Tag: SqueezeMetrics

Categories
Commentary

Daily Brief For November 10, 2021

What Happened

Equity index futures sideways, overnight, on powerful derivative market forces, alongside participants’ aims to base ahead of added clarity on the economic outlook.

Ahead is data on inflation and jobless claims (8:30 AM ET), wholesale inventories (10:00 AM ET), and the monthly budget statement (2:00 PM ET).

Graphic updated 5:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

As evidenced by a b-shaped liquidation break profile distribution (i.e., morning drop on fast tempo, followed by sideways trade) there was likely selling by short-term momentum-driven participants who had poor location.

We are confident this may be the case given where the price is, relative to the volume-weighted average price (VWAP) anchored from the Federal Open Market Committee (FOMC) announcement, last week; the average buyer, since then, is losing.

To note, given the context – lackluster breadth and market liquidity metrics – the failure to expand the range, markedly, suggests there was no new money selling.

This activity, which marks a potential willingness to clear stubborn inventory and break balance, is occurring in the face of poor structure down below, a dynamic that adds to technical instability.

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

Context: Yesterday, I made an emphasis on some of the “high leverage and risk” short-term speculators’ record call buying and put selling posed on the equity market, at large.

That’s odd. Why? 

Well, into the near-vertical price rise of highly volatile stocks like Tesla Inc (NASDAQ: TSLA), customers (you and I) signed up, through the agency of counterparties, to add liquidity to the market, via options activity.

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

So long as implied volatility remained bid (and stock prices go to the moon) – the effect of inadequate liquidity – counterparties were to exacerbate upside volatility in hedging their exposure to customer positioning. In other words, dealer short-gamma.

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

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

When dealers are long-gamma (e.g., S&P 500), counterparties buy into weakness and sell into strength, calming volatility.

Enter shock – Elon Musk selling Tesla stock – alongside a decline in implied volatility, amidst a build of gamma at higher stock prices (which has the effect of dampening realized volatility), we saw the unthinkable happen; high-flying stocks (more so Tesla, which is a large S&P 500 index constituent) turned away from the moon and headed back to earth.

The implications of this were staggering; the bulk of customers’ short puts (long calls) quickly rose (declined) in value and traded in-the-money (out-of-the-money). 

As SpotGamma noted, yesterday, “[t]here was a serious dearth of liquidity to start today’s session,” and volatility rose, as a result, in compensating for that fact.

Now, if customer short put, counterparty long put. 

To hedge, counterparty ought to buy, right? Nope. 

As SqueezeMetrics explains, “Sold puts are, quite literally, a bunch of huge buy limit orders below the market, and then a bunch of liquidity-taking stop-losses further down.”

Graphic: SqueezeMetrics unpacks implications of short put options on the limit order book.

This is, to put it simply, due in part to short-term speculators lacking the wherewithal to stay in these margin-intensive positions; as price falls, put buying (covering of shorts, too) takes liquidity and destabilizes the market.

We’re starting to see this activity, in individual stocks, affect the S&P 500 complex, too. 

The CBOE Volatility Index (INDEX: VIX) was higher, with demand coming in across the front area of the VIX futures term structure, mostly; both suggest a demand for hedges and a reduction in the flows (e.g., vanna) that support sideways to higher trade. 

Graphic: Demand for options hedges comes in at the front end of the term structure.

That has already been reflected by the trend of outperformance in the extended day. 

In other words, the front-running of increasingly impactful (and supportive) vanna and charm flows (both of which are tied to the hedging of options exposure), as a result of increased options activity (which, at least at this juncture, exposes customers to high leverage and risk), seems to be changing, slowly. 

We’re (likely) opening sideways to lower today. That’s a change, for once!

With expectations that there may be a front-running of the monthly (OPEX) options expiration (into which the forces that promote pining usually turn stronger with counterparties supplying more liquidity as their long gamma rises), a time when dealer gamma exposure is to decline, allowing for increased realized volatility (as a result of less liquidity), the added demand for hedges (as evidenced by the bid in volatility and VIX term structure shift), is of concern. 

Participants have been uber bullish, up until early this week. Should sentiment turn, and (1) those participants cover their levered, long delta exposure alongside (2) new money hedging, tempo ought to quicken; an abrupt liquidation could be in the cards.

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. 

In light of seasonality, buybacks, and earnings surprises, the potential for a rally into the end of the year remains strong. As a result, we start to look for big picture references where we may see responsive buying. See the graphic below!

Expectations: As of 5:30 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Balance Scenarios: Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,680.25 overnight high (ONH) puts in play the $4,695.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as high as the $4,711.75 regular trade high and $4,722.00 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,680.25 ONH puts in play the $4,658.75 overnight low (ONL). Initiative trade beyond the ONL could reach as low as the $4,619.00 untested point of control (VPOC) and $4,590.00 balance area boundary, or lower.

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Note the low-volume structure beneath current prices. There is the potential for a cave-fill to widen the area deemed favorable to transact at by an increased share of participants. Learn about the profile.

Definitions

Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

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

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

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

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

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

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

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Subscribe
Categories
Commentary

All You Need To Know For November 8, 2021

What Happened

Overnight, equity index futures auctioned sideways to higher alongside an absence in impactful fundamental developments and news catalysts.

Ahead, today, there are no major data releases scheduled.

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

What To Expect

On supportive intraday breadth and lackluster market liquidity metrics, the best case outcome occurred, evidenced by a gap and hold of newly discovered S&P 500 prices.

This activity, which marks a potential willingness to continue the trend, coincides with poor structure, a dynamic that adds to technical instability.

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

Context: The aforementioned trade is happening in the context of interesting developments with respect to fiscal and monetary policy, as well as supply and demand imbalances.

To start, in regards to fiscal policy, ARK Invest’s Cathie Wood thinks that there will be no capital gains tax rate increases and an installment of a minimum corporate tax (about 15%). 

“I think that is one reason the market’s been rallying,” she said in an episode of In The Know. 

In sticking with Wood’s theses, why would the market be rallying if all that we (i.e., the market participants) see, in the news, is heavily focused around fears of inflation, so to speak? It wouldn’t; Wood feels that inflation is on its way out.

Major reasons? 

(1) Productivity increases will offset dented margins and therefore not lead to impactful price increases; (2) turmoil, with respect to China’s housing and financial sector, ought to depress commodity pricing further as “when China has caught a cold, commodity prices get pneumonia”; (3) at-home inventory build-ups may takeaway from consumption during the holidays (for which businesses are scrambling to increase inventories), and this ultimately should be reflected in commodity prices, given excess inventory; (4) disruptive innovation and declining cost curves.

“The markets are conflicting,” she explains. “You’ve got energy and financials at the top for the year, 54% and 35%, respectively. Those two sectors are associated with very strong boom time economies with a yield curve steepening, meaning long rates are rising faster than short rates.”

“That would be consistent with inflation, but the other two top-performing sectors are real estate and consumer discretionary, and those do not benefit from inflation. They benefit from inflation coming down and lower interest rates.”

The bond market, on the other hand, is in the lower inflation camp. At the same time, the dollar is going up alongside assets like bitcoin, often construed as an inflation hedge.

“Could this mean that the velocity of money is going down,” she asks. “Velocity of money has been coming down because people have been saving and putting money into assets.”

This dynamic is supported by disappointing GDP figures with growth coming mostly from inventories; “Real final sales were slightly negative. Could it be … that [millennials] would prefer not to spend on goods and services, but to invest?”

It seems that participants are increasingly extending moneyness to nonmonetary assets – given monetary policies and an environment of debt and leverage that ultimately cuts into asset price volatility – adding to the prevailing risks of carry when volatility does rise and the demand for money pushes deflation.

A great explainer on the growth of global carry is the book titled The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis.

“Ivy Zelman of Zelman Research came out this week. She made a fantastic call on the housing bubble and bust starting in 05-06, and she was right, just a little early. She is very concerned that the housing prices we’re seeing right now are not sustainable,” because of speculation, as well as iBuying and private equity participation. 

For instance, just last week, Zillow Group Inc (NASDAQ: Z), a major iBuyer, sought to raise liquidity, dumping properties en masse.

https://twitter.com/BillyMcFarlend/status/1456357784828715020?s=20

“This is unsustainable … and I’m wondering if even the housing market inflation is going to give way, here,” Wood added. 

That leads to the question: what effects will a taper and the eventual reduction in the Federal Reserve’s balance sheet – a removal of liquidity – have?

Thus far, given monetary frameworks and max liquidity, markets rallies have been enforced by some of the processes embedded within the volatility market. 

To quote Cem Karsan of Kai Volatility: “There’s this constant structural positioning that naturally drives markets higher as long as volatility is compressed, or there’s a supply of volatility.”

“As volatility is compressed, … the hedging vanna and charm flows, and whatnot will push the markets higher,” Karsan added in reference to options sliding down their term structure (vanna) and skew decaying (charm). Both dynamics have counterparties covering their hedges to the most dominant customer positioning in the market (i.e., short call, long put). 

With option volumes now comparable to stock volumes, related hedging flows can represent an increased share of volume in underlying stocks; “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.”

Learn more about the implications of convexity, edge, and risk management, as well as Liquidity Cascades: The Coordinated Risk of Uncoordinated Market Participants.

Aside from a lot of these big picture dynamics – growing derivatives markets and tail risk, the heightened moneyness of nonmonetary assets, trends in seasonality, earnings surprises, and more – we have some more impactful near-term happenings to be aware of.

Graphic: “Whenever the market has been up 20%+ YTD through to October (like e.g. THIS YEAR), it has *always* had an up month in November (albeit with a n=8). Basically I would say it speaks to the momentum in the market, which despite the September stumble seems pretty much alive and well.” – Callum Thomas

The first is fragile positioning. The second is the monthly options expiration (OPEX). 

According to SqueezeMetrics analyses, “middling dark pool sentiment and middling gamma exposure [portends] … 1-month negative returns.”

Alongside that, according to data compiled and analyzed by Pat Hennessy, “2 weeks prior to OPEX (e.g., 7/30/21 to 8/6/21 in this late-cycle) [have] been extremely bullish,” while “OPEX week returns peaked in 2016 and have trended lower since.”

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. 

This comes as investors marked the S&P 500 up to the $4,700.00 strike, at which positive gamma – delta sensitivity to underlying price – is highest. 

In referencing a note I wrote for SpotGamma, “as volatility continues to decline, the gamma of those options, which are now at the money, ought to increase, forcing counterparties to supply more liquidity.”

Ultimately, $4,700.00 ought to be a magnet (or resistance) into that aforementioned pre-OPEX weakness.

This is unless (1) volatility declines markedly, “a tailwind for the S&P complex as options slid[ing] down their term structure would cause dealers to continue covering their hedges in an asymmetric manner,” or (2) more capital is committed to options at higher strikes. 

Graphic: SpotGamma shows large positive gamma at the $4,700.00 strike. “Large options strikes are considered to be support or resistance zones. The change in gamma at various levels over time can shed light on how traders are viewing the market (i.e., adding calls is bullish, puts bearish).”

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

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,674.75 visual low (likely paid attention to by short-term, technically driven market participants who seldom defend retests) puts in play the $4,711.75 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,722.00 and $4,735.00 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,674.75 visual low puts in play the $4,663.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as low as the $4,619.00 VPOC and $4,590.00 balance area boundary (BAH), or lower.

As an aside, the $4,674.75 visual low corresponds with the volume-weighted average price (VWAP) anchored at last week’s Federal Open Market Committee (FOMC) meeting. 

This is 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.

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile.

Definitions

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

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

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

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

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure. In recent history, this reset in dealer positioning has been front-run; prior, there was an increase in volatility after the removal of large options positions and associated hedging.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Subscribe
Categories
Commentary

Daily Brief For November 1, 2021

Abstract

Equity index futures higher. Commodities mixed. Bonds lower. Volatility expanded.

Ahead is a light day of economic releases, in the face of fundamental narratives and positioning metrics that promote less intraday volatility into FOMC.

What Happened

Overnight, equity index futures auctioned sideways to higher as participants seek clarity on the Federal Reserve’s intent to taper asset purchases and hike interest rates.

Ahead is data on Markit manufacturing PMI (9:45 AM ET), as well as the ISM manufacturing index and construction spending (10:00 AM ET).

Graphic updated 6:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. 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

Action: On divergent intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by a spike away from value in the S&P 500 (INDEX: SPX) (ETF: SPY) (FUTURE: /ES).

Intent: The spike (and overnight gap, out of balance) mark a willingness to continue the trend.

Validation: Sideways to higher trade (above the $4,596.50 spike base) validates the market’s prevailing intent to markup prices ahead of impactful events like this week’s meeting of the Federal Open Market Committee (FOMC).

Consideration: Poor structure left behind prior initiative trade adds to technical instability.

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.

Context: On no substantial change in volume and expansion of range, we see the Nasdaq 100 (INDEX: NDX) (ETF: QQQ) (FUTURE: /NQ) trading strong, relative to its peers.

Given where the S&P 500’s price is in relation to the yellow volume-weighted average price (VWAP) anchored from 9/2/2021, the average buyer, since that date, is in a winning position.

Generally speaking, sideways to higher trade, above the yellow VWAP, puts in play the Fibonacci resistances overhead.

Graphic: SPDR S&P 500 ETF (NYSE: SPY) top left, Invesco QQQ Trust Series 1 (NASDAQ: QQQ) top right, iShares Russell 2000 ETF (NYSE: IWM) bottom left, SPDR Dow Jones Industrial Average ETF Trust (NYSE: DIA) bottom right. The S&P 500, in particular, is out of balance on the daily, weekly, and monthly. Key levels – SPY (S~442.00, R~461.58), QQQ (S~369.66, R~391.52), IWM (S~222.58, R~234.53) where S is support and R is resistance.

Further, the aforementioned trade is happening in the context of peak growth, in the face of inflation, uncertainty around fiscal policy (with respect to dynamics like the debt ceiling), and increased prospects of tapering to Federal Reserve (Fed) asset purchases.

The implications of these themes on price are contradictory. 

To elaborate, Moody’s expects the Fed to taper its asset purchases in December by $15 billion. 

Every single month after, the Fed will continue to reduce purchases by $15 billion with the tapering process expected to be done by mid-2022. Proceeds from maturing assets will be reinvested to prevent balance sheet contraction and rate hikes ought to start in early 2023.

Moody’s notes: “Tapering won’t impact inflation. Though tapering won’t be disinflationary, it could help keep market-based measures of inflation expectations anchored, since tapering is the preamble to the Fed beginning to tighten monetary policy either by allowing its balance sheet to decline and/or by increasing the target range for the fed funds rate.”

In terms of positioning, according to SqueezeMetrics, “middling dark pool sentiment and middling gamma exposure [portends] … 1-month negative returns.”

At the same time, SpotGamma models forecast hedging (by dealers who warehouse options risk) may promote tighter ranges as dealers sell into strength, increasingly. Until event volatility leaves the market, post-FOMC, odds of directional resolve will continue to be limited as higher implied volatility takes away from important dynamics that bolster movement.

Couple that with the intent to normalize policy, the environment “creates a little bit of a challenge for [the] equity market because it does change the drivers of equity performance,” says HSBC Holdings Plc’s (NYSE: HSBC) Joseph Little.

Graphic: A “gentle reminder of the fact tapering matters,” via The Market Ear.

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

Gap Scenarios: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,596.50 spike base puts in play the $4,618.50 Fibonacci resistance. Initiative trade beyond $4,618.50 could reach as high as the $4,639.00 and $4,664.75 Fibonacci resistances, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,596.50 spike base puts in play the $4,574.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as low as the $4,551.75 low volume area (LVNode) and $4,526.25 HVNode, or lower.

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile.

What People Are Saying

https://twitter.com/VolQuant/status/1454449320778948617?s=20

Definitions

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

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

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

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

Balance-Break Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) is occurring.

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

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

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Subscribe
Categories
Commentary

Daily Brief For October 29, 2021

Abstract

In sync with bonds, equity index futures were sideways to lower. Commodities were mixed. Volatility expanded.

  • Economic growth rate slows 2%.
  • Fed may not follow counterparts.
  • Increased prospects for volatility.

What Happened

U.S. stock index futures auctioned sideways to lower overnight, within the prior day’s range, as investors looked to price in emerging dynamics with respect to slower growth and inflation, as well as the risks of a taper in asset purchases and a hike in interest rates. 

Ahead is data on income, consumer spending, core inflation, and the employment cost index (8:30 AM ET), as well as Chicago PMI (9:45 AM ET), consumer sentiment, and inflation expectations (10:00 AM ET).

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

What To Expect

Action: During the prior day’s regular trade, on supportive intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by a spike above current S&P 500 (INDEX: SPX) (ETF: SPY) (FUTURE: /ES) prices.

Intent: The spike marked a willingness to continue the trend.

Validation: Overnight, Thursday’s end-of-day price discovery, away from value, was not validated; after two weeks of markup, participants are likely basing ahead of new information.

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

Context: After unimpressive earnings results by Amazon Inc (NASDAQ: AMZN) and Apple Inc (NASDAQ: AAPL), on no substantial change in volume and minimal expansion of range, we see the Nasdaq 100 (INDEX: NDX) (ETF: QQQ) (FUTURE: /NQ) trading weak, relative to its peers. 

This comes as three of the major indices (pictured below) struggle to maintain prices above their September peaks.

Still, as evidenced by where the indices are in relation to their yellow volume-weighted average price (VWAP) indicators, the average buyer, since the last major peak, is in a profitable position. 

Should indices snap lower, those VWAPs ought to serve as dynamic support levels.

Graphic: SPDR S&P 500 ETF (NYSE: SPY) top left, Invesco QQQ Trust Series 1 (NASDAQ: QQQ) top right, iShares Russell 2000 ETF (NYSE: IWM) bottom left, SPDR Dow Jones Industrial Average ETF Trust (NYSE: DIA) bottom right. The S&P 500, in particular, is out of balance on the weekly and monthly, in balance on the daily.

Further, the aforementioned trade is happening in the context of slowing growth, as well as the risks of a taper in asset purchases and a hike in interest rates.

According to a note by The Market Ear, however, JPMorgan Chase & Co’s (NYSE: JPM) Jay Barry believes “Inflation developments have been global in nature and inflation is indeed proving to be less transitory than previously expected.”

“Our understanding of the Fed’s reaction function, as well as our view on likely compositional changes on the FOMC, leads us to believe that the Fed is unlikely to follow its British and Canadian counterparts in raising rates too early simply on inflation concerns.”

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was higher, while the VIX futures term structure settled in contango, shifting a tad higher across the entire curve. That dynamic, coupled with the long-gamma environment, signals a potential for very near-term stability.

On the other hand, according to SqueezeMetrics analyses, “middling dark pool sentiment and middling gamma exposure [portends] … 1-month negative returns.”

That’s in line with what SpotGamma sees as a potential window for volatility – given OPEX – into next week’s Federal Open Market Committee (FOMC) meeting.

“It’s likely that traders will not look to sell volatility on Monday/Tuesday (pre-Fed) which could bring a pause to this market rise.”

Expectations: As of 7:00 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET) in the S&P 500 will likely open in the lower part of a negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Balance-Break Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) may occur.

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,551.75 low volume area (LVNode) puts in play the $4,574.25 high volume area (HVNode). Initiative trade beyond the $4,574.25 HVNode could reach as high as the $4,590.00 minimal excess high and $4,602.50 Fibonacci extension, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,551.75 LVNode puts in play the $4,526.25 HVNode. Initiative trade beyond the $4,526.25 HVNode could reach as low as the $4,510.25 LVNode and $4,495.75 HVNode, or lower.

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile.

What People Are Saying

https://twitter.com/VolQuant/status/1453298446706876422?s=20

Definitions

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

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

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

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure. In recent history, this reset in dealer positioning has been front-run; prior, there was an increase in volatility after the removal of large options positions and associated hedging.

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.

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 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.

Subscribe
Categories
Commentary

Daily Brief For October 20, 2021

Market Commentary

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

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

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

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

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

What To Expect: As of 6:40 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Definitions

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

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

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

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

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

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

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

News And Analysis

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

Sentiment in neutral territory, supporting high index price.

Cryptocurrency versus gold – debating on store of value.

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

Feeling the strain of supply chain issues and high prices.

Global oil refiners cranking up output as margins recover.

Democrats are looking to break stalemate on Biden plan.

Bitcoin futures ETF starts as second-highest traded fund.

What People Are Saying

https://twitter.com/VolQuant/status/1450656933250277379?s=20

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.

Subscribe
Categories
Commentary

Daily Brief For October 19, 2021

Market Commentary

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

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

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

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

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

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

What To Expect: As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Gap Scenarios: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Definitions

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

Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

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

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

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

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

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

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

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

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

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

News And Analysis

Nordea: Is permanent inflation now an alarming consensus?

Evergrande unit has remit funds to pay yuan bond coupon.

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

World facing fiscal problems much worse than from COVID.

Investing prosperously in light of China’s common prosperity.

Bitcoin pushes toward record before debut of ETF products.

What People Are Saying

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Subscribe
Categories
Commentary

Daily Brief For October 14, 2021

Update: This morning’s 7:55 AM ET release of the newsletter failed to include updated S&P 500 levels in the very first graphic, below. That graphic has been updated, now. Sorry!

Market Commentary

Equity index, commodity, bond futures trade sideways to higher. Volatility ebbs.

  • Consumer prices rose. Taper in play.
  • Ahead: Claims, PPI data, Fed speak.

What Happened: After news that consumer prices rose more than expected, alongside the release of Federal Open Market Committee (FOMC) minutes which revealed an intent to taper asset purchases, U.S. stock index futures auctioned higher.

Ahead is data on jobless claims and the producer price index (8:30 AM ET). After is Fed-speak by Lorie Logan (12:00 PM ET), Tom Barkin (1:00 PM ET), and Patrick Harker (6:00 PM ET).

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

What To Expect: As of 6:30 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Gap Scenarios: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

Adding, during the prior day’s regular trade, on positive intraday breadth and divergent market liquidity metrics, the best case outcome occurred; after numerous sessions of a minimum separation in value (i.e., the area where 70% of the day’s volume occurred) failed to support downside price discovery, participants took back Monday’s spike and weak close. 

The activity now puts in play the minimal excess high just short of the $4,408.75 low volume area (LVNode), as well as the $4,415.00 untested point of control (VPOC), two areas where initiative buyers were unable to counter the fading momentum from short covering.

Looking across the spectrum, the Nasdaq 100 and Russell 2000 are firming, relative to the S&P 500 and Dow Jones Industrial Average, two indices that held the relative strength mantle, prior. 

This rotation, if we will, may support sideways-to-higher trade in the coming sessions as participants clash head-on with the 50.00% and 61.80% Fibonacci retracements, levels that overlap key anchored volume-weighted average price (AVWAP) levels.

Note: VWAP is 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. We look to buy above a flat/rising VWAP pinch. Sell below a flat/declining VWAP pinch.
Graphic: SPDR S&P 500 ETF (NYSE: SPY) top left, Invesco QQQ Trust Series 1 (NASDAQ: QQQ) top right, iShares Russell 2000 ETF (NYSE: IWM) bottom left, SPDR Dow Jones Industrial Average ETF Trust (NYSE: DIA) bottom right. Spending more than a few hours of trade above trend, VWAP (yellow), and the 61.80% Fibonacci retracement suggest good odds of upside continuation.

Further, the aforementioned trade is happening in the context of weakness into a seasonally bullish cycle of rebalancing and earnings. 

Some risks include the prospects of tapering off asset purchases, next month, alongside dangerous inflation pressures, as indicated by minutes from the FOMC meeting last month.

“Markets took the hint. Two-year yields are their highest since March last year, when the pandemic first hit,” said Bloomberg’s John Authers. “Meanwhile, the 10-year yield retreated from an approach toward its post-pandemic high. The two-year reflects the now-strong likelihood that the Fed will raise rates within the next two years; the 10-year reflects concerns about growth.” 

In terms of positioning, conditions may be supportive. 

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,381.25 LVNode puts in play the $4,393.75 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,415.00 VPOC and $4,437.75 micro composite point of control (MCPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,381.25 LVNode puts in play the $4,360.25 LVNode. Initiative trade beyond the $4,360.25 LVNode could reach as low as the $4,349.00 VPOC and $4,330.25 LVNode, or lower.

Click here to load today’s updated real-time key levels into the web-based TradingView charting platform. Please note that all levels are derived using the 65-minute timeframe.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

Definitions

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

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.

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.

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

News And Analysis

Consumer prices rise more than expected as energy costs surge.

Global minimum tax pact ups the chance of multinational tax hike.

Global gas crisis is spilling over into the oil markets, IEA explains.

China’s power cuts stressing economic growth and supply chains.

Federal Reserve officials seeing mid-November, December taper.

What People Are Saying

https://twitter.com/lebas_janney/status/1448598501357719557?s=20

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.

Subscribe
Categories
Commentary

Daily Brief For October 8, 2021

Market Commentary

Equity index futures sideways overnight. Volatility ebbs.

  • Senate passed debt-ceiling raise.
  • Ahead: NFP, unemployment data.
  • Clarity regarding tapering by Fed.
  • Responsive selling into RTH high.

What Happened: U.S. stock index futures auctioned sideways overnight alongside news that the Senate passed a short-term debt ceiling increase. 

Ahead is data on nonfarm payrolls, the unemployment rate, and average hourly earnings (8:30 AM ET), as well as wholesale inventories (10:00 AM ET).

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

What To Expect: As of 6:40 AM ET, Friday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 may open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

During the prior day’s regular trade, on strong intraday breadth and divergent market liquidity metrics, the best case outcome occurred, evidenced by the expansion of range and value above the $4,410.25 low volume area (LVNode), between two key anchored-volume weighted average price (AVWAP) levels.

Into the price rise, however, we note that participants sold responsively (i.e., sold in response to prices printing above an area of recent acceptance or balance); as prices came into the resting liquidity (Graphic 2) – also the location of a key AVWAP in – at and around /ES $4,410.25 (SPY $441.00), buying and selling power as calculated by the difference in volume traded at the bid and offer diverged, markedly.

In other words, at the AVWAP – a metric highly regarded by chief investment officers, among other participants, for quality of trade – there were liquidity algorithms programmed to sell.

Why? Liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.
Graphic 1: SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, encounters responsive selling at key volume-weighted average price levels. 
Graphic 2: 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 or balance (i.e., rotational trade that suggests current prices offer favorable entry and exit).

This trade is significant because it suggests a willingness to slow price discovery and balance (i.e., trade sideways as participants look to establish an equilibrium in light of new information). 

We’re carrying forward the presence of a p-shaped emotional, multiple-distribution profile structure (i.e., old-money shorts covering) left behind prior initiative trade, as well as continued trade below the 20- and 50-day simple moving averages; these dynamics induce anxiety and stress for the technical-driven, weaker-handed buy-the-dip crowd.

Further, the aforementioned trade is happening as investors await key employment data that will provide context on what the Federal Reserve with respect to monetary policy.

According to Bloomberg, Friday’s payroll data – which is likely to indicate strong improvement – likely emboldens tapering initiatives and improves the prospects of a rise in the Fed funds rate.

“What we see in the equity space is a lot of sensitivity to higher real yields,” Joseph Little, chief global strategist at HSBC Asset Management, said. “We are seeing policy normalization everywhere. That creates a little bit of a challenge for equity market because it does change the drivers of equity performance.”

Graphic 3: A “gentle reminder of the fact tapering matters,” via The Market Ear.

Adding, earlier this week, we noted that indices were best positioned for a vicious rebound as near-term downside discovery metrics likely reached a limit. These dynamics remain.

Graphic: ​​On October 5, 2021, according to SqueezeMetrics, “Net Put Delta (NPD) and the customer Vanna-Gamma Ratio (VGR) [] settled in a *bullish* place. Risk to the upside.”

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,381.25 low volume area (LVNode) puts in play the $4,415.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,437.75 micro-composite point of control (MCPOC) and $4,481.75 high volume area (HVNode), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,381.25 LVNode puts in play the $4,363.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,332.25 LVNode and $4,278.00 HVNode, or lower.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

Definitions

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

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

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

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

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.

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

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.

News And Analysis

Short-term increase in U.S. debt ceiling passes Senate.

U.S. special operations rotating into Taiwan for training.

Moody’s: Kicking [debt limits] not too far down the road.

Energy Transition: Demand destruction stalking Europe.

APAC CBDCs – pathways plenty, destination uncertain.

Vaccinations and policy decisions are key to EM growth.

Richest Americans flee Treasuries with holdings at lows.

Crypto Mystery: Where’s the $69B behind Tether’s coin.

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.

Subscribe
Categories
Commentary

Daily Brief For October 7, 2021

Market Commentary

Led by the Nasdaq 100, equity index futures were higher. Commodities and bonds were mixed.

  • Relief of worries over debt, energy.
  • Claims and credit data, Fed speak.
  • Positioning suggests risk to upside.

What Happened: U.S. stock index futures continued higher overnight alongside ease in angst over debt and energy worries.

Ahead is data on jobless claims (8:30 AM ET), Fed speak by John Williams (8:40 AM ET), Fed speak by Loretta Mester (11:45 AM ET), as well as consumer credit data (3:00 PM ET).

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

What To Expect: As of 6:20 AM ET, Thursday’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 heightened potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on negative intraday breadth and supportive market liquidity metrics, the best case outcome occurred, evidenced by trade above the level of a key volume-weighted average price (VWAP).

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

Thereafter, equity index futures, led by the Nasdaq 100, continued higher overnight, leaving behind a multi-session balance area (between the $4,363.25 and $4,278.00 HVNodes).

This trade is significant because it marks a rejection, or a willingness to not transact at lower prices. We’re carrying forward, though, the presence of poor structures (e.g., Wednesday’s advance away from session value on a taper of volume, and minimal excess lows which suggest a lack of commitment to take prices lower).

Gap + Balance-Break Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) has occurred.

At the same time, gaps ought to fill quickly. Should any gap not fill, that’s a signal of strength; do not fade. 

Therefore, the objective is to monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

Further, the aforementioned trade is happening in the context of a traditionally volatile October, as well as narratives surrounding adjustments to monetary policy, debt ceiling complications, and energy crises.

These themes support fear and uncertainty; for instance, Nordea believes there are “4 macro reasons why 2022 should be noisier than 2021: liquidity, growth slowdown, cost/margin problems and the risk of the Fed put looking very different if inflation indicators stay elevated.”

However, the Senate is nearing a deal to raise the debt ceiling, relieving the threat of imminent default; this was a likely development given that “lawmakers [knew] that voting against raising the debt ceiling would have enormous economic costs,” Moody’s noted.

Also, on the energy crisis front, Russia offered to export record volumes of fuel to Europe as winter approaches fast.

Given these developments, Tracie McMillion, head of global asset allocation strategy at Wells Fargo & Co’s (NYSE: WFC) Investment Institute said the following on Bloomberg: “We have several things that we are watching right now – certainly the debt ceiling is one of them and that’s been contributing to the recent volatility, … but we look for these 5% corrections to add money to the equity markets.”

Adding, prior to yesterday’s advance, this newsletter noted that indices were best positioned for a vicious rebound as near-term downside discovery metrics likely reached a limit. 

Graphic: ​​On October 5, 2021, according to SqueezeMetrics, “Net Put Delta (NPD) and the customer Vanna-Gamma Ratio (VGR) [] settled in a *bullish* place. Risk to the upside.”

After consolidating for numerous sessions, participants resolved the developing balance area (between the $4,363.25 and $4,278.00 HVNodes) on new information that warranted a directional move. 

In other words, the overnight session confirmed the bull thesis. 

We note, amidst a decline in top-of-book depth, as well as back and forth entry (exit) into (from) short-gamma, we limit our expectations based on some of the recent realized volatility.

In a quote highlighted by The Market Ear, Bank of America Corporation (NYSE: BAC) explained: “last Thursday was the 24th time since 1928 that the S&P experienced two or more 3-sigma shocks in 10 trading days, … [and] only in 3 of 23 episodes (and 1 in the last 50yrs) did the S&P surpass the prior month’s peak in the month following the second shock.”

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,377.00 overnight point of control (O/N POC) puts in play the $4,410.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,437.75 micro-composite point of control (MCPOC) and $4,481.75 high volume area (HVNode), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,377.00 O/N POC puts in play the $4,363.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,332.25 LVNode and $4,278.00 HVNode, or lower.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 7:10 AM ET.

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.

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

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

News And Analysis

NFT game wants you to spend real money buying fake shares.

Senate is poised to pull nation back from default brink, for now.

Global banks retain competitive advantage amid big obstacles.

Russia offers to ease Europe’s gas crisis with strings attached.

Digitalization of markets: how digital bonds can disrupt market.

U.S. utilities and regulators gear up for electric vehicle outlook.

ECB studies a new bond-buying plan for when crisis tool ends.

S&P on navigating a pathway to a low-carbon global economy. 

Rivian’s electric truck gets all attention but fate tied to Amazon.

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.

Subscribe
Categories
Commentary

Daily Brief For October 6, 2021

Market Commentary

Equity index futures, commodities, and bonds trade sideways to lower.

  • Fed action, debt ceiling fear mounting.
  • Ahead: ADP Employment, Fed speak.
  • Indices position for directional resolve.

What Happened: U.S. stock index futures auctioned sideways to lower overnight alongside narratives surrounding adjustments to monetary policy and debt ceiling complications.

Ahead is data on ADP employment (8:15 AM ET) and Fed speak (9:00 and 11:30 AM ET).

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

What To Expect: As of 6:30 AM ET, Wednesday’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 an increased potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on positive albeit weak intraday breadth and divergent market liquidity metrics, the best case outcome occurred, evidenced by trade up to $4,358.00, the level of a key anchored volume-weighted average price (VWAP).

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

Thereafter, equity index futures, led by the Nasdaq 100 and Russell 2000, liquidated overnight, leaving behind Tuesday’s prominent point of control (POC) before finding responsive buyers at a key high volume area (HVNode) for this most recent developing balance area (between the $4,363.25 and $4,278.00 HVNodes).

This trade is significant because it marks acceptance, or a willingness to transact at lower prices. We’re carrying forward, though, the presence of poor structures (e.g., Friday’s advance away from session value on a taper of volume, and a minimal excess low, suggests a lack of commitment to take prices lower).

Given the overnight gap inside of balance, the following scenarios apply.

Balance-Break Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) may occur.

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

Further, the aforementioned trade is happening in the context of a traditionally volatile October, as well as narratives surrounding adjustments to monetary policy and debt ceiling complications.

Despite these themes supporting fear and uncertainty, Marko Kolanovic, JPMorgan’s chief global markets strategist, said the following in a note Monday: “We do not believe the recent bout of de-risking will lead to sustained falls, and maintain the stance to keep buying into any weakness.”

On the other hand, in support of continued volatility, Nordea believes there are “4 macro reasons why 2022 should be noisier than 2021: liquidity, growth slowdown, cost/margin problems and the risk of the Fed put looking very different if inflation indicators stay elevated.”

Graphic: According to Nordea, “The Fed is also quickly moving closer to a tapering decision, which now sounds almost as a done deal for November. The previous three episodes of QE tapering have all gone hand in hand with rising volatility. Our scenario with Fed rate hikes in the second half of 2022 would add to those volatility risks.”

Prior to yesterday’s advance, this newsletter noted that indices were best positioned for a vicious rebound as near-term downside discovery metrics likely reached a limit. 

Graphic: ​​On October 5, 2021, according to SqueezeMetrics, “Net Put Delta (NPD) and the customer Vanna-Gamma Ratio (VGR) [] settled in a *bullish* place. Risk to the upside.”

The overnight liquidation challenges that thesis, putting indexes in a peculiar position; it’s likely that participants are seeking more information to base a directional move.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,278.00 HVNode puts in play the $4,332.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as $4,349.00 untested POC (VPOC) and $4,410.25 LVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,278.00 HVNode puts in play the $4,260.00 overnight low (ONL). Initiative trade beyond the ONL could reach as low as $4,233.00 VPOC and $4,202.25 LVNode, or lower.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

Definitions

Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

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

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

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

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

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

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.

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

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. To note, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive). In conjunction with the rapid recovery, lower rates solicit hawkish commentary as policymakers look to inhibit inflation.

News And Analysis

‘Volmageddon’ history as SEC greenlights leveraged VIX ETFs.

World trade rebounds at a faster clip than was initially expected.

Treasuries’ pain deepened amid the grimmest year since 2013.

European gas surges 60% in two days as EU sounds the alarm.

Unrelenting political brinkmanship edging U.S. closer to default.

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.

Subscribe