Our View
The ES and NQ shook off the weakness and closed on the highs of the day, but the funny thing is that it was done on negative upside/downside volume. For years now, the PitBull has said that none of the old indicators work anymore and this breadth observation is a great example of it. Like we always say, it’s definitely not our fathers’ markets or charts!
Here is the Ned Davis S&P and Nasdaq cash study for the 2021 December options expiration.
Our Lean
The Fed’s two-day meeting and the December options expiration should make for another volatile week. I know the bears are still licking their teeth, but I’m sorry, this is not the time for that. Friday’s close made that clear.
I said it two weeks ago and I’ll say it again: As fast as the ES sells off, it will go up even faster. I don’t think this happens today, but there will be days going into the end of the year where there are 100-handle ranges to the upside. There are some risks — like the Russians on the Ukrainian border and some low chance the Fed will say something about speeding up the rate hikes — but they won’t keep the markets down for long.
Our Lean: Selling the higher opens or the first rally above the gap-up has been a very profitable trade this quarter, but it’s counter-trend trading and risks throwing you off the overall trend, which is up.
I am not saying you can’t play both sides, but we are going to continue with our long-side bias and call for ES 4850 or higher. I’m not ruling out 4900 or 5000 eventually, but we need to see 4780-4800 first. So be smart, be patient, and buy the 30- to 40-point pullbacks just like Friday.
The Opening Print Recap
After closing at 4668.50, the ES rallied all the way up to 4699 on Globex. That came after the inflation report showed the consumer price index (CPI) rose 0.8% for the month and 6.8% on a year-over-year basis. While not a good reading for inflation, it was in line with expectations. In other words, it didn’t come in “too hot” and is giving investors hope that perhaps we are near some kind of peak.
However, the market couldn’t hold those gains going into the 9:30 open, which was down about 10 handles from the Globex high, at 4689.25. From there, the ES dipped down to 4686.50 and then rallied up to 4697.75 at 9:40.
The ES then dropped down to 4677 at 10:00, rallied up to another higher low at 4692.50, and then dropped almost 30 handles down to 4661.50 — just above the Globex low at 4657.
After the low, the ES chopped between 4672 and 4692 until the final 30 minutes of the regular-hours trading session. Just after 3:30, the ES traded up to 4696.25, dropped to 4689.75, and then rallied up to a session high of 4705.25 as the cash imbalance showed $2.36 billion to buy. The ES closed at 4703.50 and settled at 4704.75 on the 5:00 futures close, up about 36 points or 0.78% on the day.
In The End
In the end, it was a big push-pull type of trade, meaning the programs would push it up and then pull it back down. In terms of the ES’s overall tone, it acted firm. In terms of the day’s overall trade, volume was steady at 1.67 million contracts traded.
As we all know, there’s no crystal ball when it comes to trading stocks, options, or futures. But the Market Imbalance Meter may be as close as it comes. Knowing how the “Big Money” is placing its bets can give our trading room a big wave to ride — or a warning sign to stay out of the water. Come check it out now, risk-free for 30 days.
Technical Breakdown
- NYSE Breadth: 54.3% upside volume
- NASDAQ Breadth: 47.75% upside volume
It’s about 5:15 am and the futures are creeping higher to start the week. The ES is up 30 basis points, while the NQ is up 40 basis points. The Dow and Russell are in similar positions, with each up 0.23%.
Last week, I wrote:
“I’d love to see the S&P 500 finish in a weekly-up setup. The Nasdaq could too, but an inside week wouldn’t be bad either, as it has yet to fire above last week’s high.”
That’s exactly what we got with Friday’s late-day push cementing the setup coming into this week. Without any headline drama over the weekend, it should be an interesting week. However, I must note a couple of things.
Watching
It’s Opex week and that means we could get a potentially choppy couple of days. Adding to it, it’s quad-witch expiration as well. Opex weeks have a tendency to be choppy in the first few days of the week, killing off some of the time premium heading into the later part of the week.
Only this time, we also have the Fed’s two-day meeting too, with announcements due up at 2 pm on Wednesday. So keep these things in the back of your mind in relation to position sizing, entries, and risk.
Further, I want to add a note about inflation. For months now, inflation has been a major headline risk, even though it hasn’t resulted in lasting market damage (so far). If inflation can swing from a headwind to a tailwind (i.e. we have peaked in inflation and get some month-on-month declines), then this could be good for stocks.
S&P 500
On the S&P 500 chart above, I outlined the prior week’s high at ~4673 and low at ~4495. We went weekly-up on Tuesday, then held that level as support for the rest of the week. That’s very impressive action!
The back-to-back strong breadth days on Monday and Tuesday really helped here, even with some mixed-breadth days later in the week (I attribute this to “Roll Day” in the index futures and some choppiness ahead of this week).
In any regard, the SPX now finds itself near 4720 resistance. The upside is pretty straightforward: Clear 4720 to get to the ~4744 all-time high. Keep in mind that the new upside extension is all the way up near 4,900.
On the downside, I want to hold 4672 as support (again, the high from two weeks ago), as well as the 10-day and 21-day moving averages. Do this and we have a recipe for a strong finish to 2021.
Nasdaq
The above chart has the daily chart on the left and the weekly chart on the right. It does a great job of showing the “inside week” on the right. Regarding the potential for an inside week last week, I wrote:
“A rotation higher that’s not a false breakout likely puts 16,150+ in play. For this decline, we had a peak-to-trough fall of 7.9%. That’s pretty normal based on this year.”
A rotation higher could immediately put 16,000 in play, followed by the 16,150 level and the all-time high up at 16,212. Above 16,250 and the new upside extension near 17,000 could be on the table.
On the downside, we want to see the Nasdaq hold 15,500. A break below could put the 50-day moving average in play, followed by the gap-fill level at 15,280.
A lot of investors are scared and nervous of a big pullback. Maybe it happens, but as of now, the bulls are in control. Until they concede, we are sticking with the upside bias.
Individual Stocks — PFE, F, AAPL
The homebuilders all continue to trade incredibly well. I know we have been going on and on about these names, but keep that in mind going forward for buy-on-dips candidates.
Pfizer
Pfizer had a nice rally to new highs, followed by a bull flag consolidation back down to the 21-day moving average and the prior high. If we can get a two-times daily-up rotation over $52.84, it opens the door to $55-plus.
Ford
Ford had an explosive breakout over $20.50 on Friday. As long as it holds this level on the dips, bulls can stay long. Keep the $21.25 level in mind. That’s the 261.8% extension of the big range (from the Covid lows).
However, as long as Ford can build above $20.50, the 261.8% extension of the current range is in play, near $23.
Apple
I love Apple long-term, hence my upside extensions. However, I am a little cautious of the stock here.
Bulls are gunning for the $3 trillion valuation and closed Apple near the highs on Friday. It’s early, but they have the stock higher by 1.1% in the premarket thus far. Up about 2% and it will have the new $3T valuation.
That’s fine and dandy and if it can gap-and-go, then woo-hoo! But a gap-up that fades and loses Friday’s close near $179.50 may be a reversal. It could be short and sweet. Or it could cause Apple to reset.
Like Friday’s warning on Apple: It’s not a bearish get-levered-short in AAPL, but just a warning.
Watchlist
The Nasdaq has potential for an inside-and-up week, and so do a few tech stocks, including SNOW and DDOG. Both of these stocks were in prior strong uptrends.
One word of caution: If we do get the weekly-up trigger — particularly right off the bat this week — just be leery of a failed rotation, meaning the stocks peter out after the rotation and it ends up being a failed move. There’s patience and then there’s stubbornness. Don’t get caught in the latter.
Disclaimer: Charts and analyses are for discussion and education purposes only. I am not a financial advisor, do not give financial advice, and am not recommending the buying or selling of any security.
Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!
Economic Outlook
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