Categories
Commentary

Daily Brief For January 20, 2022

The Daily Brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below!

What Happened

Overnight, equity index futures auctioned upward, into the prior day’s range, after some overnight exploration, lower. 

As explained better below, some positioning metrics suggest a bottom (at least near-term) may be in the making.

Ahead is data on jobless claims and manufacturing (8:30 AM ET), as well as home sales (10:00 AM ET).

Graphic updated 6:40 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: The prevailing narrative facing market participants in recent trade is centered around the prospects of contractionary monetary policy in the face of strong economic and earnings growth, as well as cooling inflation while “excess supply” of goods/services builds.

This, as Bloomberg puts it well, “threatens to inject more volatility across a range of assets.” 

As a result, the benefits afforded to holders of diversified portfolios are less.

“If current, priced in, inflation and growth expectations are exactly realized we predict that risk premiums on 30-year yields will increase by 15bp and equity risk premium by 30bp,” which would, according to Damped Spring Advisors, “generate a 2% headwind on long bond prices and a 10% headwind for equity prices.”

Participants are pricing in these expectations, selling heavy the rate-sensitive products, and pushing the Nasdaq into correction territory, yesterday.

Graphic: Per Bloomberg, “The rout pushed the Nasdaq Composite over the threshold into correction territory.”

“Right now you have people waiting before they go and buy back in,” said Jamie Cox, managing partner at Harris Financial Group.

“You have a Fed meeting coming up, so there’s not going to be a lot of movement anywhere until the Fed meeting is over with. You look around, there’s not a lot of problems in the economy, what you have is just the question of, ‘does all this add up to a faster rate hiking cycle that we anticipate?’ And I don’t think so. I think it’s not likely.”

Moreover, unlike the U.S., counterparts elsewhere, in China and Europe, for example, are not looking to tighten as quickly.

“If major economies slam on the brakes or take a U-turn in their monetary policies, there would be serious negative spillovers,” said Chinese President Xi Jinping. 

“They would present challenges to global economic and financial stability, and developing countries would bear the brunt of it.”

For context, China cut its benchmark interest rate to 3.70% (10 basis points), “cement[ing] the pivot to easing.”

Graphic: Per Topdown Charts, “China cuts benchmark interest rate -10bps to 3.70%. i.e. the 1-year LPR [Loan Prime Rate].  n.b. the PBOC also cut the 5-year loan prime rate by -5bps to 4.6%.”

Though this move away from tightening in China is good for assets in that country, emerging markets, and commodities, according to Callum Thomas, an economic slowdown there may foreshadow what is to come in other parts of the world.

Obviously, in saying that plainly, we’re discounting China’s clampdown on its housing and financial sector, but the data seems to suggest the “reopening [and] stimulus-driven global economic rebound may be losing steam headed into 2022.”

Graphic: Per Topdown Charts, OECD leading indicator down sharply from highs.

Stifel Financial Corporation’s (NYSE: SF) Barry Bannister provides us with the implications of tighter U.S. financial conditions: a correction down to $4,200.00 in the S&P 500, near-term.

And, with that, post-correction, equities risk the 3rd bubble in 100 years if the “Fed loses its nerve and cancels much of the tightening plan.”

Graphic: From The Market Ear.

As an aside, to temper some of the bearishness in the above section of the newsletter, here is a chart of S&P 500 returns during Federal Reserve hiking cycles.

Graphic: Via Goldman Sachs Group Inc (NYSE: GS), from The Market Ear.

Positioning: Despite elevated measures of implied volatility like the Cboe Volatility Index (INDEX: VIX), the VIX term structure remains upward sloping, albeit less so than before.

Graphic: VIX term structure shifts higher. The flows associated with hedging protection in the S&P complex ought to pressure the market, should this term structure continue higher.

This is as the unwind of large long-delta positions in heavily weighted index constituents, pre-monthly options expiry (OPEX), alongside demand for downside (put) protection, is finally feeding into the large index products.

Graphic: SpotGamma’s (beta) Hedging Impact Of Real-Time Options (HIRO) indicator suggests Negative options delta trades likely had dealers selling the S&P 500 and Nasdaq 100 ETFs, yesterday.

Moreover, further flattening or inversion of the VIX term structure would clearly coincide with destabilizing demand for protection (as a result of the counterparty supplying protection selling underlying to hedge).

Thus, any expansion in volatility (which could be construed as demand for protection), likely coincides with further weakness.

Notwithstanding, though conditions could worsen, if we take into account options positioning, versus buying pressure (measured via short sales or liquidity provision on the market-making side), metrics remain positively skewed, even more so than before. 

Some sort of bottom (at least near-term) may be in the making.

Graphic: Data SqueezeMetrics. Graph via Physik Invest.

Technical: As of 6:40 AM ET, Thursday’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, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Spike Scenario In Play: 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).

The spike base is at $4,549.00. Above bullish. Below bearish.

In the best case, the S&P 500 trades higher; activity above the $4,565.00 untested point of control (VPOC) puts in play the $4,603.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,619.00 HVNode and $4,650.75 extended trade low (ETH Low), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,565.00 VPOC puts in play the $4,514.25 overnight low (ONL). Initiative trade beyond the ONL could reach as low as the $4,492.25 regular trade low (RTH Low) and $4,471.00 VPOC, or lower.

Click here to load today’s 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.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

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.

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.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

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

About

After years of self-education, strategy development, mentorship, 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.

Capelj is also a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, FTX’s Sam Bankman-Fried, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor developing insights around impactful options market dynamics.

Disclaimer

Physik Invest does not carry the right to provide advice.

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 January 3, 2022

What Happened

Overnight, equity index futures auctioned higher. Ahead is data on Markit Manufacturing PMI (9:45 AM ET) and Construction Spending (10:00 AM ET).

Graphic updated 6:20 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Technicals: Given the Monday gap, the S&P 500, based on its relation to Thursday’s failed balance breakout and end-of-week liquidation, is positioned for sideways-to-higher.

To note, however, the persistence of responses to technical levels, weaker-handed participants (which seldom bear the wherewithal to defend retests) carry a heavier hand in recent discovery.

Via volume profile analysis, we see a plethora of low-volume pockets – voids – that likely hold virgin tests. Successful penetration often portends follow-through as the participants that were most active at those levels (quickly run for the exits when wrong).

Graphic: Weekly chart for the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). Technically, indices are still positioned for sideways or higher.

Fundamental: The aforementioned trade is happening in the context of higher valuations, interest rates, and tax rates, according to Morgan Stanley (NYSE: MS).

These themes serve as a headwind.

To elaborate, as Nordea recently explained, the Fed will “accelerate its tapering process, and is now set to conclude net purchases already by mid-March vs mid-June with the earlier pace.”

“The dot plot was revised significantly higher, and the plot now shows three hikes for next year, a further three for 2023 and another two for 2024.”

Graphic: The “annual rate of change in the Fed Funds rate” via topdowncharts.com.

At the same time, equity markets tend to rally into the first hike; Moody’s Corporation’s (NYSE: MCO) forecast aligns with that – “the Dow Jones Industrial Average increases this quarter and peaks in early 2022, … [followed by] steady decline through 2022.”

Graphic: S&P 500 performance before and after rate hikes.

Why? Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive.

“Our view is that 2022 will be the year of a full global recovery, an end of the global pandemic, and a return to normal conditions we had prior to the Covid-19 outbreak,” JPMorgan Chase & Co (NYSE: JPM) noted

“We believe this will produce a strong cyclical recovery, a return of global mobility, and strong growth in consumer and corporate spending, within the backdrop of still-easy monetary policy.”

Positioning: According to JPMorgan Chase & Co, “S&P 500 skew overprices downside and underprices upside probabilities relative to historical returns.”

Graphic: Via The Market Ear, JPMorgan’s analysis suggests downside protection is overpriced.

This is all the while the S&P 500’s implied volatility remains above pre-COVID levels.

“SPX implied volatility is well above its pre-Covid level across the term structure.” The compression of volatility lowers the counterparties’ exposure to the positive delta. This “vanna” flow may support higher prices.

Taken together (in the face of last week’s options expiration which reduced the level of positive sticky options gamma concentrated mostly at the $4,800.00 level in the S&P 500), current options positioning and buying pressure supports a seasonally-aligned price rise in January.

Explanation: As a position’s delta rises with underlying price rises, gamma (or how an option’s delta is expected to change given a change in the underlying) is added to the delta. Counterparties are to offset gamma by adding liquidity to the market (i.e., buy dips, sell rips).
Graphic: SpotGamma data suggests the pin heading into Friday’s options expiration is no more.

The continued compression of volatility will only serve to bolster any price rise as “hedging vanna and charm flows, and whatnot will push the markets higher.”

Should that thesis not pan out – meaning the removal of hedging pressures associated with “put-heavy” single stock options positions and an end to tax-loss harvesting, among other factors – indices likely succumb to the “stealth correction” of its lesser weighted constituents.

Were participants to reach for downside protection, the implications of this would be staggering. In such a case, markets will tend toward instability. At present, the metrics don’t point to this.

Graphic: Via The Market Ear, amidst heightened cash allocations that are likely to be redeployed, “January is the big inflow month but the seasonality from here is looking less exciting.”

Expectations: As of 6:20 AM ET, Monday’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 higher; activity above the $4,791.00 untested point of control (VPOC) puts in play the $4,799.75 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,805.00 and $4,815.00 extensions, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,791.00 VPOC puts in play the $4,781.75 high volume area (HVNode). Initiative trade beyond the HVNode could reach as low as the $4,767.00 VPOC and $4,750.75 overnight low (ONL), or lower.

Click here to load today’s 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.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

What People Are Saying

Definitions

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.

Vanna: The rate at which the delta of an option changes with respect to volatility.

Charm: The rate at which the delta of an option changes with respect to time.

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.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

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

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.

About

After years of self-education, strategy development, mentorship, 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.

Capelj is also a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, FTX’s Sam Bankman-Fried, 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 carry the right to provide advice. 

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 December 28, 2021

Notice: Up to January 3, 2022, any commentaries published will be lighthearted and, generally, shorter in length.

What Happened

Overnight, equity index futures were sideways to higher with most commodities, yields. 

This is as volatility implodes; the CBOE Volatility Index, from December 20, went as low as 17.55 this week [down 9.84 (35.93%)]. This coincides with a compression in the VIX’s term structure, and that has so-called bullish/supportive implications.

Ahead is data on the S&P Case-Shiller U.S. home price index (9:00 AM ET).

Graphic updated 7:00 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On lackluster breadth and divergent market liquidity metrics, the S&P 500 continues to auction away from intraday value, the levels at which participants found it most favorable to transact.

Moreover, given the persistence of mechanical responses to technical levels, visually-driven, weaker-handed participants (which seldom bear the wherewithal to defend retests) likely carry a heavier hand in recent price discovery.

Via volume profile analysis, we see a plethora of low-volume pockets – voids, if you will – that likely hold virgin tests. 

As stated over the past few days, successful penetration often portends follow-through as the participants that were most active at those levels (quickly run for the exits when wrong).

Context: Recall that a collapse in implied volatility, coupled with relentless, seasonally-aligned passive buying would bring in positive flows that would bolster any attempt higher.

At the same time “options selling strategies [became] attractive,” according to Goldman Sachs Group Inc (NYSE: GS); the commitment of capital to options strikes at higher prices implies participants are pushing up their bets on S&P 500 movement. That’s bullish.

Graphic: Shift Search S&P 500 data (excluding weeklies) suggests participants are likely initiating box spreads and rolling their call exposure out in time (as much as 6 months).

According to SpotGamma, “[s]ince, customers are thought to be net short calls (short-delta), as the index moves toward the high activity $4,800.00 strike, they become longer delta.”

Why? When a position’s delta rises with stock or index price rises, gamma – the expected change in delta given movement in the underlying – is added to delta. 

“As participants keep adding to their bets at $4,800.00, the dealer only takes on more exposure to positive gamma, which they hedge by selling futures and adding liquidity to the market.”

The commitment of capital on lower volatility ups the dealers’ exposure to positive gamma; this will be offset through a supply of liquidity (via short futures), which weighs on price discovery.

Taking into account this positioning, versus buying pressure (measured via short sales or liquidity provision on the market-making side), positioning metrics remain positively skewed, albeit less so than before.

Graphic: Data SqueezeMetrics. Graph via Physik Invest.

Going forward, coming into Friday’s weighty options expirations, at the index level, hedging pressures ought to be sticky and weigh on the upside. 

Thereafter, positive fundamental forces and dealers’ covering of hedges to remaining “put-heavy” positioning could bolster any seasonally-aligned price rise into the very first interest rate hikes.

Graphic: Per The Market Ear, “January typically sees 134% of inflows (the rest of the 11 months -34%). And with every private wealth manager in the world right now pitching increased allocations into equities (out of cash and out of bonds), Goldman calculates that keeping 2021 pace, This would be $125BN worth of inflows quickly in January.”

Moody’s Corporation’s (NYSE: MCO) forecast is in agreement: “the Dow Jones Industrial Average increases this quarter and peaks in early 2022, … [followed by] steady decline through 2022.”

Graphic: S&P 500 performance before and after rate hikes.

Expectations: As of 7:00 AM ET, Tuesday’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, just 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 $4,771.00 untested point of control (VPOC) puts in play the $4,784.25 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,797.25 overnight high (ONH) and $4,803.75 extension, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,771.00 VPOC puts in play the $4,732.50 high volume area (HVNode). Initiative trade beyond the HVNode could reach as low as the $4,717.25 low volume area (LVNode) and $4,690.25 micro composite point of control (MCPOC), or lower.

Click here to load today’s 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.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile.

Definitions

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.

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.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

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

Volume-Weighted Average Prices (VWAPs): A metric 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.

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, helping develop insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not carry the right to provide advice. 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 November 29, 2021

What Happened

Overnight, equity index futures auctioned sideways to higher as participants looked to take back nearly all of Friday’s shortened holiday trading range. 

According to some metrics, the SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, experienced one of its most illiquid days, Friday.

At the same time, the CBOE Volatility Index (INDEX: VIX) closed up nearly 50% while the VIX futures term structure settled in backwardation amidst a re-pricing of tail-risk, so to speak.

Moreover, ahead is data on Pending Home Sales (10:00 AM ET).

Graphic updated 5:50 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Despite the lackluster intraday breadth and divergent market liquidity metrics, the worst-case outcome occurred, Friday, evidenced by downside expansion of range and separation of value.

Coming into the session, the experiences associated with ‘Volmageddon’ came to mind; the VIX was up nearly 40.00%, a concern given the exuberance of past weeks and options positioning, as well as a decline in correlations, and unsupportive breadth.

Tempering the fall were divergences; the Russell 2000 was down nearly 4.00% before Friday’s U.S. open while the S&P 500 was off about 2.00% or so, buoyed by the Nasdaq 100 which was only down about 1.00% amidst an 8% dip in the ten-year yield.

The divergence persisted with the S&P 500 closing firmly below its 20-day simple moving average, a visual level often acted on by short-term, technically-driven participants who generally are unable to defend retests.

Graphic: Divergent delta (i.e., non-committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index.

Context: A resurgence in the COVID-19 coronavirus as an improvement in macroeconomic conditions prompts a hawkish shift from the Federal Reserve (Fed). 

“Many risky asset tailwinds in 2021 are turning into at least mild headwinds in 2022,” Nordea says. “Economic growth should decelerate, liquidity conditions are deteriorating, profit margins should be under pressure from rising costs and question marks regarding the Fed/ECB put will arise due to elevated inflation indicators. To us, this spells higher volatility.”

Moreover, for the past two years, almost, equities rallied amidst an acceleration in growth, which is typically correlated with equity outperformance over bonds.

Graphic: Accelerating growth correlates with equity outperformance over bonds.

At the same time, there’s been an insatiable appetite for stocks, according to Bloomberg, with investors pouring “almost $900 billion into equity exchange-traded and long-only funds in 2021 — exceeding the combined total from the past 19 years.”

This appetite for risk fed into the activity of some high-flyers like Tesla Inc (NASDAQ: TSLA) with customers, at least in the past weeks, opting to aggressively sell puts and buy calls heading into the November monthly options expiration (OPEX).

Graphic: Per The Market Ear, participants were hating on downside protection for weeks.

Unfortunately, (1) after OPEX, the absence of sticky and supportive hedging flows freed the broader market for directional resolve, and (2) according to SpotGamma, in light of recent exuberance, “participants [were] underexposed to downside put protection.”

Graphic: Customers took on significant leverage in their purchase and sale of options, via SpotGamma.

What this meant was that after OPEX’s unpinning and increase in correlation, fundamental contexts were to matter more.

Therefore, the Fed’s “increased openness to accelerat[e] the taper pace” and hike rates, alongside fresh travel restrictions on a new COVID-19 variant, as well as holiday illiquidity, resulted in a rough re-pricing of tail risk as participants sought after those highly “convex” options which had counterparties exacerbating underlying price movement.

Graphic: According to Bloomberg, markets price “a full quarter-point rate hike into the June Fed meeting with a second by September and a third by December.”

To elaborate, in short, was volatility to pick up, those participants (who were once exuberant) were likely to reach for protection forcing dealers to reflexively hedge in a destabilizing manner. 

Dealers is the term used to describe those participants that take the other side and warehouse customer options risk, at least in the case where orders can’t be matched between customers.

With that, as volatility rose and customers demanded protection, counterparties hedged by selling into weakness. The conditions worsened when much of the activity was concentrated in shorter-dated tenors where the sensitivity of options to direction is higher if we will.

Graphic: VIX term structure. Backwardation signals an entry into an unstable environment.

Once that short-dated protection rolls off the table (and/or is monetized), dealers will reverse and support the market, buying to close their existing stock/futures hedges.

This flow is stabilizing and may play into a seasonally-aligned rally into Christmas as participants see defenses rolled out against the new COVID-19 variant, and the positive effects of pro-cyclical inflation and economic growth, improvements in global trade, and continuity at the Fed, among other dynamics, play out.

We see participants opportunistically buying the dip, already, via metrics like DIX that’s derived from liquidity provision on the market-making side.

Expectations: As of 6:00 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a positively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,618.75 high volume area (HVNode) puts in play the $4,647.25 HVNode. Initiative trade beyond the latter HVNode could reach as high as the $4,674.25 micro composite point of control (MCPOC) and $4,691.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,618.75 HVNode puts in play the $4,590.00 balance boundary (BAH). Initiative trade beyond the BAH could reach as low as the $4,574.25 HVNode and $4,551.75 LVNode, 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.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile.

Charts To Watch

Graphic: (NYSE: SPY). (S~$460 and $453). S is for support.
Graphic: (NASDAQ: QQQ). (S~$389 and $381). S is for support.
Graphic: (NYSE: IWM). (S~$222 and $216). S is for support.

What People Are Saying

Definitions

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.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

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

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. To note, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive).

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.

Categories
Commentary

Daily Brief For Black Friday 2021

What Happened

Ahead of a shortened holiday session, equity index futures auctioned lower alongside the narrative of a resurgence in the COVID-19 coronavirus. 

Most affected appears the Russell 2000 which was down nearly 4.00%, at the time of this writing. The S&P 500 was off about 2.00% or so, buoyed by the innovation- and tech-heavy Nasdaq 100 which was only down about 1.00%. 

This shift in relative strength comes as the ten-year yield sits lower about 8.00%. The CBOE Volatility Index (INDEX: VIX) was up over 40.00% and the implications of this are staggering, given the underhedged market I talked about over the past sessions.

Moreover, there are no scheduled economic releases, today.

Graphic updated 6:00 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On Wednesday’s lackluster breadth and market liquidity metrics, the best case occurred. 

The S&P 500 recovered its $4,697.50 spike base, below which selling activity appeared to be the result of weaker-handed participants liquidating as a result of poor location and news.

Overnight, however, the tone shifted. The S&P 500 initiated back through its $4,647.25 high volume area (HVNode) which had corresponded with the 20-day simple moving average.

The 20-day presented participants with a clear way to measure risk, given the mechanical responses in prior trade. As explained, Wednesday, should participants manage to break past the 20-day, then conditions have changed and follow-through was likely

Reason being? Those visual levels are acted on by short-term, technically-driven participants who generally are unable to defend retests.

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings were supportive of responsive trade (i.e., rotational trade that suggests current prices did not offer favorable entry and exit; the market was in balance).

Context: The aforementioned trade is happening in the context of an “insatiable appetite for stocks this year,” as Bloomberg explains

“Investors have poured almost $900 billion into equity exchange-traded and long-only funds in 2021 — exceeding the combined total from the past 19 years.”

This appetite fed into the activity of some high-flyers like Tesla Inc (NASDAQ: TSLA) with customers opting to aggressively sell puts and buy calls heading into the November monthly options expiration (OPEX).

Graphic: Customers took on significant leverage in their purchase and sale of options, via SpotGamma.

Unfortunately, (1) after OPEX, the absence of sticky and supportive hedging flows freed the broader market for directional resolve, and (2) according to SpotGamma, in light of recent exuberance, “participants [were] underexposed to downside put protection.”

The implications of the latter are staggering.

In short, should volatility continue to pick up, those participants (who were once exuberant) are likely to reach for protection forcing dealers to reflexively hedge in a destabilizing manner. 

As volatility rises and customers demand protection, counterparties are to hedge by selling into weakness. The conditions worsen when much of the activity is in shorter-dated tenors where options gamma is more sensitive if we will. This is what we’re seeing.

Graphic: The CBOE Volatility Index (INDEX: VIX) was higher, while demand came in most predominantly across the entire area of the VIX futures term structure. That, alongside the market’s entry into short-gamma, suggests participants’ hedging has destabilizing implications.

Note that I said short-dated

Once that exposure rolls off the table (and/or is monetized), dealers/counterparties will reverse and support the market, buying-to-close their existing stock/futures hedges to negative gamma positions. 

This flow is stabilizing and may play into a seasonally-aligned rally into Christmas.

As stated on November 23, 2021: “This last part is educated conjecture. It’s what I also feel as though would frustrate the most amount of participants. Basically, a quick wash (or sideways to lower), followed by a move higher into year-end. Be nimble and responsive!”

Expectations: As of 6:00 AM ET, Friday’s regular session (9:30 AM – 1:00 PM ET), in the S&P 500, will likely open in the lower part of a negatively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Gap Scenarios Are In Play: 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 $4,618.75 high volume area (HVNode) puts in play the $4,647.25 HVNode. Initiative trade beyond the latter HVNode could reach as high as the $4,674.25 micro composite point of control (MCPOC) and $4,691.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,618.75 HVNode puts in play the $4,596.75 overnight low (ONL) and $4,590.00 balance boundary (BAH). Initiative trade beyond the BAH could reach as low as the $4,574.25 HVNode and $4,551.75 LVNode, 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.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile.

Charts To Watch

Graphic: (ETF: IWM). (Key VWAP support at ~$223)
Graphic: (ETF: SPY). (Key VWAP support at ~$460)
Graphic: (ETF: QQQ). (Key VWAP support at ~$388)

What People Are Saying

Definitions

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).

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.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

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

Volume-Weighted Average Prices (VWAPs): A metric 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.

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.

Categories
Commentary

Daily Brief For November 24, 2021

What Happened

Overnight, equity index futures auctioned within the confines of Tuesday’s range, unable to follow through on attempts higher or lower. This comes as there was a clear validation of Monday’s knee-jerk selling.

This sideways-to-lower price action in the index products is happening alongside a sell-off in new issues and richly priced technology stocks. Part of the weakness may have something to do with investors booking capital losses to lower their capital gains. 

The other part of it, according to Bloomberg, is an exodus among professional investors who were counting on high-flyers to salvage their year. 

“There was a desire to kind of keep up with the broader index. And there was definitely a view that those are higher-beta assets and that’s a way to try and play a little bit of catch-up,” Barclays Plc’s (NYSE: BCS) Todd Sandoz said. “When the market turns and it’s not working, you need to take risks down. And everybody’s in those names, so you also probably have a view to try to cut things faster.”

With indices pinned and heavily weighted constituents sideways to higher, there is only one form of reconciliation – a decline in correlation. Nonetheless, fundamentals are no different; investors may be able to buy quality stocks at a discount amidst the market’s entry into a seasonally bullish period. 

Buybacks and increased retail engagement, resilient activity, and macro metrics, as well as excess liquidity, in the face of central bank cautiousness, suggest “dips should be bought,” according to Barclays.

Ahead is data on jobless claims, GDP, durable and core capital goods orders, and trade in goods (8:30 AM ET). Thereafter is data on personal and disposable income, consumer spending, core inflation, home sales, sentiment, and 5-year inflation expectations (10:00 AM ET). FOMC minutes come later (2:00 PM ET). 

Graphic updated 6:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On divergent intraday breadth and market liquidity metrics, the worst-case outcome occurred, evidenced by an acceptance of Monday’s knee-jerk, high-tempo selling.

Though this activity marks a potential willingness to start trending lower, the nature of Monday’s liquidation, as well as the failure to follow-through (i.e., expand the range to the downside) forces us to question whether participants have it in them to push indices lower. 

In light of the activity we’re seeing, it’s tough to pick a direction and stick with it; the higher odds play, in light of the divergences we’re seeing in breadth metrics between exchanges, as well as market liquidity (below), is to responsively buy dips and sell rips.

Key levels to trade against are the high volume areas (HVNodes) at $4,691.25 and $4,647.25. The latter level corresponds with the 20-day simple moving average.

These levels are the clearest ways to measure risk, given the mechanical responses in prior trade. Should participants manage to break past either level, then conditions have changed. Follow-through is likely. Reason being? Those visual levels are acted on by short-term, technically-driven market participants who generally are unable to defend retests.
Graphic: Divergent delta (i.e., non-committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: Keeping this section very short.

We saw the CBOE Volatility Index (INDEX: VIX) end higher, yesterday. 

However, supply came in across the entire area of the VIX futures term structure. That, with the long-gamma environment (defined below), suggests participants are not reaching for hedges.

For the time being, that’s stabilizing, cognizant of the fact that exuberance in individual stocks, over the past weeks, fed into the stock indices themselves.

Further, the price action we’re seeing is likely the resolve of some of that weak breadth we were seeing, recently, in addition to some of the topics discussed at the beginning of this newsletter.

Graphic: Divergences in breadth. SPX versus % of SPX stocks above the 200-day average.

In short, however, should volatility continue to pick up, those participants (who were once exuberant) may reach for protection forcing dealers to reflexively hedge in a destabilizing manner.

Once that protection rolls off the table (expires and/or is monetized), dealers will reverse and support the market, buying-to-close existing stock/futures hedges to negative gamma positions. 

This flow is stabilizing and may support a seasonally-aligned rally into Christmas.

Expectations: As of 6:00 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Spike Scenario In Play: A spike marks 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).

The spike may also be looked at as a pivot; in today’s case, the spike base is $4,697.50.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,691.25 high volume area (HVNode) puts in play the $4,711.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,740.50 minimal excess high and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,691.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,647.25 HVNode and $4,619.00 VPOC, 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.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile.

Charts To Watch

What People Are Saying

Definitions

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.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

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.

Categories
Commentary

Daily Brief For November 23, 2021

What Happened

Overnight, yesterday’s knee-jerk sellers were emboldened by equity index futures auctioning sideways to lower with other products – from commodities to bonds – following suit. 

The prevailing narrative is that “[I]nvestors are reducing expectations for a deeper dovish stance by the Fed after Powell got a second term.” Meaningless headlines, like this, are precisely why we, as participants, should opt to avoid making short-term decisions based on the news!

Anyways, ahead is data on Markit Manufacturing and Services PMI (9:45 AM ET).

Graphic updated 6:30 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On weak intraday breadth and market liquidity metrics, the worst-case outcome occurred, evidenced by a spike below prices most recently accepted by S&P 500 traders.

Such activity denotes an obvious change in tone, as well as a potential willingness to start a trend in the opposite direction. 

To note, however, yesterday’s price action came alongside a few dynamics: (1) an increase in tempo after a failure to solicit more involvement on an initial attempt higher; (2) a volume delta that was in line with price action; (3) breadth (i.e., volume into stocks that are up versus those that are down) on the Nasdaq was negative, divergent from the positive breadth on the NYSE. 

Adding, the knee-jerk selling and associated price action left behind poor structure (i.e., participants will look to validate [or invalidate] the move, spending time below [or above] the $4,697.50 spike base). Caution warranted on validation of the spike. 

Graphic: Delta (i.e., committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in line with the price action of the SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of initiative trade (i.e., directional trade that suggests current prices offer unfavorable entry and exit; the market is seeking balance).

Context: The aforementioned trade is happening in the context of what was an unstable environment after Friday’s monthly options expiration (OPEX).

To recap, heading into OPEX, activity in options tied to the S&P 500 was concentrated in time and price. 

During this time – which I, alongside data and analytics providers like SpotGamma (go follow), surmise participants were betting the market would not move, selling-to-open call exposure – dealers/counterparties were left warehousing increased exposure to positive options gamma.

In hedging risks, dealers sold to open (bought to open) the underlying as the price rose (fell). 

This responsive buying and selling are what causes the market to balance (i.e., trade sideways) in a tight range. It was expected to end after OPEX, as that options exposure rolled off. 

Monday, finally, there was an increase in range; the S&P 500, in particular, closed over 1.00% lower from its intraday high, weighed down by the Nasdaq 100 heavyweights and high flyers of the past weeks. 

Moreover, I was focused on two dynamics, primarily: (1) after OPEX, the absence of sticky and supportive hedging flows freed the market for directional resolve, and (2) according to SpotGamma, in light of recent exuberance, “participants [were] underexposed to downside put protection.”

The second part is slightly more important with regards to where we are today. 

As the exuberance in individual stocks fed into the stock indices themselves – the place where the world comes to hedge – participants weren’t as quick to add downside protection. No! Instead, they were more so selling to open (buying to open) downside (upside) protection.

Without getting too much into the dynamics of the exuberant positioning, the implications of this, nonetheless, are staggering. 

In short, should volatility continue to pick up, those participants (who were once exuberant) are likely to reach for protection forcing dealers to reflexively hedge in a destabilizing manner. 

As volatility rises and customers demand out-of-the-money put protection, counterparties are to hedge by selling into weakness. The conditions worsen when much of the activity is in shorter-dated tenors where options gamma is more sensitive if we will.

Pictured: SqueezeMetrics highlights implications of volatility, direction, and moneyness. The left orange marker is reflective of a basic reaction to call-buying (as observed during the rise of meme stocks). The right orange marker reflects a reaction to put-buying (as observed during the COVID-19 sell-off).

Now, here is the kicker. 

If indices turn, and participants start reaching for out-of-the-money protection with positive exposure to gamma (i.e., buy put, market down, put rises in value), especially in shorter-dated expiries, then yes, there may be some near-term instability. 

Note that I said shorter-dated

Once that exposure rolls off the table (and/or is monetized), dealers/counterparties will reverse and support the market, buying-to-close existing stock/futures hedges to negative gamma positions. This flow is stabilizing and maybe the start of what is a seasonally-aligned rally into Christmas.

This last part is educated conjecture. It’s what I also feel as though would frustrate the most amount of participants. Basically, a quick wash (or sideways to lower), followed by a move higher into year-end. Be nimble and responsive!

Expectations: As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a negatively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Spike Scenario In Play: A spike marks 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).

The spike may also be looked at as a pivot; in today’s case, the spike base is $4,697.50.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,692.25 micro composite point of control (MCPOC) puts in play the $4,711.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,740.50 minimal excess high and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,692.25 MCPOC puts in play the $4,674.25 high volume node. Initiative trade beyond the HVNode could reach as low as the $4,647.25 HVNode and $4,619.00 VPOC, 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.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile.

Charts To Watch

Graphic: (NYSE: SPY). (S~$460, R~$471). S is for support. R is for resistance.
Graphic: (NYSE: QQQ). (S~$388, R~$402). S is for support. R is for resistance.

What People Are Saying

Definitions

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.

DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market-making side) — we can measure buying pressure.

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.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

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

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.

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.

Categories
Commentary

Daily Brief For November 9, 2021

What Happened

Overnight, equity index futures were divergent.

The Nasdaq-100 led while the Russell 2000, which broke out of massive range, recently, slowed its pace of price discovery, trading relatively weak.

Ahead is data on the PPI (8:30 AM ET) and real household debt (11:00 AM ET).

Graphic updated 6:20 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On lackluster intraday breadth and supportive market liquidity metrics, the best case outcome occurred, evidenced by the balance and overlap of value areas (i.e., where 70% of the prior day’s trade occurred, or +/- 1 standard deviation), at the current S&P 500 prices.

This activity, which marks a potential willingness to continue balance as participants seek new information to resolve on, is built on poor structure, a dynamic that adds to technical instability.

Graphic: Supportive delta (i.e., committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: The aforementioned trade is happening in the context of a lot of big-picture dynamics such as the growth of derivatives exposure and tail risk, the heightened moneyness of nonmonetary assets, trends in seasonality, buybacks, earnings surprises, and more.

The implications of these themes on price are contradictory.

To elaborate, on one hand, seasonality, buybacks, and earnings surprises have bolstered (and will continue to bolster) the most recent price rise, since early October. 

Similarly, participants are seeing a trend of outperformance in the extended day, due in part to the front-running of increasingly impactful vanna and charm flows (both of which are tied to the hedging of options exposure), as a result of increased options activity (which, at least at this juncture, exposes customers to high leverage and risk). 

I say “high leverage and risk” as a result of short-term speculators’ record call buying and put selling over the past weeks.

As stated in a SpotGamma note, yesterday, “Should there be an adverse move, those short-term speculators are likely to cover (sell) their short put (long call) positions as they lack the wherewithal (capital) to maintain exposure.”

With exposure concentrated in shorter-dated expiries, the November 19 monthly options expiration (OPEX) is somewhat of a concern for us.

The reason being?

Presently, the S&P 500 is pinned near options strikes at which positive options gamma – delta sensitivity to underlying price – is highest. 

I note those participants that take the other side of options trades will hedge their exposure to risk by buying and selling the underlying. 

When dealers are short-gamma (e.g., Tesla), they buy into strength and sell into weakness, exacerbating volatility. 

When long-gamma, counterparties buy into weakness and sell into strength, calming volatility.

Coming into OPEX, the forces that promote pinning turn stronger; counterparties supply more liquidity as their long gamma becomes longer (i.e., rises), so to speak. 

As OPEX is essentially a reset (or reduction) in dealer gamma exposure, participants ought to see an increase in realized volatility as a lot of the exposure that warranted dealers’ supply of liquidity comes off the table, thus necessitating less liquidity

Less liquidity means more movement

More liquidity means less movement

Get it?

With short-term speculators taking on the risks that we’re seeing them take on, and the prospects of a front-running of post-OPEX volatility – given that, according to Pat Hennessy, “OPEX week returns peaked in 2016 and have trended lower since” – there is a potential that adverse moves force those that are off-sides cover (sell) their short put (long call) positions, thereby exacerbating near-term volatility.

We see recent options activity reflected in a sideways to higher CBOE Volatility Index (INDEX: VIX) and shift up in the VIX futures term structure; both suggest a demand for hedges and a reduction in the flows (e.g., vanna) that support sideways to higher trade. 

“The moves have been large and the demand for upside in single stock land insatiable,” said Danny Kirsch of Cornerstone Macro LLC. “Single stock vols clearly feeding into the index.”

Expectations: As of 6:20 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Market Is In Balance: Current prices offer favorable entry and exit. Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,692.25 micro composite point of control (MCPOC) puts in play the $4,722.00 Fibonacci. Initiative trade beyond $4,722.00 could reach as high as the $4,735.00 and $4,772.50 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,692.25 MCPOC puts in play the $4,674.75 visual low. Initiative trade beyond the visual low (likely paid attention to by short-term, technically driven market participants who seldom defend retests) could reach as low as the $4,663.00 untested point of control (VPOC) and $4,619.00 VPOC, 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.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Notice Monday’s “Cave-Fill” or the act of increasing the area deemed favorable to transact at by participants. This is most obvious by observing where the bulk of Monday’s distribution sits, relative to the pocket of low-volume left behind Friday’s trade. This is a positive development. Learn about the profile.

Charts To Watch

Graphic: (NASDAQ: TSLA). (S~1108, R~1187 to 1195). S is for support. R is for resistance. Looking to buy/sell responsively. 
Graphic: (NYSE: CMG). (S~1680, R~1820). S is for support. R is for resistance. Looking to buy/sell responsively.
Graphic: (NYSE: SPY). (S~456, R~471). S is for support. R is for resistance. Looking to buy responsively.
Graphic: (NASDAQ: QQQ). (S~382, R~403). S is for support. R is for resistance. Looking to buy responsively.

What People Are Saying

Definitions

Vanna: The rate at which the delta of an option changes with respect to volatility.

Charm: The rate at which the delta of an option changes with respect to time.

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.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

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.

Categories
Commentary

Daily Brief For October 20, 2021

Market Commentary

Mostly in sync with bonds and commodities, equity index futures were mixed. Volatility compressed, further.

  • Ahead: Fed speak and the Beige Book.
  • Monetary uncertainty. Earnings pick up.
  • Options positioning may support prices.

What Happened: The pace of markup in the equity indices slowed as participants await key earnings, as well as updates on monetary and fiscal policy. 

Ahead is Fed-speak by Evans, Bullard, Bostic, Kashkari, and Quarles (12:00 and 1:00 PM ET), as well as a release of the Beige Book (2:00 PM ET). Tonight, also, Fed President Daly speaks (8:35 PM ET).

Graphic updated 6:45 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: As of 6:40 AM ET, 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.

Status Quo Is Balance: Rotational trade that denotes current prices offering favorable entry and exit. Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break), coming into today’s session.

Adding, during the prior day’s regular trade, on supportive intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by initiative buying and separation of value.

Coupled with that dynamic, in carrying forward the narrative from days prior, is the sustained presence of numerous gaps and p-shaped emotional, multiple-distribution profile structures (i.e., old-money shorts covering).

Participants will likely look to revisit, repair, and strengthen – build out areas of high volume (HVNodes) via the cave-fill process – these areas of low volume (LVNodes), later.

Graphic: Supportive delta (i.e., committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of the initiative trade or markup in price.

Zooming out, we see the Nasdaq 100 trading strong, relative to its peers. 

Given where the S&P 500’s price is in relation to the yellow anchored volume-weighted average price (VWAP), below, the average buyer, since the all-time high, holds a winning position; sideways-to-higher trade, above the upward sloping trendline, as well as the 50.00% and 61.8% retracements, likely puts in play a recovery of the all-time high.

Graphic: SPDR S&P 500 ETF (NYSE: SPY) top left, Invesco QQQ Trust Series 1 (NASDAQ: QQQ) top right, iShares Russell 2000 ETF (NYSE: IWM) bottom left, SPDR Dow Jones Industrial Average ETF Trust (NYSE: DIA) bottom right.

Further, the aforementioned trade is happening in the context of improving breadth amidst a seasonally bullish cycle of contributions, rebalancing, and earnings, as well as the risks associated with a taper in asset purchases and a hike in rates.

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was lower, while the VIX futures term structure was unchanged; supply at the front end of the curve, alongside the long-gamma environment, signals a potential for near-term equity market stability.

With this decline in implied volatility (a dynamic that, at least in recent history, leads into increased call selling, more dealer hedging and liquidity, as well as further realized volatility suppression), the S&P 500 found itself marked up to the key $4,510.00 low volume area (LVNode)

The $4,510.00 figure is in the vicinity of what options modeling platform SpotGamma calls a Call Wall (i.e., the level at which positive options gamma, essentially delta sensitivity to the underlying price, is highest), which is a near term magnet (and resistance) given associated hedging and a failure to see increased interest and activity in higher options strikes.

Moreover, we’re carrying forward yesterday’s price levels; for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,495.75 high volume area (HVNode) puts in play the $4,510.00 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,526.25 HVNode and $4,550.00 overnight high (ONH), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,495.75 HVNode puts in play the $4,471.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as low as the $4,437.75 micro composite point of control (MCPOC) and $4,393.75 HVNode, or lower.

Click here to load today’s updated real-time key levels into the web-based TradingView charting platform. Please note that all levels are derived using the 65-minute timeframe.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:40 AM ET.

Definitions

Cave-Fill Process: Widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

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.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

More On Volume-Weighted Average Prices (VWAPs): A metric 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.

News And Analysis

A combination of lower growth, higher inflation isn’t good.

Sentiment in neutral territory, supporting high index price.

Cryptocurrency versus gold – debating on store of value.

Who could be the winners and losers of the energy crisis?

Feeling the strain of supply chain issues and high prices.

Global oil refiners cranking up output as margins recover.

Democrats are looking to break stalemate on Biden plan.

Bitcoin futures ETF starts as second-highest traded fund.

What People Are Saying

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 finance and technology reporter. Some of his biggest works include interviews with 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.

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 October 19, 2021

Market Commentary

Out sync with bonds, equity index futures and commodities traded higher. Volatility compressed.

  • Monetary uncertainty. Earnings pick up.
  • Options positioning may support prices.
  • Ahead: Building permits, housing starts.

What Happened: U.S. stock index futures auctioned sideways to higher overnight as participants sought to price in robust earnings against the backdrop of monetary uncertainty and increased pricing pressures. 

“The world is watching interest rates more closely than it has for some time — and rightly so, the moves have been emphatic, especially in the short-term maturities,” Chris Weston, head of research at Pepperstone Financial Pty, said. He added it’s “impressive how resilient and calm markets are in the face of the rates repricing.”

Ahead is data on building permits and housing starts (8:30 AM ET).

Graphic updated 6:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: As of 6:30 AM ET, Tuesday’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.

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.

Adding, during the prior day’s regular trade, on non participatory intraday breadth and supportive market liquidity metrics, the best case outcome occurred, evidenced by a response at the $4,437.75 micro composite point of control (MCPOC), which carried into initiative buying, past the $4,469.75 overnight high (ONH).

Coupled with that dynamic is the sustained presence of numerous gaps and p-shaped emotional, multiple-distribution profile structures (i.e., old-money shorts covering); as a result, participants will likely look to revisit, repair, and strengthen – build out areas of high volume (HVNodes) via the cave-fill process – these areas of low volume (LVNodes).

Graphic: Mostly supportive delta (i.e., committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings support this recent leg of initiative trade.

Zooming out, we see the Nasdaq 100 trading relatively strong.

Given where the S&P 500’s price is in relation to the yellow anchored volume-weighted average price (VWAP), below, the average buyer, since the all-time high, holds a winning position; sideways-to-higher trade, above the upward sloping trendline, as well as the 50.00% and 61.8% retracements, likely puts in play a recovery of the all-time high.

Graphic: SPDR S&P 500 ETF (NYSE: SPY) top left, Invesco QQQ Trust Series 1 (NASDAQ: QQQ) top right, iShares Russell 2000 ETF (NYSE: IWM) bottom left, SPDR Dow Jones Industrial Average ETF Trust (NYSE: DIA) bottom right.

Further, the aforementioned trade is happening in the context of improving breadth amidst a seasonally bullish cycle of contributions, rebalancing, and earnings, as well as the risks associated with a taper in asset purchases and a hike in rates.

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was lower, while the VIX futures term structure remained in contango; supply at the front end of the curve, alongside the long-gamma environment, signals a potential for near-term equity market stability.

According to SpotGamma analyses, participants were likely selling puts into yesterday’s price rise; this dynamic may support sideways to higher trade.

In a barebones overview of some of the dynamics at play, here, if implied volatility were to rise, the counterparty to the aforementioned trade would purchase stock (long delta) to hedge their rising long put (short delta) exposure. If implied volatility were to decline, the counterparty would likely sell stock (short delta) as their long put (short delta) exposure declines.

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

Moreover, for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,495.75 high volume area (HVNode) puts in play the $4,510.00 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,526.25 HVNode and $4,550.00 overnight high (ONH), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,495.75 HVNode puts in play the $4,471.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as low as the $4,437.75 micro composite point of control (MCPOC) and $4,393.75 HVNode, or lower.

Click here to load today’s updated real-time key levels into the web-based TradingView charting platform. Please note that all levels are derived using the 65-minute timeframe.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:20 AM ET.

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.

Short Covering: The profile shape suggests participants were “too” short and had poor location.

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.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

Initiative Buying (Selling): Buying (selling) within or above (below) the previous day’s value area.

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

Volume-Weighted Average Prices (VWAPs): A metric 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.

News And Analysis

Nordea: Is permanent inflation now an alarming consensus?

Evergrande unit has remit funds to pay yuan bond coupon.

China’s central bank should cut RRR, one adviser suggests.

World facing fiscal problems much worse than from COVID.

Investing prosperously in light of China’s common prosperity.

Bitcoin pushes toward record before debut of ETF products.

What People Are Saying

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 finance and technology reporter. Some of his biggest works include interviews with 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.

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.