Categories
Commentary

Weekly Brief For September 4, 2021

Editor’s Note: Before getting into today’s commentary, we take a moment to reflect on the following quote taken from page 123 of The Disciplined Trader by Mark Douglas. 

“For years, many people in the academic community believed that the markets were random; this is a perfect example of their general lack of understanding of human nature. People act as a force on prices in perfectly logical ways, when you understand the logic of their fears.”

Also, given Labor Day, markets are closed Monday, September 6. As a result, Daily Briefs will resume Tuesday, September 7. Thank you and have a great extended weekend!

Market Commentary

Equity index futures traded sideways to higher last week.

  • Reality throwing a wrench in seasonality.
  • Ahead: Light calendar to base decisions.
  • Equity indices rising; SPX above 50-day.
  • Positioning risks mount case for volatility.
  • A couple trade ideas for the week ahead.

What Happened: U.S. stock index futures auctioned mostly sideways to higher, into Friday’s nonfarm payrolls miss.

Next week participants have a light calendar to base decisions around.

Graphic updated 10:30 AM ET 9/4/2021. Sentiment Neutral if expected /ES open is inside of the prior day’s range. 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 approximation. 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: During the prior week’s trade, on mostly lackluster intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by new all-time highs in the S&P 500 and Nasdaq 100. 

This is significant because the sideways to higher trade marks acceptance, or a willingness to transact at higher prices after a v-pattern recovery, above the key 50-day simple moving average.

V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation.
Graphic: S&P 500 maintaining prices above the 50-day simple moving average. This moving average can be looked at as a key dynamic level on any move lower. Losing that particular level likely changes the tone.

Further, the aforementioned trade is happening in the context of peak growth and a moderation in the economic recovery, as well as non-seasonally aligned inflows, impactful options market dynamics, divergent sentiment, and fears of a mid-cycle transition.

The implications of these themes on price are contradictory

To elaborate, August, over the past 25 years, has historically been the largest month for equity outflows. According to Goldman Sachs Group Inc’s (NYSE: GS) Scott Rubner, “We have seen none of these outflows and it has been buying the dip (TINA).” 

Given this divergence from the norm, advances are not “welcomed and may lead to a quick right tail hedging … [as] option volume notional is 120% of stock volume notional.” 

To put it simply, an increased share of options being traded expires within two weeks. The hedging of these directionally sensitive options can represent an increased share of volume in underlying stocks. 

As a result, option flows impact the underlying’s price, markedly. 

We couple this so-called right-tail hedging with the structural positioning – the so-called wall of worry – that can drive the market through three factors – change in the underlying price (gamma), implied volatility (vanna), and time (charm) – that are well known to impact an options exposure to directional risk or delta.

“Charm is a major driver for support in the markets,” said Cem Karsan of Kai Volatility Advisors. “All of that support is leading up to and accelerating into that Monday-Wednesday window” ahead of options expiration (OPEX). “And then the window really opens for lack of support. It’s not like there’s a bunch of selling all of a sudden. It’s a window of non-strength; a lack of these supportive flows that have been there prior.”

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. Based on his analysis, Pat sees that the “2 weeks prior to OPEX (e.g., 7/30/21 to 8/6/21 in this late-cycle) [have] been extremely bullish.”

With the August monthly OPEX behind us, the focus shifts now to September. At and around the same time, Morgan Stanley’s (NYSE: MS) Michael Wilson expects a formal signal (which would align with Karsan’s window of non-strength) on the taper of asset purchases, that could lead to a mid-cycle transition and possibly an S&P 500 correction.

“Assuming a stable equity risk premium at 345bp, P/Es would fall to 19x, or 10% lower.”

Graphic: @pat_hennessy breaks down S&P 500 OPEX returns. Pat sees that “OPEX week returns peaked in 2016 and have trended lower since.”

Adding, the eventual reduction in the Federal Reserve’s balance sheet – a removal of liquidity – may exacerbate any sort of risk-off scenario in which participants try to get ahead of whatever cascading reaction may come with a taper.

As Karsan explains: “It’s not a coincidence that the mid-February to mid-March 2020 downturn literally started the day after February expiration and ended the day of March quarterly expiration. These derivatives are incredibly embedded in how the tail reacts and there’s not enough liquidity, given the leverage, if the Fed were to taper.”

SpotGamma – in a September 2, 2021 note – echoed the possibility of volatility; “markets are fast approaching a window of volatility which could produce some pretty sharp volatility: 9/15 VIX expiration, 9/17 Quarterly OPEX and the 9/22 FOMC. This lineup is particularly interesting as we believe that expiration leads to a pickup in volatility – however, traders may hold the pause button on selling that volatility due to the FOMC. This could catch less sophisticated vol sellers off guard and lead to some exacerbated volatility.”

Others, like SqueezeMetrics – which sees “the current combination of weak put flows and large customer vanna exposure” as fragile – suggest that volatility risks have risen, too.

Given the big picture context (i.e., status quo – higher prices – in the face of volatility risks) participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,527.75 high volume area (HVNode) pivot puts in play the $4,550.00 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the Fibonacci extensions at $4,556.25 and $4,592.25.

In the worst case, the S&P 500 trades lower; activity below the $4,527.75 HVNode puts in play the $4,510.00 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as low as the $4,495.00 and $4,481.75 HVNodes.

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

If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 10:30 AM ET 9/4/2021.

Weekly Trade Ideas

Please Note: In no way is the below a trade recommendation. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Options offer an efficient way to gain directional exposure. 

If an option buyer was short (long) stock, he or she could buy a call (put) to hedge upside (downside) exposure. Additionally, one can spread, or buy (+) and sell (-) options together, strategically.

Commonly discussed spreads include credit, debit, ratio, back, and calendar.

  • Credit: Sell -1 option closer to the money. Buy +1 option farther out of the money.
  • Debit: Buy +1 option closer to the money. Sell -1 option farther out of the money.
  • Ratio: Buy +1 option closer to the money. Sell -2 options farther out of the money. 
  • Back: Sell -1 option closer to the money. Buy +2 options farther out of the money.
  • Calendar: Sell -1 option. Buy +1 option farther out in time, at the same strike.

Typically, if bullish (bearish), sell at-the-money put (call) credit spread and/or buy a call (put) debit/ratio spread structured around target price. Alternatively, if the expected directional move is great (small), opt for a back spread (calendar spread). Also, if credit spread, capture 50-75% of the premium collected. If debit spread, capture 2-300% of the premium paid.

Be cognizant of risk exposure to direction (delta), time (theta), and volatility (vega). 

  • Negative (positive) delta = synthetic short (long). 
  • Negative (positive) theta = time decay hurts (helps).
  • Negative (positive) vega = volatility hurts (helps).

Trade Idea 1: SELL -1 1/2 BACKRATIO GOOGL 100 17 SEP 21 2770/2670 PUT @.15 LMT

I’m neutral on Alphabet Inc and I think the stock may travel sideways to lower over the next couple of weeks, toward $2,770.00, or the volume-weighted average price anchored from the July 28 gap. I will structure a spread below the current stock price, expiring in 2 weeks. I will buy the 2770 put option once (+1) and sell the 2670 put option twice (-2) for a $0.15 credit. Should the stock not move to my target, I keep the $15 credit. Should it move to $2,670.00 I could make $10,015.00 at expiry. Should the stock move past $2,570.00 or so, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the stock moves lower.

If necessary, I will hedge the position by either (A) selling stock, (B) widening strikes, (C) buying a far out-of-the-money put option to cap downside in case of an unpredictable move lower, or (D) roll strikes down in price and out in time.

Trade Idea 2: SELL -1 1/2 BACKRATIO SPX 100 (Weeklys) 10 SEP 21 4480/4430 PUT @.25 LMT

I’m neutral on the S&P 500 and I think the index may travel sideways to lower over the next week, toward its key moving averages. I will structure a spread below the current index price, expiring in 2 weeks. I will buy the 4480 put option once (+1) and sell the 4430 put option twice (-2) for a $0.25 credit. Should the index not move to my target, I keep the $25 credit. Should it move to $4,430.00, past the 20-day simple moving average, I could make $5,025.00 at expiry. Should the index move past $4,380.00 or so, beyond the 50-day simple moving average, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the index moves lower.

If necessary, I will hedge the position by either (A) selling futures, (B) widening strikes, (C) buying a far out-of-the-money put option to cap downside in case of an unpredictable move lower, or (D) roll strikes down in price and out in time.

News And Analysis

Moody’s Weekly Market Outlook on Ida, gas, and inflation. 

Reinventing tail risk: a fresh look at market crash protection.

Kansas City Southern mulls $27B CP Rail bid after ruling.

ARK Invest on commodities, innovation, economic signals.

Taliban relies on financing from China following withdrawal.

Hedge Funds cut exposure to stocks that count on China.

Three hours a week: China has put limits on video gaming.

Global gas prices threatening to dent economic recovery.

Are Treasuries in a cautious stance as debt story unfolds?

Could the macro theme/picture be an edge for day traders?

George Soros: Investors in China face a rude awakening.

400,000 homeowners enter the final month in forbearance.

Let’s Hang Out

Los Angeles, CA September 10-12

Salt Lake City, UT September 28-30

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 September 3, 2021

Market Commentary

Equity indexes were sideways to higher with most commodities, yields, and the dollar. 

  • Ahead: NFP, unemployment, and more.
  • Participants await context on Fed taper.
  • Indexes positioned for directional move.
  • Market is closed Monday, September 6. 

What Happened: U.S. stock index futures auctioned higher overnight ahead of Friday’s jobs report which may provide market participants context with respect to the Federal Reserve’s intent to de-stimulate.

Ahead is data on nonfarm payrolls, unemployment rate, and average hourly earnings (8:30 AM ET), as well as Markit services PMI (9:45 AM ET) and ISM services index (10:00 AM ET).

Graphic updated 6:40 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. 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 approximation. 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, Friday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on positive intraday breadth and divergent market liquidity metrics, the best case outcome occurred, evidenced by trade sideways above the $4,526.25 level, a prominent high volume area (HVNode).

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 or balance (i.e., rotational trade that suggests current prices offer favorable entry and exit).

This is significant because of acceptance, or a willingness to transact at higher prices. We’re carrying forward the presence of poor structure left behind prior trade.

Gap Scenarios Likely 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.

Further, the aforementioned trade is happening in the context of Friday’s jobs report. This report may have strong implications on the equity market; to elaborate, the data release will provide market participants color with respect to the Federal Reserve’s intent to wind down stimulus.

Forecasted is the addition of 725,000 jobs in August, according to Bloomberg, a moderate pace in comparison to months prior. 

A strong report would suggest a success, on the part of businesses, to hire after months of crunched labor supply. On the other hand, “The softening in employment activity would be consistent with other economic data that have weakened since the surge in Covid case counts due to the delta variant,” Bank of America Corporation (NYSE: BAC) economists said.

Bloomberg’s Katie Greifeld adds: “[R]ates are more likely to push higher on the heels of an unexpectedly strong jobs print than they are to fall in the wake of a weak one. With that dynamic in mind, bet against bonds.”

Graphic: Wells Fargo & Co (NYSE: WFC) data plotted by Bloomberg. 

To note, a softer report may pause any talk of taper to asset purchases. A reduction in the Federal Reserve’s balance sheet – a removal of liquidity – could prompt a sort of risk-off scenario in which participants try to get ahead of whatever cascading reactions may come with the taper.

In other words, as Kai Volatility’s Cem Karsan explained to me: “It’s not a coincidence that the mid-February to mid-March 2020 downturn literally started the day after February expiration and ended the day of March quarterly expiration. These derivatives are incredibly embedded in how the tail reacts and there’s not enough liquidity, given the leverage, if the Fed were to taper.”

Moreover, for today, given an increased potential for higher volatility and initiative trade, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,526.25 high volume area (HVNode) puts in play the $4,545.75 overnight high (ONH). Initiative trade beyond the ONH puts in play the $4,556.25 and $4,592.25 Fibonacci extensions. 

In the worst case, the S&P 500 trades lower; activity below the $4,526.25 HVNode puts in play the $4,510.00 level, a regular trade high (RTH High), and gap. Initiative trade beyond the RTH High and gap puts in play the $4,481.75 HVNode and $4,454.25 LVNode.

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

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

Initiative Buying (Selling): Buying (selling) within or above (below) the previous day’s value area.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

News And Analysis

Moody’s Weekly Market Outlook on Ida, gas, and inflation expectations. 

Short bets rise against consumer discretionary stocks as stimulus fades.

Traders set to test Powell’s push to delink hikes from bond-buying taper.

Three doses could become a standard COVID regimen, Dr. Fauci says.

The Western U.S. drought is forecasted to continue through fall at least.

U.S. structured finance issuance totaled $57B in August, rising 65% YoY.

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 August 11, 2021

Market Commentary

Equity index futures are sideways and divergent.

  • Senate passes new $3.5T economic blueprint.
  • Ahead: Data on CPI, Federal Budget Balance.
  • Sideways chop as participants position for CPI.

What Happened: U.S. stock index futures auctioned sideways ahead of data that would provide clarity on the direction of consumer prices.

According to Moody’s: “The CPI rose 0.9% in June, but it likely moderated in July, since we don’t expect used car prices to have risen as quickly as they have recently. Elsewhere on the inflation front, we will get data on producer and import prices. After the release of the CPI and PPI, we will have a good idea of what the core PCE deflator, the Fed’s preferred measure of inflation, did in June.”

Ahead is also data on the Federal Budget Balance and Fed speak.

Graphic updated 6:45 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. See here for more on the Dark Pool Index and Gamma. A positive Dark Pool Index reading is bullish. At the same time, the higher (lower) the gamma, the less (more) volatility. SHIFT Search data used for options activity. Note that options flow is sorted by the call premium spent; if green and more (less) positive then more (less) was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator. VIX reflects a reading of the CBOE Volatility Index from 0-100.

What To Expect: As of 6:45 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.

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by initiative trade above the $4,422.75, a prior balance area high (BAH), up to the $4,438.50 Fibonacci extension. 

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

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

This advance happened in spite of top-line divergences, as well as lackluster metrics with respect to market liquidity and breadth.

Unlike on the NYSE side of things (which sported positive breadth with an inflow into stocks that were up versus down), internals on the Nasdaq were markedly weak with negative breadth supporting a liquidation in the Nasdaq 100 (INDEX: NDX). 

In terms of market liquidity, the cumulative volume delta – a measure of buying and selling power as calculated by the difference in volume traded at the bid and offer – revealed no actionable divergences.

Coming into today’s Consumer Price Index (CPI) release, participants will notice the S&P 500, in particular, trading within a 3-day balance area, above a prior 10-day balance area. In short, since last week’s breakout, little has changed. What was thought would happen (i.e., expansion of range) didn’t happen.

Instead, trade was volatile, establishing excess just a tick short of the $4,438.50 Fibonacci extension as participants likely worked to position themselves for the mid-week data dump. As a result, until after the first couple of impulses on the CPI release, participants are cautioned on early trade.

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.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,422.75 BAH likely puts in play the $4,433.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,438.25 regular trade high (RTH High) and $4,446.25 Fibonacci extension.

In the worst case, the S&P 500 trades lower; activity below the $4,422.75 BAH likely puts in play the $4,415.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as low as the $4,411.00 VPOC and $4,406.25 LVNode.

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

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

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Graphic updated 6:45 AM ET.

News And Analysis

Earnings historically strong and policy transition.

Hackers steal $600M in likely largest DeFi theft.

Economic activity restart is real and broadening.

A turning point for markets meriting a hard look.

Biden administration to urge OPEC output boost.

The Senate passed a $550B infrastructure plan.

Delta forces hospitals to ration scarce ICU beds.

Mortgage applications rise with rates below 3%.

A systemic cyberattack presents risks for banks.

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 August 10, 2021

Market Commentary

Equity index futures are sideways and divergent.

  • Taper talk, COVID-19 fears, infrastructure news.
  • Ahead: NFIB, productivity, unit labor, Fed speak.

What Happened: U.S. stock index futures auctioned sideways alongside COVID-19 fears, infrastructure, crypto regulation, and taper talk.

This comes as core inflation is expected to come in around 4.8%, “likely unhinging Powell and expediting the talk about talking about tapering as early as in September,” according to Nordea.

Ahead is data on the NFIB small-business index, productivity, unit labor costs, and earnings. Cleveland Fed President Loretta Mester speaks at 10:00 AM ET.

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. See here for more on the Dark Pool Index and Gamma. A positive Dark Pool Index reading is bullish. At the same time, the higher (lower) the gamma, the less (more) volatility. SHIFT Search data used for options activity. Note that options flow is sorted by the call premium spent; if green and more (less) positive then more (less) was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator. VIX reflects a reading of the CBOE Volatility Index 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 inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by sideways trade at the $4,422.75 balance area high (BAH). This is significant because the BAH marked a shift in tone (i.e., a transition from two-time frame trade, or balance, to one-time frame trade, or trend).

Given that the BAH was not lost, the default balance break scenarios remain in play (i.e., play the break rather than fade the edges). As a result, we monitor for rejection (i.e., a return inside of balance). This would portend a move to the opposite end of balance, or the $4,365.25 low volume area (LVNode) in the S&P 500 future.

Graphic: 65-minute candlestick charts of the cash-settled S&P 500 (INDEX: SPX), Nasdaq 100 (INDEX: NDX), Russell 2000 (INDEX: RUT), and Dow Jones Industrial Average (INDEX: DJI). The S&P 500, of the four index products covered, has yet to invalidate its breakout.

To note, briefly, yesterday’s rangebound trade came alongside divergences with respect to price, market liquidity, and market internals. 

For instance, breadth at the exchange level was negative with a minuscule inflow into stocks that were down, versus those that were up. The cumulative volume delta – a measure of buying and selling power as calculated by the difference in volume traded at the bid and offer – diverged from mid-afternoon prices inspiring confidence in responsive trade. 

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

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,422.75 BAH puts in play the $4,429.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,433.25 regular trade high (RTH High) and $4,438.50 Fibonacci extension.

In the worst case, the S&P 500 trades lower; activity below the $4,422.75 BAH puts in play the $4,415.76 LVNode. Initiative trade beyond the LVNode could reach as low as the $4,411.00 untested point of control (VPOC) and $4,406.25 LVNode.

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

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

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

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

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Graphic updated 6:20 AM ET.

News And Analysis

China’s top oil refiner said to cut run as delta hits.

Biden’s agenda teed up for Senate endorsement.

SoftBank cut China investments until more clarity.

Major shocks see a divergence in rating migration.

The fully vaccinated are still catching COVID-19.

Analysts are warning on buy now, pay later trend.

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 August 9, 2021

Market Commentary

Equity index futures diverge, trading sideways to lower with commodities.

  • Themes: COVID-19, taper, infrastructure.
  • Ahead: JOLTS, Fed speak, and earnings.
  • Indices negate breakout and trade lower.

What Happened: U.S. stock index futures auctioned sideways to lower alongside talk of infrastructure and taper, as well as a resurgence in the COVID-19 coronavirus.

Adding, in research put out by Nordea, Andreas Steno Larsen said: “Powell hinted that the Fed has already reached one out of two targets and that full employment and inflation ‘moderately exceeding the 2% target’ are not prerequisites for a taper decision.”

Moreover, ahead is data on job openings, earnings, and Fed speak. 

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. See here for more on the Dark Pool Index and Gamma. A positive Dark Pool Index reading is bullish. At the same time, the higher (lower) the gamma, the less (more) volatility. SHIFT Search data used for options activity. Note that options flow is sorted by the call premium spent; if green and more (less) positive then more (less) was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator.

What To Expect: As of 6:30 AM ET, Monday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open on a small gap just below 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, the best case outcome occurred – a balance area breakout – evidenced by trade above the $4,422.75 balance area high (BAH). This is significant because it marked a shift in tone (i.e., a transition from two-time frame trade, or balance, to one-time frame trade, or trend).

In such a case, the modus operandi shifts from responsive trade (i.e., fade the edges) to initiative trade (i.e., play the break). 

A failure to expand range in the indexes – as evidenced by Friday’s lackluster breakout and early trade Monday – portends a rotation back toward the lower end of the balance, which corresponds with the $4,365.25 low volume area (LVNode) in the S&P 500 Future.

Graphic: Market Internals (Advance/Decline, Up-Volume/Down-Volume, Tick) displayed as Peter Reznicek at ShadowTrader teaches.
Graphic: 65-minute candlestick charts of the cash-settled S&P 500 (INDEX: SPX), Nasdaq 100 (INDEX: NDX), Russell 2000 (INDEX: RUT), and Dow Jones Industrial Average (INDEX: DJI).

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,422.75 BAH puts in play the $4,429.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,433.25 regular trade high (RTH High) and $4,438.50 fibonacci-derived price target.

In the worst case, the S&P 500 trades lower; activity below the $4,422.75 BAH puts in play the $4,417.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as low as the $4,411.00 untested point of control (VPOC) and $4,406.25 LVNode.

To note, the $4,406.25 level corresponds with a key anchored volume-weighted average price (VWAP), 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.

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

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

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Graphic updated 6:38 AM ET.

News And Analysis

Moody’s Weekly Market Outlook: Jobs and talk of tapering plans.

Oil tumbles to three-week low as virus spread menaces outlook. 

Why it is too early to celebrate the blockbuster July jobs report.

The key lessons for traders from fund managers with Ken Katzen. 

The financial fragility of U.S. households and businesses hit low.

A large loosening of consumer underwriting standards continues.

U.S. labor market job loss mismatch could persist through 2022. 

China’s semiconductor self-reliance is posing overcapacity risks.

The technology upside from the COVID-19 coronavirus pandemic. 

Homeowners have a tough time finding themselves underwater.

VC tear continues with $61B invested and 53 new unicorns born.

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.