Pre-Market Outlook – 7/19/2021

Due to time constraints, this will be an abbreviated version which I will supplement later this morning. Make sure you have the CBOE put/call ratio up somewhere on your screens – as the shorts will run for cover at some point in a squeeze. The ratio is at the high end of the pandemic range. Also, review “View from the Top” published this morning.

This large gap will cause an increase in volatility which opens the door to higher volatility options trades. This same volatility also makes day trading more lucrative than usual as the setups are the same, but stocks travel further and faster.

Gap rules are in play, to put it mildly. Overnight inventory is close enough to 100% net short. We have lots of market profile levels around where we will open and just below. Focus on the prominent VPOC’s at 4256.25 and 4239 and the GAP top and bottom at 4251.25 and 4246.25. The overnight halfback could also be a key pivot point at 4292. Take all of the levels in order – looking for pivots, as well as acceptance above or below. Always remember that the market likes the ’50 point increments, so all the points congregating around 4250 could likely provide the initial support in this decline.

Focus also on bigger picture dynamics today. This overnight move has futures trading well below the 21-day line on the S&P 500 (4200) and to a lesser degree on the Nasdaq 100 (14545) as well. This is noteworthy for both futures. In the S&P 500, there is potential to trade to the 50 (about 4230), while in the NASDAQ 100, it’s quite a bit further away (currently at 14017). When volatility gets elevated, your focus should shift away from more nuanced/granular levels and more towards the larger signposts that everyone trades on the daily charts.

As with any large, true gap, the potential for an early fade is there. Early failure to take out the ONL can be a signal. Aggressive traders can also buy the high of the first one-minute bar or repurchase the cross through the open should the opening drive be lower. Monitor for continuation and target overnight halfback first. Be very familiar with gap rules #2 and #4.

Any continuation lower (trending day) obviously needs acceptance below the ONL first. Internals will be important to note. Downside follow-through is often accompanied by a lack of positive ticks for the better part of the first hour.

If I haven’t stressed it enough, don’t assume you need to catch anything early on these days. Large gaps are the hardest type of day to trade early, as all moves are against the backdrop of how much the market has already moved overnight. It’s hard to trend early on top of that.

Good luck today.

A.F. Thornton