Abstract
Equity index futures higher. Commodities were higher. Bonds mixed. Volatility compressed.
Ahead is a heavier day of economic releases, in the face of fundamental narratives and positioning metrics that may support intraday price stability.
What Happened
Overnight, equity index futures were marked up ahead of the House’s plan to vote on President Joe Biden’s economic package and infrastructure, as well as October jobs data.
Also, in the news, there were narratives surrounding China’s dollar surplus, a pandemic resurgence in Europe, Pfizer Inc’s (NYSE: PFE) development of a pill for COVID-19.
Ahead is data on payrolls, unemployment, and average hourly earnings (8:30 AM ET), as well as consumer credit (3:00 PM ET). I apologize as this is what I listed yesterday, mistakenly.
What To Expect
On weak intraday breadth and lackluster market liquidity metrics, the best case outcome occurred, evidenced by balanced trade at newly discovered S&P 500 prices.
As also evidenced by the separation of value, overnight, the gap out of yesterday’s range marks a potential willingness to continue the uptrend.
To note, poor structure left behind prior initiative trade adds to technical instability, a dynamic mentioned in prior commentaries. Participants will likely look to check old value (i.e., revisit, repair, and strengthen) pockets of low-volume, feverishly, on any breakdown of trend.
Context: The aforementioned trade is happening in the context of a slowdown in economic growth, increased clarity on the Federal Reserve’s (Fed) intent to moderate stimulus, as well as the prospects of renewed fiscal support.
The implications of these narratives on price are contradictory.
To elaborate, supply chain disruptions slowed the pace of economic growth, while participants saw both the Fed’s decision to taper and keep rates unchanged, as well as the potential passage of President Biden’s economic plan, today, as near-term positives.
In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was lower, while supply came in across the VIX futures term structure. That, alongside the long-gamma environment and increased demand for options above current prices (i.e., bets on the upside), points to increased odds of near-term equity market stability.
To quote options analysis and data provider SpotGamma, “the term structure of IV (this is how high the IV is for longer-dated options) remains elevated. That suggests near term options could have more ‘bleed’ which could keep the SPX market price tailwind intact.”
Expectations: As of 6:30 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a positively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.
Gap Scenarios: 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.
In the best case, the S&P 500 trades sideways or higher; activity above the $4,663.00 untested point of control (VPOC) puts in play the $4,684.25 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,705.25 and $4,725.50 Fibonacci, or higher.
In the worst case, the S&P 500 trades lower; activity below the $4,663.00 VPOC puts in play the $4,619.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,590.00 balance boundary and $4,574.25 high volume area (HVNode), or lower.
Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Charts To Watch
Other charts I’m watching include BABA (S~155.29), ZM (S~245.92), ARKK (S~120.15), PINS (S~42.06), Z (S~58.15), BBY (S~123.65), GOOS (S~40.91), CTSH (R~82.00), LYFT (S~44.41), TMUS (S~118.00), WDC (51.47). S is for support. R is for resistance.
What People Are Saying
Definitions
Cave-Fill Process: Widened the area deemed favorable to transact at by an increased share of participants. This is a good development.
Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.
Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
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.
POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
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).
Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).
Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.
About
After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.
Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.
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.
