Markets Stuck In Riptide of Liquidity

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Alex Partida

Oct 05th 2022  .  3 min read

Markets Stuck In Riptide of Liquidity

As the closing bell rang yesterday, the markets found themselves swimming in a pool of liquidity. As discussed in the market brief yesterday, this area would affect the market trend today. 

The areas between the 15-day simple moving average (SMA) at 3,780 and the 21-day exponential moving average (EMA) at 3,820 have created an impactful zone on the chart. Why? It has four levels of support and resistance converging together. Squarely between the 15-day SMA and the 21-day EMA, you’ll find the point of control (POC) at 3,792 and the psychological level at 3,800. Combined, these levels form a large pool of liquidity that drowns any meaningful price action, as we saw today. 

If the S&P is to escape the riptide of liquidity, it will need to break through these support and resistance levels and hold. 

Why was the market choppy today?

As prefaced on Tuesday, in the article “Is Market Spike A Continuation Rally or Bull Trap“, the possibility of gapping below the area was likely.

“Because the zone between the 15-day SMA and 21-day EMA are so tight, the cash session may open tomorrow above or below the area. Depending on where it opens, these levels can act as either support or resistance.”

This scenario is exactly how the market opened and reacted. Throughout the night, the market crept lower and eventually broke the 3,780 level before the opening bell sounded. At the open, the S&P tried to retest the level, but just as acknowledged, the resistance held strong sending the market lower.

Price action attracted to liquidity

When the market has closely stacked areas of liquidity, it can act as a magnet for price action, preventing it from moving too far away. 

This magnet analogy perfectly explains what happened today after the morning sell-off. Price broke below the 3,780 level, but it couldn’t break through the attraction. 

For the remainder of the trading session, the S&P 500 consolidated between 3,820 and 3,780. If these levels hold for the remainder of the week, the market will have accumulated a substantial amount of potential energy. When this happens, price action will usually move up or down, breaking through the areas of support or resistance. This is commonly known as the squeeze. For more information about how to trade this type of price action, read this article.

Economic data before the open

The initial jobless claims report will be released at At 8:30 a.m. EST Thursday morning. This report can potentially impact price action and should be noted. 

The market fights back but closes negative

The Nasdaq and the S&P 500 were slightly negative to close the day. The S&P 500 closed down .03%, losing 34 points, while the Nasdaq closed down 0.31%, a loss of 11.76 points. The Dow was down 68.47 points, losing .23%.