Categories
Commentary

Market Commentary For 3/4/2021

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

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

What Does It Mean: Broad market indices are mixed.

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

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

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

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

More On Gamma: Gamma is the sensitivity of an option to changes in underlying price. Dealers that take the other side of option trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.
Graphic 1: SpotGamma data suggests Nasdaq-100 at or below “Short-Gamma” juncture.
Graphic 2: Option activity for the largest ETFs that track the S&P 500, Nasdaq-100, and Russell 2000.

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

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

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

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

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

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

More On Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

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

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

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

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

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

If participants were to auction and find acceptance into areas of prior low-volume, then future discovery ought to be volatile and quick as participants look to areas of high-volume for favorable entry or exit.
Pictured: Profile overlays on a 4-hour chart of the Micro E-mini S&P 500 Futures.

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

Categories
Commentary

Market Commentary For 3/3/2021

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

What Happened: After an end-of-day spike liquidation, overnight, U.S. stock index futures rebounded.

What Does It Mean: Broad market indices are no longer in price-discovery mode. Instead, indices are in balance, two-sided trade as participants look for more information to base their next move on.

While leading economic indicators point to expansion, stock market liquidity has weakened and volatility has expanded, exacerbated by the market’s transition into short-gamma.

More On Gamma: Gamma is the sensitivity of an option to changes in underlying price. Dealers that take the other side of option trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.
Pictured: SpotGamma data suggests S&P 500 at or below “Short-Gamma” juncture.

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

During Tuesday’s trade, the best case outcome occurred: the S&P 500 was able to maintain higher prices, rotating within Monday’s trading range, above the $3,860.75 LVNode. However, near the end of regular trade, the S&P 500 experienced a rapid spike liquidation, away from value, or the price level that participants transacted most at.

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

Given the aforementioned dynamics, and an overnight failure to reclaim the high-volume area (HVNode) at $3,894.25, which offered initiative buyers (responsive sellers) favorable exit (entry), participants can trade from the following framework.

In the best case, market’s remain rotational, with the S&P 500, in particular, remaining within Tuesday’s trading range, above the $3,860.75 low-volume area, or LVNode.

In the worst case, participants auction past Tuesday’s regular trade low, emboldening sellers and starting a new auction, to the downside.

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

If participants were to auction and find acceptance into areas of prior low-volume, then future discovery ought to be volatile and quick as participants look to areas of high-volume for favorable entry or exit.
Pictured: Profile overlays on a 15-minute candlestick chart of the Micro E-mini S&P 500 Futures.

Levels Of Interest: $3,860.75 LVNode.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Should I Stay Or Should I Go’

Notice: Physik Invest’s daily market commentaries will be suspended for the next five regular trading sessions or February 22-26.

Please accept our apologies for the inconvenience and thank you for the support!

Key Takeaways:

  • Debt, inflation threatening low-rate regime.
  • Markets most complacent in two decades.
  • Sentiment turns hot from hotter amid slide.
  • Global equity fund net inflows decelerated.
  • Markets fret about economic performance.
  • Retail sales and industrial production gain.

What Happened: U.S. stock index futures auctioned lower last week.

What Does It Mean: Market participants witnessed a rapid de-risking event, as a result of individual stock volatility, and a subsequent v-pattern recovery, that was later taken back as Friday’s large February monthly options expiration (OPEX) neared.

More On The 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.

At the same time, bond and equity market volatility diverged, materially. 

In other words, a rapid move up in rates — as investors become increasingly concerned over the value of their bonds due to rising debt levels and inflation — has yet to be priced in as an equity market risk.

Graphic 1: The Market Ear unpacks divergence in volatility across different markets.

Adding, the risk of inflation comes alongside a potential for slowing in economic growth, which may have knock-on effects, such as savers protecting their capital by investing in non-productive assets, thus helping form speculative asset bubbles.

Risk Of Monetary Support: The increased moneyness of financial markets; investors look to exchange-traded products (e.g., S&P 500) as savings vehicles, thereby forcing participants, like the Federal Reserve, to backstop market liquidity, and promote market and economic stability in times of turmoil.
A great paper on the impact of central bank intervention, passive index investing, and asymmetric liquidity provisioning.

Still, as Bloomberg suggests, reasons to not panic include an overreaction by market participants, premature Fed tightening, and a risk asset rout (i.e., rising rates may eventually increase demand for safety assets).

“Typically it’s a good environment for risk assets. Neither the pace nor the extent of the move so far has been unusual relative to other historical moves coming out of a recession,” said Pimco’s Erin Browne. “It would take a significant move in real yields in order to disrupt risk markets broadly.”

Graphic 2: Benchmark 10-year real rate in solidly negative territory.

Moving on, given OPEX, participants have a clue as to why the market failed to resolve directionally over the past week: option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire worthless) and the reduction dealer gamma exposure.

Aside from OPEX, we must talk more about the v-pattern recovery and a prior week’s spike exit from balance, as well as low broad market volatility.

In light of the v-pattern, balance, and spike, the S&P 500’s long-term uptrend remains intact. In support of this uptrend, systematic and hedge fund participants are increasing their long-exposure, given the economic recovery, and a drop in volatility.

Beyond that, speculative activity in the options market and measures of market liquidity fail in offering much information.

Graphic 3: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week ending February 19, 2021. Activity in the options market was primarily concentrated in short- and long-dated tenors, near the $390, a strike that corresponds with $3,900.00 in the cash-settled S&P 500 Index (INDEX: SPX).

What To Expect: U.S. stock indexes are positioned for directional resolve.

This comes alongside the acceptance of higher prices (inside a prominent high-volume area, or HVNode) and an overnight rally-high at $3,959.25.

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

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

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

What To Do: In the coming sessions, participants will want to pay attention to the VWAP anchored from the $3,959.25 peak and $3,909.25 HVNode.

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

In the best case, the S&P 500 opens and remains above the $3,909.25 volume area.

Additionally, auctioning above the $3,915.00 VWAP would suggest buyers, on average, are in control and winning, since the February 15 rally high.

Auctioning beneath $3,909.25 turns the HVNode, nearby, into an area of supply, offering initiative sellers favorable entry and responsive buyers favorable exit. 

The situation would drastically deteriorate with trade beneath the $3,880.00 HVNode, the last reference before participants find acceptance in an area of low-volume.

In such scenario, future discovery ought to be volatile and quick as participants repair some of the poor structures left in the wake of a prior advance, and look to the next area of high-volume (i.e., $3,830.75) for favorable entry and exit.

Graphic 4: Profile overlays on a 65-minute and 4-hour chart of the Micro E-mini S&P 500 Futures. See all decision levels of /ES and /NQ here, also.

Conclusions: The go/no-go level for next week’s trade is $3,909.25. 

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

Levels Of Interest: $3,909.25 HVNode.

Photo by Charles Parker from Pexels.

Categories
Commentary

Market Commentary For 2/19/2021

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

Key Takeaways For Today:

  • $3,900.00 S&P 500 is sticky, so expect balance.
  • The longer-term bias remains up until it is not.
  • Hedge bets when you can, not when you have to.

What Happened: Overnight, U.S. stock index futures auctioned higher, ahead of economic releases on U.S. business activity.

What Does It Mean: The past few weeks have been volatile.

Market participants witnessed a rapid de-risking event, as a result of individual stock volatility, and a subsequent v-pattern recovery, that was later taken back as the February monthly options expiration (OPEX) neared.

Given OPEX, participants have a clue as to why the market has failed to resolve directionally: option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire worthless) and the reduction dealer gamma exposure.

Aside from OPEX, we must talk more on the aforementioned v-pattern recovery and last week’s spike exit from balance, as well as weakening broad market volatility.

More On The 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.

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

In light of the v-pattern, balance, and spike, the S&P 500’s long-term uptrend remains intact. In support of this uptrend, systematic and hedge fund participants are increasing their long-exposure, given the economic recovery, and a drop in volatility.

Beyond that, speculative activity in the options market and measures of market liquidity fail in offering much information.

What To Expect: Friday’s regular session (9:30 AM – 4:00 PM ET) will likely open outside of prior-balance and -range, suggesting the potential for immediate directional opportunity.

This comes alongside the acceptance of higher prices (above a prominent high-volume area), and an overnight rally-high at $3,959.25.

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

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

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

Given the above dynamics, the following frameworks ought to be applied.

In the best case, as stated yesterday, the S&P 500 opens and remains above the $3,900.00 confluence zone. Auctioning beneath $3,900.00 turns the high-volume area (HVNode) nearby into supply, offering initiative sellers favorable entry and responsive buyers favorable exit.

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

Levels Of Interest: $3,900.00 HVNode.

Categories
Commentary

Market Commentary For 2/17/2021

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

What Happened: U.S. stock index futures auctioned lower as investors turned cautious ahead of economic releases.

What Does It Mean: After a v-pattern recovery and sideways trade in the weeks prior, stock index futures auctioned out of prior-balance and -range, via Friday’s end-of-day spike.

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

The spike and shift from balance (i.e., the transition from two- to one-time frame trade) was accepted, despite Tuesday’s liquidation break.

More On Liquidation Breaks: The profile shape in the S&P 500 suggests participants were “too” long and had poor location.

Adding, for the entirety of Tuesday’s session, prices rotated lower in the face of increased buying interest, as observed by volume delta and option activity.

Given that the market is technically positioned for higher, it will be interesting to see whether on not Tuesday’s interest (as measured by volume delta) leads to upside resolve.

More On Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

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

This comes alongside a resumption in trend, acceptance of higher prices (above a prominent high-volume area), and an overnight rally-high at $3,959.25.

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

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

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

Thus, given the above dynamics, the following frameworks ought to be applied.

In the best case, the S&P 500 opens and remains above the $3,919.75 spike base, further confirming last week’s higher prices. In the worst case, the S&P 500 auctions below the $3,919.75 spike base.

Trade below the spike base would be the most negative outcome.

Why? Beneath the spike base is a high-volume concentration which offers favorable entry and exit for initiative buyers and responsive sellers. Should the market auction beneath the spike base (and aforementioned high-volume area), then participants may see a new wave of downside discovery.

Levels Of Interest: $3,919.75 spike base.

Categories
Commentary

Market Commentary For 2/16/2021

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

What Happened: U.S. stock index futures auctioned higher, over the holiday weekend, as investors remained optimistic on the progress of coronavirus relief.

What Does It Mean: After a v-pattern recovery and sideways trade in the weeks prior, stock index futures auctioned out of prior-balance and -range, via Friday’s end-of-day spike.

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

Adding, the spike makes it easy to spot the shift from balance (i.e., the transition from two- to one-time frame trade). For the entirety of Friday’s session, prices rotated in the face of increased buying interest, as observed by volume delta. At the outset, buying pressure looked as thought it was absorbed by sellers. Eventually, the rise in delta was resolved when participants broke through a ledge of responsive selling, and established record highs.

More On Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

What To Expect: Tuesday’s regular session (9:30 AM – 4:00 PM ET) will likely open outside of prior-balance and -range, suggesting the potential for immediate directional opportunity.

This comes alongside a resumption in trend and an overnight rally-high at $3,959.25.

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

Given the spike, balance-break and subsequent resumption in trend, as well as the overnight high (ONH), participants are aware that favorable opportunities primarily rest on the long-side.

Thus, given the aforementioned dynamics, the following frameworks ought to be applied.

In the best case, the S&P 500 opens and remains above the $3,919.75 spike base, confirming last week’s higher prices. In the worst case, the S&P 500 auctions below the $3,919.75 spike base.

Trade below the spike base would be the most negative outcome and could trigger a new wave of downside discovery, repairing some of the poor structures left in the wake of the aforementioned advance.

Levels Of Interest: $3,919.75 spike base.

Categories
Commentary

Market Commentary For The Week Ahead: ‘To The Moon’

Key Takeaways:

  • Positive earnings revisions nearing records
  • Equity mutual funds attract strong inflows.
  • Multi-asset funds raising equity allocations.

What Happened: U.S. stock indexes resolved a week-long trading range, Friday.

What Does It Mean: As the new administration looked to advance the status of coronavirus relief, U.S. stock index futures established record highs.

This comes as stock indexes, particularly the S&P 500, traded sideways after a rapid de-risking event associated with the GameStop Corporation (NYSE: GME) crisis, and subsequent v-pattern recovery.

More On The 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.

As stated on Friday, the tight trading range is most likely attributable to the large February monthly options expiration (OPEX), after which, the interest at the $3,900.00 S&P 500 option strike will roll-off. 

Graphic 1: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week ending February 12, 2021. Activity in the option market was primarily concentrated in short-dated tenors near $390, a strike that corresponds with $3,900.00 in the cash-settled S&P 500 Index (INDEX: SPX).

Why’s this? Most funds are committed to holding long positions. In the interest of lower volatility returns, these funds will collar off their positions, selling calls to finance the purchase of downside put protection.

As a result of this activity, option dealers are long upside and short downside protection.

This exposure must be hedged; dealers will sell into strength as their call (put) positions gain (lose) value and buy into weakness as their call (put) positions lose (gain) value.

Now, unlike theory suggests, dealers will hedge call losses (gains) quicker (slower). This leads to “long-gamma,” a dynamic that crushes volatility and promotes momentum, observed by lengthy sprints, followed by rapid de-risking events as the market transitions into “short-gamma.”

If the interest near $3,900.00 S&P 500 is not rolled up in price and out in time, then option hedging requirements will change.

However, it is important to note that, in recent days, some exposure has been rolled up in price and out in time. This suggests an inclination by participants to maintain long exposure through OPEX, a day that would mark an end to pinning (which we’ve seen over the past weeks).

One such example can be seen below.

Graphic 4: Purchase of call positions higher in price and farther out in time in the cash-settled S&P 500 Index

What To Do: In coming sessions, participants will want to pay attention to the $3,919.75 spike base and $3,928.25 balance-area high.

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

Balance-areas make it easy to spot change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).

Given the spike out of balance, the following frameworks ought to be applied. 

In the best case, the S&P 500 opens and remains above the $3,919.75 spike base, confirming last week’s higher prices. In the worst case, the S&P 500 auctions below the $3,919.75 spike base.

Trade below the spike base would be the most negative outcome and may trigger a new wave of downside discovery, repairing some of the poor structures left in the wake of the aforementioned advance.

Graphic 5: Profile overlays on a 30-minute candlestick chart of the Micro E-mini S&P 500 Futures.

Conclusions: The go/no-go level for next week’s shortened holiday trade is $3,919.75. Trade below this level suggests markets are not yet ready to rally.

Levels Of Interest: $3,919.75 spike base.

Cover photo by Pixabay, from Pexels.

Categories
Commentary

Market Commentary For 2/9/2021

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

What Happened: U.S. stock index futures established record all-time highs Monday before trading back into range.

What Does It Mean: On an end-of-day spike, U.S. stock index futures established new all-time highs.

This price action occurred on the heels of a quick de-risking event and v-pattern recovery, alongside non-participatory speculative flows, a divergence in the DIX, and the market’s re-entry into long-gamma.

More On The 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. 

More On Speculative Flows: Participants looking to capitalize on either upside or downside through the purchase and sale of options, the right to buy or sell an asset at a later date and agreed upon price.

More On 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.

More On Gamma: Gamma is the sensitivity of an option to changes in underlying price. Dealers that take the other side of option trades hedge their exposure to risk by buying and selling the underlying. 

When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.
Graphic 1: SpotGamma data suggests S&P 500 at or above “Long-Gamma” juncture.

Important to note: unlike in prior sessions, participants saw some change in the undercurrents. A divergence between price (lower) and cumulative volume delta (higher). This divergence resolved itself in the last hour of trade on Monday.

More On Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

What To Expect: Tuesday’s regular session (9:30 AM – 4:00 PM ET) will likely open inside a spike, within prior-balance and -range, suggesting minimal directional opportunity. This comes after participants traversed nearly 7%, a non-typical weekly trading range.

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

Further, given how far the discovery process has come, attention is drawn to a few key references.

The first is the end-of-day spike. Trade below the $3,899.00 spike base would be the most negative outcome and may trigger a new wave of downside discovery that would repair some of the poor structures left in the wake of the aforementioned advance.

The second key reference is the overnight high. Typically, there is a low historical probability associated with overnight rally-highs ending the upside discovery process. Add on the fact that Monday’s regular trade left minimal excess (i.e., a proper end to price discovery) at the high, odds point to the potential to trade higher in the coming session(s).

Given those key references, the following frameworks apply.

In the best case, the S&P 500 does some backfilling to repair poor structures left in the wake of strong initiative buying. In such a case, participants would look for responsive buying to surface at or above the $3,880.00 high-volume area (HVNode). 

In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below the $3,880.00 HVNode, would favor continuation as low as the $3,794.75 and $3,727.75 HVNodes.

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

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

Today’s go/no-go level is the $3,899.00 spike base. Below, would portend downside discovery and structural repair. At or above denotes balance or continued upside discovery.

Levels Of Interest: $3,899.00 spike base.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Ping-Pong’

Quote Of The Week: Excessive determinism is almost always the biggest enemy of stability. This seeming contradiction is behind the concept of metastability which captures the mode of market functioning in the last years. Metastability is what seems stable, but is not — a stable waiting for something to happen. [An] avalanche is a good example of metastability to keep in mind — a totally innocuous event can trigger a cataclysmic event (e.g., a skier’s scream, or simply continued snowfall until the snow cover is so massive that its own weight triggers an avalanche).

Quote by Aleksandar Kocic, Managing Director at Deutsche Bank AG (NYSE: DB), from Heisenberg Report.

Key Takeaways:

  • V-pattern recovery suggests higher prices.
  • Risks offset and funds looking to re-gross.
  • Dip presented a favorable buy opportunity.

What Happened: In light of a v-pattern recovery, after a quick de-risking event, U.S. stock indexes are positioned for further upside, as high as the 100% price projection, which happens to be above $4,000.00, a primary target in the S&P 500.

More On The 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. 

What Does It Mean: This positive price action is happening in the context of bearish undercurrents, as evidenced by non-participatory speculative flows and delta, as well as a divergence in the DIX.

More On Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

More On 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.

More On Speculative Flows: Participants looking to capitalize on either upside or downside through the purchase and sale of options, the right to buy or sell an asset at a later date and agreed upon price.

Adding, according to The Market Ear, similar risk rallies have happened after hedge fund de-grossing events; now, “Equities are rising along higher yields, dollar and [volatility], and the magic word here is discounting inflation.”

Further, since price pays, participants ought to discount the bearish undercurrents, and position themselves for upside. Hedge funds are doing so, as evidenced by an increase in gross exposures (Graphic 1), alongside other speculative participants that look to capitalize on their opinions through the options market (Graphic 2). 

Graphic 1: JPMorgan Chase & Co. (NYSE: JPM) data suggests normalization as “HFs add back to gross exposures.”
Graphic 2: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust, for the week ending February 6, 2021.

Last week, per Graphic 2, the SPDR S&P 500 ETF Trust, the largest ETF that tracks the S&P 500, saw a rise in purchases of short-dated call and put options. Given the tenor (i.e., the length of time remaining before contract expiration), there’s a lack of long-term commitment to direction.

Adding, early and late in the week, the purchase of put options dominated. This suggests participants were either looking to protect against or capitalize on downside. In the middle of the week, participants were looking to protect against or capitalize on upside. 

More On Options: If an option buyer was short (long) stock, he or she would buy a call (put) to hedge upside (downside) exposure. Option buyers can also use options as an efficient way to gain directional exposure.

The above, alongside the market’s re-entry into long-gamma (Graphic 3) and a normalization of the VIX futures term structure (see Graphic 4) in which longer-dated VIX expiries are more expensive, suggests the potential for less risk and volatility in equity markets.

More On Gamma: Gamma is the sensitivity of an option to changes in underlying price. Dealers that take the other side of option trades hedge their exposure to risk by buying and selling the underlying. 

When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

Graphic 3: SpotGamma suggests S&P 500 at or above “Long-Gamma” juncture.
Graphic 4: VIX Futures Term Structure per vixcentral.com.

What To Expect: U.S. stock indexes are best positioned for further balance or upside discovery.

Graphic 5: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

In Graphic 5, the highlighted zones denote high-volume areas (HVNodes), or valuable areas to transact.

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

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

Last Monday, participants found acceptance in prior low-volume. Thereafter, discovery was volatile and quick as participants looked to areas of high-volume for favorable entry and exit (e.g., where the market spent the majority of its time Tuesday through Thursday).

On Friday, the S&P 500 left the HVNode near $3,840.00. As stated, HVNodes can be thought of as building blocks — they also denote areas of supply and demand. In this case, $3,840.00 can now be thought of as an area of demand. The primary strategy is to respond to probes into these supply (i.e., selling responsively) and demand (i.e., buying responsively) areas as they offer favorable entry and exit.

What To Do: Participants will want to pay attention to last Thursday’s $3,855.00 Virgin Point Of Control, or VPOC (i.e., the fairest price to do business in a prior session), and end-of-day spike, as well as the $3,840.00 HVNode.

More On POCs: POCs (like HVNodes described above) 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.

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

Given the above references, the following frameworks ought to be applied.

In the best case, the S&P 500 does some backfilling to repair aforementioned poor structures. In such a case, participants would look for responsive buying to surface at or above the $3,840.00 HVNode

In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below the $3,840.00 HVNode, would favor continuation as low as the $3,794.75 and $3,727.75 HVNodes.

Note that the $3,727.75 HVNode corresponds with the $372 SPY put concentration, which may serve as a near-term target, or bottom, for a sell-off. 

Graphic 6: Profile overlays on a 15-minute candlestick chart of the Micro E-mini S&P 500 Futures.

Conclusions: Simplicity is key here.

Participants ought to look for favorable areas to transact, such as those high-volume areas in the S&P 500 featured in Graphic 5.

Levels Of Interest: $3,840.00 HVNode.

Photo by Josh Sorenson from Pexels.

Categories
Commentary

Market Commentary For 2/5/2021

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

What Happened: Ahead of data on employment, alongside the passage of a budget plan to advance $1.9 trillion in COVID aid, U.S. stock index futures rose overnight.

What Does It Mean: Given a v-pattern recovery, U.S. stock indexes are positioned for further upside, as high as the 100% price projection, which happens to be near $4,000.00 in the S&P 500.

This positive price action is happening in the context of bearish undercurrents as evidenced by non-participatory speculative flows, delta (i.e., non-committed buying as measured by volume delta), and a divergence in DIX, a proxy for buying derived from short sales (i.e., liquidity provision on the market making side).

Since price pays, participants ought to discount these undertones and position themselves for further upside discovery.

What To Expect: Friday’s regular session (9:30 AM – 4:00 PM ET) will likely open outside of prior-balance and -range, suggesting the potential for immediate directional opportunity.

Currently, the S&P 500 is rotating below the $3,884.75 projection, a typical target on a break from balance. Below current price lies Thursday’s $3,855.00 Virgin Point Of Control, or VPOC (i.e., the fairest price to do business in a prior session).

Noting: POCs (like HVNodes described below) 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.

Further below is a the $3,840.25 HVNode. As stated in prior sessions, HVNodes can be thought of as building blocks — they also denote areas of supply and demand. The primary strategy is to respond to probes into these supply (i.e., selling responsively) and demand (i.e., buying responsively) areas as they offer favorable entry and exit.

In the coming session, participants will want to pay attention to Thursday’s end-of-day spike and overnight all-time high (ONH).

Spike’s mark the beginning of a break from value and, in this case, would support the bullish thesis as long as participants, during regular trade, spend time above the spike base ($3,857.75). Adding, there is a low historical probability that overnight rally-highs end the upside discovery process.

For today, the following frameworks ought to be applied.

In the best case, the market will remain above, or find acceptance at (in the form of rotational trade) the $3,857.75 spike base. In the worst case, responsive sellers appear and restart the downside discovery process.

A break above the $3,886.25 ONH, participants may see discovery as high as $3,900.00, a balance-area extension (i.e., another balance-break target). A break below the prior RTH Low ($3,830.25), participants may see prices as low as the $3,799.00 balance-area low.

Levels Of Interest: $3,886.25 ONH, $3,857.75 spike base, $3,830.25 RTH Low.