Our View
The Whipsaw Continues
It’s been a very ugly start to 2022 and it seems like traders are bracing for more downside. Yesterday Fed Chairman Jerome Powell didn’t rule out that a rate increase could come at every meeting in 2022, starting in March.
Everyone thought the ES was going to rip after the Fed headlines and instead it crashed. Interestingly, we are seeing mini crashes every day and it’s becoming the new normal. As I’ve said, the current price action is the worst since the credit crisis.
As of yesterday’s close, the S&P has declined in 5 of the last 6 sessions and in 12 of 16 sessions since hitting new all-time highs earlier this year.
The VIX — AKA the fear gauge — made a low at $26.90 yesterday before rallying all the way up to $33.04 and settling at $31.95.
I’m going to keep this short and sweet: We all know what the markets are up against and none of this is set to change anytime soon.
Our Lean
Our lean is to sell higher open or any big short-covering rallies and look for new lows eventually. The first level is the 50% retracement of yesterday’s range that comes in at 4370. If that fails, Tuesday’s high in the 4406 to 4410 area would be the best setup.
The ES and Nasdaq ran a ton of buy-stops yesterday and today the downside sell-stops should come into play. Happy hunting to you!
Update: The ES traded up to 4368 on Globex and sold off all the way down to 4276.25 after the DAX opened lower and rallied 500 points straight up. Today should be an inside day. We are sticking with the earlier call to sell the ES above 4400.
My guess is the ES comes in fades this morning then rallies. With the Fed out of the way, the markets are going to continue the downward spiral and take out the 2022 low at ~4212 set on Monday.
Daily Recap
This one’s a little longer because of the Fed Day.
The ES opened at 4413.25 and sold off down to 4394 at 9:36. From there, it rallied about 40 points up to 4437 at 10:04 and dropped 56 points down to 4381 at 10:48.
After the drop, the ES traded back up to 4420 at 11:42 and sold back down to 4403.25 at 11:52, before rallying back up to 4427 at 12:45. After another small pullback and a lower high at 4426.50, the ES got hit by a sell program going into 1:00 that pushed it down to 4408.25 in less than 3 minutes.
Notice how the rips and dips are now 20 to 50 handles apiece and not just 10 handles.
At 2:00 the Fed headlines started to hit: FED SAYS IT ‘WILL SOON BE APPROPRIATE’ TO RAISE FUNDS RATE.
The ES initially spiked up to 4446.25, pulled back to 4426 a few minutes later, bounced back to 4446 — 20 handles whips — and finally fell more than 50 handles to 4393 just seven minutes later around 2:15.
For the next 30 minutes, the ES mostly chopped between 4390 and 4425. Eventually, that range gave way as support broke and the ES dropped down to 4354 at 2:50, down almost 90 points from the 4446.25 Fed-headline high.
It wasn’t done, though. After a ~20 point bounce, the ES dropped to 4307 at 3:10, traded in another wide 20 to 23 point range, then made new lows at 4294.25 at 3:24, 152 points off the high of the day.
Another day, another 100+ point range day in the ES.
However, the bulls found their footing to some degree, with the ES jumping back up to 4343 at 3:41 (up about 50 points) and as the early MIM was showing $200 million to buy. It traded 4329.50 as the 3:50 cash imbalance showed $1.1 billion for sale. The ES dipped, then traded 4340 on the 4:00 cash close.
After 4:00, the ES traded between 4326 and 4345 before settling at 4338.75 on the 5:00 futures close, up 32.5 points or up 0.75% on the day (measuring from one settlement to the other). From cash session to cash session, it was a slight decline for the day.
In the End
It was a very ugly day of giant reversals. The NQ was up over 759 points at its high (from yesterday’s low) and then fell over 660 points to Wednesday’s low.
In terms of the ES’s overall tone, it was fine until 1:00 then turned extremely negative after the Fed headlines and Powell spoke. In terms of the day’s overall trade, it was steady but exploded after the Fed, with total volume of 2.36 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 Edge
- NYSE Breadth: 65% Downside Volume
- NASDAQ Breadth: 63% Downside Volume
So not only was there no rate hike on Wednesday (which was in line with expectations), the Fed’s tone was not surprisingly more hawkish; Nothing that implied a 50 basis point hike in March — like some had been saying — and a regular tapering of asset purchases.
While the Fed is undecided on when to start reducing its balance sheet, Powell did say, “I think there’s quite a bit of room to raise interest rates without threatening the labor market.”
Of course, it’s now up to the market to decide how this is interpreted and it goes one of two ways.
- The Fed (approximately) stuck to its plan, did not become more hawkish overnight and will continue forward — What a relief! Buy the Dip!
- The Fed did not fold in its staredown with the S&P 500 and become more dovish overnight — Crap! Keep selling stocks like it’s Q4 2018!
Game Plan
The SPY is gapping up about 80 basis points on the open and you know how I feel about gap-ups during downtrends.
We remain below the 200-day and in a downtrend, and while we can (and likely will) see a snap-back rally at some point, you must keep the current trend in mind.
I cannot reiterate enough the positive results of “Keep It Simple.”
I don’t care what anybody says: This is a tough tape to trade and if you have a dull edge, there’s no use trying to cut through it. More likely than not you’ll just get hurt.
If the edge is there, take it. That has been the case with XOM and energy this week. It’s why we’re up at a time when so many traders are down. While it has limited us to just 1 to a handful of trades a day, we have our account moving in the right direction and more importantly, our mental capital is safe.
Sometimes, less is more.
S&P 500 Futures and SPY
The SPY continues to build below last week’s low of ~$438. For the ES, that’s ~4381 and it too continues to build below it.
We need to see the SPY reclaim this level and regain $440, then the 200-day. For the ES, that’s ~4400 and the 200-day.
If the bulls can do that and clear the declining 10-day — keep in mind, this has been active resistance for both the SPY and ES — we could see a sizable short-covering rally take hold.
However, that rally doesn’t start until we’re able to reclaim the above levels.
On the downside, keep an eye on the 50-week moving average and the weekly VWAP measure. If we fade from this morning’s gap-up and fail to hold these levels, the $426 to $429 zone is back in play — which has been support the last two days.
Below $426.36 and Monday’s low is on deck.
Individual Stocks —
Energy
We have been all over energy lately and doing a really good job extracting profits out of this one — the only one that has kept a semblance of an uptrend in this mess.
Gapping higher today as oil hits new 2022 highs though, and there is a bit of bearish divergence on the chart. Divergence doesn’t mean much without some sort of rotation or reversal, but it does have me hitting pause.
If energy was flat and/or gapping down, it would be an easier trade on the long side. A gap-up makes it harder.
Above yesterday’s high that fails to hold and/or below last week’s high at ~$65.50 and the XLE may need to rest more. Keep an eye on oil.
MCD
Not typically a trade candidate, MCD is interesting as it’s gapping down a couple of percents but right into the December low and the 200-day moving average.
If we undercut the low at $243.95 and can bounce from the 200-day back up through this market, we may have a decent bullish reversal on our hands — particularly if the S&P doesn’t fall on its face today.
AMD
I almost took a late-day trade in AMD yesterday but held off because of the hoopla with the Fed. Let’s see if we undercut yesterday’s low around the 200-day or can get some kind of early reversal in the first 15/30/60 minute window.
The stock is gapping down this morning but trying to bottom in the short term. INTC reported last night, so keep an eye on that vs. how it could impact this space.
Go-To List: Keeping It Short
- NVDA — again — One to watch for stabilization around the 200-day
- PG — keep an eye on yesterday’s and last week’s low ($156.38 and $156.04, respectively). PG gave us a nice trade last week, can it again? Y’day low comes into play near the 50-day. An undercut and reversal could be a good R/R.
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.
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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