One of the things about trading the S&P 500 futures is knowing when the move has already happened. During Friday’s trade, I saw the lows of the day forming as the S&P futures (ESZ15:CME) were getting ready to moving higher, and I was right about the low as the futures moved up accordingly. However, knowing when an S&P rally is exhausting itself is just as important. Instead of a late Friday rip, it became a late Friday Flunk-A-Dunk, as the bio-tech sell off pushed the equity indexes lower into the later afternoon.
The S&P rallied late Thursday when Janet Yellen signaled confidence in the US economy and laid out the case for raising short term interest rates sometime before the end of 2015. The spillover of weakness in the bio-techs kept a lid on the S&P, and after a nearly 12-handle rally from the early low, to the 1942.50 cash session high, the S&P got hit by wave after wave of sell programs, knocking the ESZ15 down 28 points in an hour, and overall fell 40 handles from its overnight high.
I have to be honest: I thought the price action was pointing to a ‘Late Friday Rip’ and I was 100% wrong. The Dow Jones futures (YMZ15:CBT) was up as much as 250 points before tanking in the afternoon. It still managed to close up +0.70% at 16,171. The S&P and Nasdaq futures didn’t fare as well. The ESZ15 fell 32 points in the late day selloff, all the way down to 1910.25, but settled at 1919.20, up .40 cents on the day. The Nasdaq futures (NQZ15:CME) got hit the worst, the futures made a high at 4298.50 on the regular session and sold off all the way down to 4185.00, falling 113 points in over the course of the day.
Overnight the S&P futures opened at 1915.50, and proceeded to trade 10 handles lower in the first hour of Globex, making a low of 1905.25, before rallying 2 ticks shy of 25 handles into the early Euro session. We have started pointing out 3:00 am CT as a key globex pivot, and last night it’s where the futures saw their big turn. After trading up to 1929.75, the index futures pushed lower back below the early globex low to trade at 1903.75, and now at 6:30 CT it sits nearly 10 handles from that low at 1912.25.
UGLY WEEK AHEAD
According to Goldman Equity Derivatives Strategist Krag “Buzz” Gregory, the options market say the S&P 500 Is poised for a major move this week. Gregory says the S&P 500 straddle, a trade that profits if the market goes at least a certain magnitude either up or down, is pricing in a gain or loss of 2.4 percent this week, based on options set to expire on Friday. As such, the ESZ15 (S&P 500 futures) that closed at 1919.20 on Friday, would have to fall below 1885, or rise above 1980 this week for options traders to make a positive return on the straddle trade. As we have pointed out traders are going to have their hands full digesting all the economic and fed speak this week. The top releases this week start with the ISM Manufacturing index, and Non-Farm Payrolls reports for September, due out on Thursday and Friday. According to Bloomberg, even with a jam packed economic calendar, expectations of larger than normal ranges are expected. Goldman’s Gregory said that “While the straddle price is down from a local high of 4.7 percent in August, the expected move of +/- 2.4 percent is 1.7 times its median level 1 week prior to payroll releases over the last year,” wrote the strategist. Gregory also also notes that the spot level of the VIX index, which measures the implied volatility of the S&P 500 over the next thirty days, indicates that “volatility is searching for a new home.” At 23.6, the spot level of VIX is between 18, a level Goldman thinks is consistent with where the economy is in the business cycle, and 26, which constitutes recession-level volatility.
In the end, we have said it before and we will say it again; No one promised us a rose garden, and the end of the Q3 and the beginning of Q4 is going to be an extremely volatile time. Keep your powder dry and your stops tight.
In Asia, 6 out of 11 markets closed lower (Shanghai Comp. +0.27%), and in Europe 9 out of 12 markets are trading lower (DAX -1.44%) this morning. This week has a very high level of economic fed speak. There are a total of 21 economic reports, nine T-bill or T-bond auctions or announcements, nine Federal Reserve Bank president speaking, Janet Yellen speaking, and Friday’s jobs report. Today’s economic calendar starts with William Dudley speaking, Personal Income and Outlays, Pending Home Sales index, Dallas Fed Mfg Survey, Charles Evans speaks, and John Williams speaks.
3 TRADING DAYS LEFT IN Q3
Our View: I called it and traded the first part of Friday correctly, then got punished late in the day when I tried to buy the ESZ. I also have to admit that it has not been an easy trade. Some long time traders I speak to are not trading because of how unpredictable things have become. It’s easy to get whacked around if you’re not using your head. Long before Goldman’s Gregory was calling for an increase in volatility this week, we had been warning people about the last trading week in September. One of the things I am not fully convinced about is that traders are actually looking at any of the long term statistics that show up going from August into the end of October. The PitBull got me to start looking at stats, and I encourage you to go get yourself a copy of the Stock Trader’s Almanac by Jeffrey and Yale Hirsch, https://www.stocktradersalmanac.com/. Jeff is a great guy and a good friend and I follow his work everyday.
1900 SELL STOPS
Our view is that the markets are going to continue to frighten people. I do agree with Goldman’s Gregory that the markets are going to be moving this week, and something tells me its gonna get ugly. As for the ESZ, the Globex low came in at 1902.25, it’s my guess we see some type of retest, but the problem is all the sell stops below that level. The ESZ sell stops start under 1903 and initially go down to 1894-96, but we’ll probably see them all the way down to 1885. We all know when there is this much going on the algos will be taking full advantage. I want to get a look at the first 20 minutes of trade before I make any trades.
As always; please use protective buy and sell stops when trading futures and options.
- In Asia 6 out of 11 markets closed lower : Shanghai Comp. +0.27%, Hang Seng +0.43%, Nikkei -1.32%
- In Europe 9 out of 12 markets are trading lower : CAC -2.03%, DAX -1.44%, FTSE -1.48% at 6:00 am CT
- Fair Value: S&P -10.05 , NASDAQ -13.65, Dow -110.75
- Total Volume: 2mil ESZ and 5.4k SPZ
- Economic calendar :William Dudley speaks, Personal Income and Outlays, Pending Home Sales index, Dallas Fed Mfg Survey, Charles Evans speaks, John Williams speaks.[s_static_display]
No responses yet