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Commentary

Daily Brief For December 23, 2021

What Happened

Led by the Russell 2000, overnight, equity index futures continued higher while commodities were mixed and bonds were a touch lower. Friday, December 24, markets are closed.

Pursuant to comments made earlier this week, volatility was sold aggressively; the CBOE Volatility Index (INDEX: VIX) dropped ~9.00. This coincides with a compression in the VIX’s term structure, and that has so-called bullish/supportive implications.

Ahead is data on jobless claims, personal income, consumer spending, inflation, disposable income, goods orders (8:30 AM ET), as well as new home sales, University of Michigan sentiment, and five-year inflation expectations (10:00 AM ET).

Graphic updated 6:40 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 intraday breadth and divergent market liquidity metrics, the best case outcome occurred, via the S&P 500’s spike close higher, away from intraday value, the levels at which participants found it most favorable to transact.

This activity, which marks the continuation of an earlier trend change, is built on poor structure. 

That, ultimately, adds to technical instability.

Why? If you haven’t noticed, the levels quoted daily in this particular commentary seem to be holding to the tick. Given the persistence of mechanical responses to key technical levels, visually-driven, weaker-handed participants (which seldom bear the wherewithal to defend retests) 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, yesterday, successful penetration portends follow-through given the participants that were most active at those technical levels. Caution is warranted.

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 are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: According to Ryan Detrick of LPL Financial, the “official Santa Claus Rally starts this Monday (last 5 days of the year and the first two of the following year).”

The 7 days (after this Monday) are up nearly 79% of the time. 

However, in the past 5 occurrences, “Jan was also in the red and Q1 been weak as well.”

Graphic: LPL Financial on the so-called Santa Claus rally.

This activity comes after last week’s weighty “quad-witching” and ahead of the December “Quarterlys” expiry.

The exposure that rolled (and is to roll) off was “put-heavy.”

Participants’ commitment to capital at strikes lower in price and out in time – in the face of weak breadth and bearish fundamental developments – in single stocks, fed into the indices, also. 

According to SpotGamma, the December 17 expiration cleared quite a bit of negative delta (e.g., the ARK Innovation ETF [NYSE: ARKK] had $1.5 billion in notional put delta expire).

This opened a window of strength and realized volatility, wherein positive fundamental forces and dealers’ covering of hedges could bolster any recovery.

So, it is this week’s collapse in implied volatility (and associated collapse in term structure), coupled with the pending management of large S&P positions, and relentless, seasonally-aligned “passive buying support,” which brought positive flows bolstering this “Santa Claus rally.”

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

Notwithstanding, as mentioned, yesterday, Goldman Sachs Group (NYSE: GS) saw “options selling strategies as attractive in the near term,” estimating “a 12% probability of a 1-month 5% down-move in the SPX in this economic environment based on [the] GS-EQMOVE model.”

“Options are pricing a 22% probability of that size move indicating that puts are overvalued.”

As noted Tuesday, the commitment of capital on lower volatility results in counterparties taking on more exposure to positive gamma. The growth in positive gamma (as the data is showing) will be offset through the dealers’ supply of liquidity, pressuring the price discovery process.

Note: As a position’s delta rises with stock or index price rises, gamma (or how an option’s delta is expected to change given a change in the underlying) is added to the delta.

This is while many products are in lower liquidity and short-gamma (wherein an options delta decreases with stock prices rises and increases when stock prices drop) in which moves are more erratic.

Therefore, coming into weighty options expirations, correlations may be off (as that is the only reconciliation in an environment where, at the index level, hedging pressures are sticky, whereas elsewhere they aren’t).

Thereafter, participants ought to monitor the sides and levels capital is committed for clues as to where we go next. Continued compression of volatility, as well as a commitment to options higher in prices and further out in time, supports upward price discovery.

Graphic: Via The Market Ear, “There have been five prior years since 1953 (when we went to the 5-day trading week) that have seen December as the most volatile month: 1973, 1978, 1985, 1995, and 2018. The January following these five prior years was BIG positive four out of five times, with January 2019 seeing the biggest gain.”

Weakness (alongside a commitment to strikes lower in price and out in time) likely sets the market up for another round of instability, as realized in late November and early December.

Graphic: A compression in the VIX term structure would provide markets with a boost.

Expectations: As of 6:30 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, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Spike Rules 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 $4,678.50. Below bearish (change in tone). Above bullish (status quo).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,690.75 micro composite point of control (MCPOC) puts in play the $4,709.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,732.50 high volume area (HVNode) and $4,743.00 regular trade high (RTH High), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,690.25 MCPOC puts in play the $4,673.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,647.25 HVNode and $4,623.00 POC, 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

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.

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.

Price Discovery (One-Timeframe Or Trend): Elongation and range expansion denotes a market seeking new prices to establish value, or acceptance (i.e., more than 30-minutes of trade at a particular price level). 

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

Market Commentary For 12/31/2020

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

What Happened: After a range-bound balancing day, U.S. index futures tested lower overnight alongside news that COVID-19 case counts were rising, before turning at a visual level, and trading back into range.

What Does It Mean: Participants further accepted the upside break of $3,691.00 in the S&P 500, a boundary that attracted responsive selling in the week prior.

What To Expect: Thursday’s regular session (9:30 AM – 4:00 PM ET) will open within prior-balance and -range.

Given three-sessions worth of unchanged value, and the failure to fill the gap beneath a weak low (i.e., a visual level that attracts the business of short-term, technically-driven market participants) at $3,714.50, participants will come into today’s session knowing the following: (1) markets are closed on Friday, (2) the failure to resolve directionally points to the absence of larger, other time frame participants (i.e., institutions that don’t transact at technical levels), (3) the overnight rally high at $3,747.75 remains intact (i.e., historically, there is a low probability that overnight all-time highs end the upside discovery process), and (4) the period leading up to New Year, after Christmas, is historically bullish.

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

Putting it all together, the S&P 500 is trading within a larger bracket; trade between $3,747.75 and $3,714.50 ought to be responsive. Auctioning beyond either reference would end the bracketing process and portend continuation.

Levels Of Interest: Overnight high at $3,747.75, Tuesday’s pullback low at $3,714.50, the upside extension at $3,756.75 and the $3,691.00 break-point.

Bonus: Below, you will find two visuals. The first suggests the big picture S&P 500 breakout remains intact. The second suggests conviction is thinning, given light intra-day participation (i.e., the activity that occurred before the end-of-day positioning).

Pictured: Daily candlestick chart of the cash S&P 500 Index on the left. Intraday order flow in the SPDR S&P 500 ETF Trust (NYSE: SPY) on the right.
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Commentary

Market Commentary For 12/30/2020

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

What Happened: After a liquidation in the backdrop of a longer-term uptrend, U.S. index futures auctioned off their lows and traded back into range.

What Does It Mean: Participants further accepted the upside break of $3,691.00 in the S&P 500, a boundary that attracted responsive selling in the week prior.

What To Expect: Wednesday’s regular session (9:30 AM – 4:00 PM ET) will open on a gap within prior-balance and -range. Given unchanged value and a failure to fill the gap beneath Monday morning’s pullback low at $3,716.00, participants will come into today’s session knowing yesterday’s downside reversal left minimal excess.

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

Putting it all together, the S&P 500 is trading within a larger bracket; trade between $3,747.75 and $3,714.50 ought to be responsive. Auctioning beyond either reference would end the bracketing process and portend continuation.

Levels Of Interest: Overnight high at $3,747.75, Tuesday’s pullback low at $3,714.50, the upside extension at $3,756.75 and the $3,691.00 break-point.

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Commentary

Market Commentary For 12/29/2020

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

What Happened: Alongside stretched sentiment and bets that fiscal aid will improve the vaccine-led recovery, U.S. index futures, again, auctioned to record highs.

What Does It Mean: During Monday’s session, participants accepted the break of $3,691.00 in the S&P 500, a boundary that attracted responsive selling in the week prior. Since then, participants continued the upside discovery process, establishing a new overnight all-time high at $3,747.75.

What To Expect: Tuesday’s regular session (9:30 AM – 4:00 PM ET) will likely open on another gap. Given that this is the second gap (the gap between Friday and Monday’s session was the start of the short-term auction), in the context of a new trend , participants know that upside conviction and strength has been reaffirmed.

Noting: Monday’s break-out from balance confirmed the start of a new short-term auction. The acceleration of that trend overnight, via the second gap, further emboldens buyers.

Now, given what appears to be an absence of other-time frame participants (e.g., institutions, larger-time frame players), participants will come into today’s session knowing (1) the structure at Monday’s regular session high was poor, (2) overnight activity established a new all-time high (i.e., historically, there is a low probability that overnight all-time highs end the upside discovery process), and (3) the period leading up to New Year, after Christmas, is historically bullish.

Putting it all together, the path or least resistance is up. Important references for today’s trade include the low-volume area between $3,737.00 and $3,732.25 which ought to be supportive, the untested point of control (i.e., VPOC — the most valuable price from the day prior) at $3,727.25, and the overnight all-time rally high at $3,747.75.

Auctioning beneath yesterday’s morning pullback low at $3,716.00 would jeopardize the breakout. At that point, participants would look for a response at the $3,691.00 break-point. Auctioning below $3,691.00 is a no-go and would portend further rotation.

Levels Of Interest: $3,737.00 and $3,732.25 LVNodes, VPOC at $3,727.25, overnight high at $3,747.75, pullback low at $3,716.00, and the $3,691.00 break-point.

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Commentary

Market Commentary For 12/28/2020

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

What Happened: As President Donald Trump moved to sign into law a $2.3 trillion pandemic aid bill, U.S. index futures auctioned to record highs.

What Does It Mean: Friday’s session found responsive selling surface near the $3,691.00 S&P 500 profile level. Since then, participants initiated past the level with conviction, and took out the $3,724.25 prior all-time high, before auctioning back into range and finding acceptance near $3,720.00.

What To Expect: The low-volume area (marked as the LVNode at $3,711.50) is representative of upside conviction after a break of the $3,691.00 boundary. This same low-volume area should offer support on a future test. Acceptance within the low-volume area, beneath $3,711.50, may portend a test of the $3,691.00 break point. Auctioning beneath the breakpoint would be the most negative outcome, negating the transition from balance to trend.

Noting: In most cases, a break-out (i.e., gap or auction failure) from balance is usually the start of a short-term auction. Therefore, placing trades in the direction of the gap is the normal course of action. Further, gaps tend to fill within the first half-hour of regular trade (9:30 AM – 4:00 PM ET). The longer a gap holds, however, the higher odds of continuation. Should responsive sellers auction through the entire gap, then conditions have changed.

Adding, the days leading up to the New Year, after Christmas, are historically bullish, dubbed the Santa Claus Rally. Here’s an excerpt from a Yahoo Finance article on the topic:

“Well, there isn’t a single seven-day combo out of the full year that is more likely to be higher than the 77.9% of the time higher we’ve seen previously during the Santa Claus Rally,” LPL Financial’s analysts observed after analyzing data going back to 1950. “Additionally, these seven days are up an average of 1.33%, which is the second-best seven-day combo of the year.“

Levels Of Interest: $3,711.50 LVNode and $3,726.50 all-time overnight high. Today’s go/no-go level in the S&P 500 is $3,691.00; remaining above is bullish.