Our View
As traders, we are always learning new things. However, I have long said, the strategies we used to use to make money do not work and the new strategies that make money only last until it’s programmed into a bot.
A trader told me that during times of extreme volatility, the programmers turn down the algorithmic and high frequency trading programs. I believe it, but certainly not all of them. The main bot that’s been pushing things around since last Friday has been buying stocks nonstop. From Friday’s low to yesterday’s high, the ES and NQ have rallied ~225 and 1,054 points, respectively.
I understand why the markets sold off and why they’ve been going up the last two days. I also understand that this rally could continue, but I don’t think the selloff is over. There are just too many big obstacles and it’s too early in the year to say “the low is in.”
That comes hard for me because I’m a bull market guy, but things still have a shaky feeling to them.
How does this term work? — “You can’t make this stuff up.”
The ES has rallied 240+ points from the January low and closed out the last trading day of the month up 2% on the day, but down 5.3% for the month. It took a two-day 7.7% rally from the lows in the NQ to save it from its worst January performance in 50 years.
When the S&P has fallen 5% or more in January, it has gone on to gain just 2.7% on average in the rest of the year. The tech-heavy Nasdaq fell 9% in January, its largest one-month decline since March 2020.
Our Lean
In the last two days, the MIM buys have totaled more than $5 billion, but the total buying from Friday’s open to Monday’s close is in the $10s of billions. You could see how powerful it was late Friday and you could clearly see it on all the 10- to 15-handle pullbacks yesterday. I tried not to over-forecast the down move because when the S&P and Nasdaq fall that hard, they generally bounce hard. Combined with the end of January rebalance, it helped create a major short squeeze.
Yesterday when the ES was going up I started talking about the 50% retracement from this year’s range, which comes into play at 4510. We’ve also talked about that level in the technical portion below. Now look at yesterday’s high (4507.75).
While I can’t rule out money being put to work on the first few days of February, I don’t think it will be as explosive as the last few days.
My lean is to sell the early rallies and look for a 30- to 40-handle pullback, which should help set up a late-day rally.
Daily Recap
After rallying hard late Friday, the ES sold off down to 4495.50 on Globex and opened Monday’s regular session at 4415.50 and quickly dropped down to 4402.75.
From there, it rallied 54 points up to 4456.75 at 10:10 am, then up to 4463. The ES then pulled back a bit and consolidated the big morning pop. Shortly after 11:00, a buy program rallied the futures up to 4480.25 going into 1:00. The ES traded sideways to lower for the next 30 minutes, then made a new high at 4591.50. After pulling back to 4465 at 3:15, the ES rallied up to 4471.50 and then traded down to 4461.75 as the early MIM was showing $6.5 billion to buy at 3:20 and then rallied back up to 4480.50 at 3:25, dipped slightly, then traded 4494.50 at 3:39.
The ES traded 4498 as the 3:50 cash imbalance showed $4.3 billion to buy and traded 4501.75 on the 4:00 cash close. After 4:00, the ES pulled back 10 points and settled at 4491.75 on the 5:00 futures close, up 72 points or 1.6% on the day.
In the End
In the end, it was all about the EOM rebalancing — money being put to work and marking up the beaten-down stocks. In terms of the ES’s overall tone, it was firm but especially firm in the Nasdaq. In terms of the ES’s overall trade, volume was steady at 1.71 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: 82.9% Upside Volume (!)
- NASDAQ Breadth: 91.4% Upside Volume (!!)
We have back-to-back days of 80%-plus upside volume in the Nasdaq, with one of those days being a 90%-plus volume day. That typically gives us reason to perk up and wonder if the coast is clear. Unfortunately we couldn’t get the back-to-back days in the NYSE, which would make us feel a bit better here.
That 90% upside day is the first we’ve had in the Nasdaq in a long time. According to the highly-respected Helene Meisler, that hasn’t happened once in the last five years. Throw in this from @Sentimentrader and bulls may have another vote of confidence thrown their way:
Game Plan
There’s a nagging feeling that this isn’t over with yet. Before the last few years, V-bottoms were relatively rare. The typical fashion of a bottom is a bounce, a retrace, then a base to work higher out of.
That said, it may simply pay to be bullish until the rally runs out of steam.
S&P 500
Yesterday we said there’s “still a path up to $450 in the SPY” and with yesterday’s high of $450.28, that was achieved.
Now it’s running into the 50% retracement and the December lows. If it can reclaim this area, the plan is the same from yesterday: It opens the door to the $457-ish area. There the SPY finds the daily VWAP and declining 21-day moving average, as well as the 61.8% retracement.
On the downside, bulls don’t have to sweat unless we break below the 10-day and 200-day moving averages, as well as last week’s high near $444.
Dow — YM
The Dow Futures are still struggling with the 200-day and are now at the 50% retracement of the current range.
If we can get a daily-up rotation here, perhaps it can propel the YM up to the 21-day and 50-day moving averages, which is roughly where it will also find the 61.8% retracement.
Below last week’s high and we can start to see a move lower again.
Individual Stocks & Go-To Watchlist
BRK.B
We did pretty well with BRK.B last week and we’re back again looking at a potential two-times daily-up rotation over $313.30.
If we get it, it could put last week’s high in play in a hurry, followed by a potential move to $320-plus.
VRTX
Generally, I’m not in a hurry to fade a large rally, but VRTX has my attention as it struggles with the 2021 high and makes new highs with bearish divergence on the RSI.
A move above yesterday’s high (at $244.41) could open the door to a reversal, as could an open above $243 that fails to take out the high and rolls over back below this level.
We don’t know how VRTX will open — and it could very well not give us a trade (don’t force it!) — but we’re watching it.
UPS
You don’t have to trade or fade UPS’s gap-up open on earnings. However, recognize that the $220 area has been significant since Q2 2021.
Go-To List — Still Keeping It Short
- AAPL — back on the go-to list
- NVDA — went weekly up like we had in yesterday’s notes. Let’s see if the 21-day is in play. AMD reports tonight. Keep that in mind if you’re swinging NVDA.
- ABBV continues to do quite well on the long side (reports Wed)
- CVS hit new highs on Friday.
- BRK.B (charted above)
- TD — decent relative strength. Weekly-up at $80.45
V & MA — both climbed about 10% on Friday on better-than-expected earnings.
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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