurally sound market will build on past areas of high-volume (HVNode). Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area (LVNode) 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: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

News And Analysis

Economy | Housing starts reach the highest level since 2006. (MND)

Recovery | U.S. is unlikely to ‘just cancel’ J&J COVID-19 shots. (BBG)

Markets | Citi to exit banking in 13 markets across Asia, Europe. (BBG)

Markets | Record-high systemic leverage is pressuring rates. (Moody’s)

Economy | S&P Global Ratings expects global rebound to roar. (S&P)

Economy | Projections on global population, aging, urbanization. (REU)

Trade | Amazon sellers slammed with COVID-induced constraints. (S&P)

Recovery | How well COVID-19 vaccines work against variants. (AB)

Markets | SPACs boost credit at targets but carry unique risks. (Moody’s)
Markets | ‘Roaring Kitty’ adds to GME bet after exercising calls. (BBG)

What People Are Saying

Innovation And Emerging Trends

Economy | Looking at the pop culture of the original Roaring Twenties. (NYT)

Markets | Want to take your company public? Here are your options. (CB)

FinTech | Societe Generale adds first structured product on blockchain. (SG)

Exodus | Hedge funds are ready to get out of NY and move to FL. (BBG)

Trading | The answer to how much capital you should be allocating. (TT)

Venture | European venture reaches all-time high in first quarter 2021. (CB)

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, Canadian 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.

Cover photo by eberhard grossgasteiger from Pexels.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Fast Moves’

Key Takeaways:

  • U.S. Senate passes a $1.9T relief package.
  • COVID vaccination timeline is sped up.
  • Equities are recipients of $12B in inflows.
  • Treasury yields aren’t at worrisome levels.
  • VIX term structure suggests no real panic.
  • Real GDP growth to be over 6% this year.

What Happened: U.S. stock index futures ended the week mixed.

This came after U.S. non-farm payrolls grew by 379,000, versus a consensus of ~180,000, improvement in sales and manufacturing data, as well as news that COVID-19 coronavirus vaccinations were accelerating.

Dynamics Unpacked: On a relative basis, the Nasdaq-100 is weaker, while the S&P 500, Russell 2000, and Dow Jones Industrial Average are stronger. This push-pull dynamic, in prior sessions, made it hard for participants to resolve directionally, evidenced by volatility.

On Friday, after an attempt by market participants to resolve lower, via a break of consolidation, stock indexes made a vicious rebound.

Why did stock indexes make a sudden reversal? Well, despite indexes being best positioned for sideways or lower trade, technically, near-term downside discovery reached its limit, based on market liquidity metrics and the inventory positioning of participants.

As stated in Friday’s morning commentary, according to SqueezeMetrics, the steepness of the GammaVol (GXV) curve suggested there was more risk to the upside than downside.

More On Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.
Graphic 1: SqueezeMetrics data suggested a near-term turnaround after Thursday’s violent liquidation.

Adding, also, coming into Friday’s session, market liquidity suggested (1) buying pressure was increasing and/or (2) sellers were absorbing resting liquidity (opportunistic buying or short covering into weakness), while speculative options activity was concentrated on the call-side.

In simple terms, one could argue, based on the aforementioned dynamics (e.g., speculative derivatives activity), that participants bought last week’s dip.

Graphic 2: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week ending February 26, 2021. Noting activity in short- and long-dated tenors, near the $380, a strike that corresponds with $3,800.00 in the cash-settled S&P 500 Index (INDEX: SPX).

Important to note, though, is the S&P 500’s long-term trend break, prior to Friday’s dramatic reversal and higher close, as well as Friday’s divergent volume delta in ETFs that track the S&P 500, Nasdaq-100, and Russell 2000.

Graphic 3: Long-term uptrend in the cash-settled S&P 500 Index (INDEX: SPX) was broken.
More On Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

What To Expect: Directional resolve and volatility, given news that the U.S. Senate, on Saturday, passed President Joe Biden’s $1.9 trillion COVID-19 coronavirus relief plan, as well as the (2) short-gamma (Graphic 4) environment (i.e, volatility is exacerbated due to dealer hedging requirements), as mentioned in the prior section.

Graphic 4: SpotGamma data suggests Nasdaq-100, the weakest index discussed in this commentary, is below the “Short-Gamma” juncture.

What To Do: In the coming sessions, participants will want to pay attention to the VWAP anchored from the $3,959.25 peak, the $3,720.50 minimal excess low, as well as the $3,837.75 high-volume area (HVNode).

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

More On 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.

More On Volume Areas: A structurally sound market will build on past areas of high-volume (HVNode). Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area (LVNode) 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 S&P 500 opens and remains above the $3,837.75 volume area. Auctioning above the VWAP anchored from the $3,959.25 peak would suggest buyers, on average, are in control and winning since the February 15 rally high.

In such a case, participants can look to the $3,892.75 HVNode for favorable entry and exit, the $3,934.25 profile ledge, and $3,959.25 overnight rally-high.

More On Ledges: Flattened area on the profile which suggests responsive participants are in control, or initiative participants lack confidence to continue the discovery process. The ledge will either hold and force participants to liquidate (cover) their positions, or crack and offer support (resistance).

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

Any activity below the VWAP anchored from the $3,959.25 peak may leave the $3,837.75 HVNode as an area of supply — offering initiative sellers favorable entry and responsive buyers favorable exit.

In such a case, participants can look to other areas of high-volume (i.e., $3,795.75 and $3,727.75) for favorable entry and exit, as well as the repair of the $3,720.50 minimal excess low.

Graphic 5: Profile overlays on a 65-minute candlestick chart of the Micro E-mini S&P 500 Futures.
Graphic 6: 4-hour chart of the Micro E-mini S&P 500 Futures.

Conclusions: The go/no-go level for next week’s trade is $3,837.75.

Any activity at this level suggests market participants are looking for more information to base their next move. Anything above (below) this level increases the potential for higher (lower). 

Levels Of Interest: $3,837.75 HVNode.

Cover photo by Chris Peeters from Pexels.

Categories
Commentary

Market Commentary For 3/4/2021

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

What Happened: After Tuesday’s end-of-day spike liquidation, U.S. stock index futures were further sold, during Wednesday’s sessions.

What Does It Mean: Broad market indices are mixed.

On a relative basis, the Nasdaq-100 is weaker, while the S&P 500 and Russell 2000 are stronger. This push-pull dynamic is making it hard for participants to resolve directionally, evidenced by recent volatility.

Based on Wednesday’s action, the S&P 500 and Russell 2000 are in balance, while the Nasdaq-100 is in price-discovery mode, evidenced by a successful break from balance. In other words, the outlook is mixed; one may argue that lower prices in the S&P 500 are likely, given the relative weakness of the Nasdaq.

Adding, there’s one guarantee over the next few sessions: volatility.

Given that the S&P 500 and Nasdaq-100 are in short-gamma territory (Graphic 1), option dealers are required to hedge their exposure in a manner that exacerbates volatility. This hedging activity will worsen with the purchase of put options by market participants looking to hedge their downside, which is happening, as evidenced by Graphic 2.

More On Gamma: Gamma is the sensitivity of an option to changes in underlying price. Dealers that take the other side of option 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.
Graphic 1: SpotGamma data suggests Nasdaq-100 at or below “Short-Gamma” juncture.
Graphic 2: Option activity for the largest ETFs that track the S&P 500, Nasdaq-100, and Russell 2000.

Important to note is market liquidity, which suggests (1) buying pressure is increasing or (2) sellers are absorbing resting liquidity (which could be opportunistic buying or short covering into weakness).

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

During Wednesday’s trade, the worst case outcome occurred: participants auctioned past Tuesday’s regular trade low, emboldening sellers and starting a new auction, to the downside. The session ended on a spike lower, away from value, with the Nasdaq-100 breaking its week-long balance area, to the downside.

More On 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).

More On Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).

Important to mention is overnight discovery, which established clear excess on the composite profile.

More On 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.

Given the aforementioned dynamics, participants can trade from the following frameworks.

In the best case, the S&P 500 either (1) remains rotational, trading responsively between the $3,785.00 gap boundary and $3,837.75 high-volume area (HVNode), or (2) auctions past the $3,837.75 HVNode.

Thereafter, if higher, attention shifts to whether the S&P 500 can get past the $3,861.25 low-volume area (LVNode). Doing so suggests the most recent downside probe was an auction failure (i.e, participants rejected lower prices, sparking a rapid recovery).

In the worst case, participants auction past the $3,777.75 regular trade low (RTH Low). In such a case participants may target the $3,727.75 and $3,689.50 HVNodes.

More On 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.
Pictured: Profile overlays on a 4-hour chart of the Micro E-mini S&P 500 Futures.

Levels Of Interest: $3,837.75 HVNode, $3,777.75 RTH Low, and $3,727.75 HVNode.

Categories
Commentary

Market Commentary For 2/4/2021

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

What Happened: U.S. stock index futures balanced in prior-range, as evidenced by a lack of directional resolve.

What Does It Mean: After a rapid de-grossing and v-pattern recovery, stock indexes are nearing an important hurdle.

In particular, the S&P 500 has to contend with a transition into long-gamma.

Gamma is the sensitivity of an option to changes in underlying price. Dealers that take the other side of option 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.

Adding: Here’s a good explanation I wrote regarding the derivative market’s impact on the equity market.

Graphic 1: SpotGamma suggests S&P 500 nearing “Long-Gamma” territory.

Further, given the aforementioned v-pattern recovery, a price sequence that ought to be followed by further price discovery, as high as the 100% price projection, which happens to be near $4,000.00 in the S&P 500, market participants ought to also pay attention to divergences popping up across different indices.

To be more specific, Wednesday’s regular trade in the Nasdaq-100 showed weakness relative to the S&P 500. In the end, participants established a neutral-center day on S&P 500 and neutral-extreme down day in the Nasdaq-100.

On a neutral-center day, participants test both extremes before closing an index in range, suggesting minimal confidence and balance. On a neutral-extreme day, participants test both extremes before closing at on extreme, suggesting increased confidence and imbalance.

The profile shape in the S&P 500 confirms balance while in the Nasdaq-100 it’s likely that participants were “too” long and had poor location.

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 and high volatility.

Currently, the S&P 500 is rotating at the $3,842.00 high-volume area (HVNode).

As stated, HVNodes can be thought of as building blocks — they also denote areas of supply and demand. In this case, $3,842.00 can be thought of as an area of supply. The primary strategy is to respond to probes into these supply (i.e., selling responsively) and demand (i.e., buying responsively) areas as they offer favorable entry and exit.

In the coming session, participants will want to pay attention to Tuesday’s overnight high ($3,483.50) and Monday’s regular-trade low ($3,799.00). The reason being, between those two references is a developing balance area. Balance-areas make it easy to spot change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).

Added Note: There is a low historical probability that overnight rally-highs end the upside discovery process.

From an order flow perspective, the absence of aggressive buying suggests more of the same — balance or downside to repair poor structures left in the wake of short-covering and initiative buying in the day’s prior.

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.

For today, the following frameworks ought to be applied.

In the best case, the market will initiate above, or find acceptance at (in the form of rotational trade) the $3,842.00 HVNode. In the worst case, responsive sellers appear and restart the downside discovery process. Any break that finds increased involvement below the $3,799.00 regular-trade low, would favor continuation as low as the $3,727.75 HVNode.

The go/no-go for upside is the $3,843.50 overnight-trade high (ONH). The go/no-go for downside is $3,799.00 regular-trade low (RTH Low). Anything in-between portends responsive, non-directional trade.

A break above the ONH, participants may see discovery as high as $3,880.00, a balance-area projection (i.e., typical balance-break target). A break below the RTH Low, participants may see prices as low as $3,750.00, another balance-area projection.

Levels Of Interest: $3,843.50 ONH, $3,799.00 RTH Low.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Hello, Goodbye’

Key Takeaways:

What Happened: Coming into the extended holiday weekend, on tapering volumes, U.S. index futures balanced for four regular trading sessions (9:30 AM – 4:00 PM ET), before breaking out.

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

What To Expect: Thursday’s session found initiative buying surface above the $3,731.00 high-volume node (HVNode), the market’s most recent perception of value.

Given four-sessions worth of unchanged value, and the failure to fill the gap beneath a weak low (i.e., a visual level that attracts the business of short-term, technically-driven market participants) at $3,714.50, participants will come into Monday’s session knowing the following:

  1. Amid Thursday’s late-day buying, price diverged from value.
  2. The overnight rally high at $3,747.75 was recovered (i.e., based on historical trade, there were low odds that the overnight all-time high would end the upside discovery process).
  3. The multi-month upside breakout targeting S&P 500 prices as high as $4,000.00 remains intact.

In light of the above dynamics, the following frameworks apply for next week’s trade.

In the best case, the S&P 500 remains above its $3,731.00 HVNode. Expectations thereafter include continued balance, or a response followed by initiative buying to take out the price extension at $3,756.75.

In the worst case, the S&P 500 initiates below its $3,731.00 HVNode. Expectations thereafter include a test of the weak, minimal excess low at $3,714.50, and subsequent follow-through as low as the $3,691.00 break-point. 

Noting: Excess forms after an auction has traveled too far in a particular direction and portends a sustained reversal. Absence of excess, in the case of a low, suggests minimal conviction; participants will cover (i.e., back off the low) and weaken the market, before following through.

Two go, no-go levels exist; trade that finds increased involvement above $3,752.75 and below $3,714.50 would suggest a change in conviction. Anything in-between favors responsive trade.

Conclusion: From an uneven recovery, stimulus, elections, trade, and the like, it helps to boil it down to what actually matters: price and value. 

Though risks remain, markets are pricing in the odds of a continued rebound. All broad-market indices are in an uptrend. A break below $3,600.00 in the S&P 500 would denote a substantial change in tone.

Pictured: Retest of the upside breakpoint on a weekly candlestick chart of the cash S&P 500 Index

Levels Of Interest: $3,752.75 rally-high, $3,714.50 weak low, $3,731.00 HVNode, $3,756.75 price extension, $3,691.00 break-point.

Bonus: Here is a look at some of the opportunities unfolding.

Photo by Max Walter from Pexels.

Categories
Commentary

Market Commentary For 12/17/2020

What Happened: After yesterday’s Federal Reserve policy decision, U.S. index futures auctioned higher overnight alongside hopes of added U.S. fiscal and monetary stimulus, as well as vaccine rollouts.

What Does It Mean: During Wednesday’s regular trade, the S&P 500 initiated up to the $3,691.25 high-volume node, a valuable price, before sellers responded, established excess, and extended lower into the close.

Given the response to yesterday’s Federal Reserve decision, as well as overnight activity, the S&P 500 remains in a tactically bullish position, confirming the higher-time frame upside breakout which targets prices as high as $4,000.

What To Expect: In light of the overnight gap higher, the following frameworks apply for today’s trade.

In the best case, buyers maintain conviction and hold the index above the $3,691.25 high-volume node. Thereafter, upside references include the high-volume node near $3,710.00, and then the $3,720.00 price extension.

In the worst case, if the S&P 500 is brought back into range, participants can expect further balancing. The current market environment supports the long-gamma narrative in which volatility is suppressed and the market pins or slowly rises in a range-bound fashion.

Adding, the market has initiated back through $3,680.00, a low-volume area. Such low-volume areas denote directional conviction and ought to offer support on any test. Penetrating the low-volume area would put in play the $3,667.75 high-volume node.

Levels Of Interest:  $3,680.00 low-volume node, the $3,710.00 and $3,667.75 high-volume nodes, as well as the $3,720.00 price extension.

Bonus: Opportunities unfolding.

Categories
Commentary

Market Commentary For 12/14/2020

What Happened: Alongside optimism surrounding the COVID-19 coronavirus vaccine and stimulus talks, U.S. index futures auctioned higher overnight.

What Does It Mean: During last week’s trade, U.S. index futures auctioned to new all-time highs, before moving back into balance.

For the remainder of the week, participants accepted lower prices until Friday’s session established minimal excess lows, broke into prior poor structure, and ended the technical downtrend. 

Since Friday’s session found responsive buying surface at a key technical level (i.e., the high-volume node near $3,630.00 and 20-day simple moving average), buyers extended range through the $3,667.75 high-volume node, the most positive outcome.

What To Expect: In light of the overnight gap higher, the following frameworks apply for today’s trade.

In the best case, the auction makes an attempt to repair some of the poor overnight structure. Thereafter, buyers regain conviction and initiate back through the $3,667.75 high-volume node before continuing to at least the next high-volume node at $3,690.75, and then the prior all-time rally high.

In the worst case, if the S&P 500 auctions below $3,667.75, participants would look to whether the S&P 500 resists Friday’s range. Accepting Friday’s range (i.e., spending more than one half-hour period) may put in play the minimal excess lows near $3,625.00.

Levels Of Interest:  $3,667.75 high-volume node is the go/no-go level.

Bonus: Opportunities unfolding.

Categories
Commentary

‘To Infinity And Beyond’: Market Commentary For The Week Ahead

Key Takeaways:

What Happened: During last week’s trade, U.S. index futures auctioned to new all-time highs, before moving back into balance.

What Does It Mean: After participants established an all-time rally high during Wednesday’s overnight session, the S&P 500 liquidated in regular trading, down to the micro-composite high-volume node near $3,667.75, a price level where participants spent a large amount of time in the past. The session ended in prior balance and range with poor profile structure denoting the presence of directional conviction.

For the remainder of the week, participants accepted lower prices until Friday’s session established minimal excess lows, broke into prior poor structure, and ended the technical downtrend. 

Given the mechanical trade (i.e., minimal excess at Friday’s lows) and poor structure (e.g., low-volume areas), it’s very likely that the selling range extension was the result of weak-handed, short-term momentum buyers liquidating positions in panic.

Pictured: Profile overlays on a 65-minute candlestick chart of the Micro E-mini S&P 500 Futures

What To Expect: Friday’s session found responsive buyers surface at a key technical level (i.e., the high-volume node near $3,630.00 and 20-day simple moving average). The fact that there was a response at a technical reference confirms that participation in the market is overwhelmingly short-term; in other words, institutions (e.g, funds) tend not to transact at exact technical levels. 

Given that the higher-time frame breakout remains intact, participants will come into Monday’s session knowing the following:

  1. Both sentiment and positioning are historically stretched while the market has entered a short-gamma environment; 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, will exacerbate volatility in the coming week.
  2. Looking to 2021, the decline in realized correlation due to factor and sector rotation, as well as the return of systematic option selling strategies should push the long-gamma narrative in which volatility is suppressed and the market pins or slowly rises in a range-bound fashion.
  3. JPMorgan Chase & Co. (NYSE: JPM) strategist Marko Kolanovic suggests equities will 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.
  4. Despite high CAPE ratios, stock-market valuations aren’t that absurd.
  5. Prior trade points to the non-presence of committed selling; after Friday’s session saw a failure to range extend and establish excess, the technical down-trend was broken.

Therefore, the following frameworks for next week’s trade apply.

In the best case, buyers surface at the $3,654.75 low-volume node and extend range up to the high-volume node at $3,667.75. High-volume areas denote value and should slow prices allowing participants enough time to enter and exit trades. An initiative drive through this area would portend a test of the $3,690.75 high-volume node, and then the prior all-time rally high.

In the worst case, if the S&P 500 auctions below $3,630.00, participants would look to repair the poor structure just shy of $3,625.00. Finding acceptance (i.e., spending more than one half-hour of regular trade) below Friday’s range would be the most negative outcome.

Conclusion: Though sentiment and positioning imply limited potential for further upside, the S&P 500’s higher-time frame breakout remains intact.

Pictured: Retest of the upside breakpoint on a daily candlestick chart of the cash S&P 500 Index

Levels Of Interest: $3,720.00 extension, $3,715.00 all-time rally high, the micro-composite HVNode at $3,690.75, $3,667.75, and $3,630.00, as well as the $3,654.75 LVNode and poor structure near $3,625.00.

Bonus: Here is a look at some of the opportunities unfolding.

Spotify Technology SA (NYSE: SPOT) – Acceptance after higher-time frame balance-breakout. Potential remains for a push to the balance-area projection.

Apple Inc (NASDAQ: AAPL) – Acceptance after higher-time frame balance-breakout. Potential scenarios include (1) continued rotation, (2) upside continuation, or (3) failed breakout and a return to balance.

Advanced Micro Devices Inc (NASDAQ: AMD) – Acceptance after higher-time frame balance-breakout. Potential for upside continuation or failed breakout and return to balance.

Shopify Inc (NYSE: SHOP) – Balance just shy of channel boundary. Potential for upside breakout and continuation.

Chipotle Mexican Grill Inc (NYSE: CMG) – Just shy of balance-area high. Potential for upside breakout and continuation.

Tesla Inc (NASDAQ: TSLA) – Rejected prior week’s balance-area. Likelihood of continuation up to S&P 500 index inclusion intact on surging call volumes, dealer accumulation. $700 strike is the high-OI strike of interest.

Zoom Video Communications Inc (NASDAQ: ZM) – Just shy of long-term trend, anchored VWAP. Potential for responsive buying.

Summit Materials Inc (NYSE: SUM) – Failed breakout, but speculative call volumes surfaced on the return into balance. Potential exists for another attempt higher.

Nasdaq-100 (INDEXNASDAQ: NDX) – Retest of balance-area high. Higher time-frame breakout remains intact.

Cover photo by SpaceX from Pexels.