Our View
People lose track of the trend when the ES pulls back and start thinking the markets are going back down. If there is one rule of thumb, it’s that the trend is your friend.
After a 278 point and 6% rally off the 4520 low, the ES pulls back 28 points and the world is coming to an end. That’s losing sight of the trend. Pullbacks are just pullbacks…not bearish signals.
The ES is up 27.5% this year. Who won? Not the bears!
As I have said, no one knows for sure what the ES is going to do next. Can the ES sell off? Sure! Will it? I doubt it.
The simple fact of the matter is that the S&P rises more than it falls and the average annual gain outpaces the average annual loss. While the crashes and scares sell the best, they are not something we should expect on a constant basis.
If you want numbers with those claims, it looks something like this:
We are looking at an investment that has delivered a 78.5% win rate since 1950, and an 82.8% win rate when including dividends. In the up years, it has generated a 17% return, and in the down years, it’s only lost about 12%. Just once has it doled out three straight losing years, but 10 times it has doled out three or more consecutive years of gains.
If you walked into a casino that had a similar setup, where would you place your bets? A casino would never have this game unless investors could only bet on “down,” because the house would always bet on “up.”
Our Lean
I think there is a high probability that the ES trades up to 4850 in the next few days. Let the sellers get short and put in their buy stops because it will only help the bulls’ cause. You can sell the rallies and buy the pullbacks or just follow the trend and buy the dips.
Daily Recap
The ES traded up to 4797.25 on Globex, just 2.75 points off 4800, and opened Tuesday’s regular session at 4787.50.
It jumped two points, then dropped 7 handles down to 4782.25 at 9:40 am. After the drop, the ES made a new high at 4792, backed down to 4685 and then had another quick pop up to 4798 going into 10:00. That ended up being the high for the day.
After the high, the ES sold off down to 4783.75, rallied back above the VWAP up to 4790.25, and then dropped down to 4780.75 at 10:20. It tried one more time to take out the high, but fell short by about 1 point, exhausting the buying power at that point after Monday’s big rally.
The ES gradually pulled back down to 4681.75, rallied back up to 4791.75, and then fell hard down to 4770.50 at 12:35. Just before the drop I posted this in the MTS chat:
- IMPRO: Dboy :(12:18:01 PM) : seems a tad weak
- IMPRO: Dboy :(12:18:17 PM) : maybe another flush but big to buy today
When there’s very little volume, there can be very little traction. We saw that on Tuesday.
After the drop, the ES rallied back up to the 4782 level at 2:00, then fell another 10 points back down to 4772.50 before popping 9 points as the early MIM showed $164 million to sell. The ES pulled back down to 4775.50 and then traded up to 4787.25 at 3:48. The ES traded 4784.25 as the 3:50 cash imbalance showed $466 million to sell and traded down to 4775.25 at 3:53.
It finished the 4:00 session at 4780 and settled at 4781 at the 5:00 futures close, roughly flat from the prior settlement, but 17 points off the morning high.
In the End
In the end, it was a very slow day. In terms of the ES’s overall tone, it was firm early and got a little weak on the decline. In terms of the ES’s overall trade, volume was low at 923,000.
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: 40.6% upside volume
- NASDAQ Breadth: 31.3% upside volume
Tuesday was what I call a “no day.” It didn’t give us much to work with on the upside and we haven’t had enough corrective action on the downside. That’s fine. Not every day has to be littered with trades.
Our reversal trade in AVGO paid well and while we didn’t quite get the technical triggers for TSLA, the short worked there too if anyone took it.
Combined with Monday’s trade in AMD, it has us pausing coming into Wednesday. As I mentioned on Monday, there may be a day or two where there is no game plan for the day as our patience has worked quite well for us this month.
I will recharge and look for opportunities throughout the day. If something meaningful develops, I will send an afternoon update. Otherwise, let’s prepare for Thursday as we gear up for 2022.
Economic Outlook
Comments are closed