Danny’s View: Russia’s Military Buildup in Ukraine is an Overhang on Stocks

Our View — Nifty 50 vs FAANG 

I know these markets are rough right now, but even if they rally, I still think it has a “buyers beware” sign on it. 

I have always said the S&P tends to take bad news and make good of it, but remember, we are only 7 weeks into 2022 and the S&P is only down 6% on the year. My year-end call is for a +15% pullback, then for the ES to close near the highs at the end of 2022. 

The price action in the ES and NQ is doing the exact opposite of what it did over the last 11 years. Every selloff was supported by zero borrowing cost and quantitative easing and now the price action has flipped to sell every rally as the Fed prepares to raise interest rates. 

Eventually, the ES will adjust to higher rates, but not right now. Below is a chart of the Fed’s rate hikes, as you can see in 6 out of the 7 rate hikes from 2017 to 2019 there is only one instance of the ES being lower than the prior rate hike. It shows how resilient the market is. 

In conclusion, I believe the S&P will start to move back up after the rate hikes, but I think the markets may stay weak until after the Fed raises rates during the two-day meeting in March. 

That doesn’t mean it will mark the low, but remember: The market is a forward-looking mechanism. 

Our Lean 

I told you Putin was not backing down and Russia is continuing its military buildup around Ukraine despite saying it had begun drawing down some troops, tanks and armored personnel carriers from Crimea. The headlines will continue to feed the algos, keeping the volatility here.

Our lean is to buy the early weakness and sell the rallies.  My guess is there will be some type of Russian flare-up in the next few days or next week. It’s also a holiday weekend, creating the potential scenario of “Who wants to go long into a three-day weekend with potential conflict at hand?” 

Lastly, here are the Ned David statistics for this week’s monthly expiration. 

Daily Recap

The S&P opened at 4437.75, down 13.5 points from Tuesday’s 5:00 futures close. Sellers stepped in right out of the gate, driving the ES down to 4426. It found its footing, bounced, and a few hours later hit a high of 4443 before selling off back down to the 4420s ahead of the 2:00 Fed announcement. 

Just after 2:00, the knee-jerk reaction was lower, as the ES dipped about 9 points, then flew to the upside, climbing more than 40 handles in 30 minutes. The ES traded 4479.50 as the 3:50 cash imbalance showed $941 million to buy, traded up to a new daily high at 4484.50 and then reversed and went out at 4470.50 at 4:00. On the 5:00 futures close, the ES settled at 4465, up 8 points.

In the end, it was a Fed minutes downside fakeout. Everyone got short into the event, then the ES rallied 50 points. In terms of the ES’s overall tone, the futures traded sloppy all day, despite the late-day gains. In terms of the ES’s overall trade, volume was low with 250,000 futures trading on Globex and 1.13 million trading on the day session for a total of 1.38 million contracts traded. 

ES Range: 61.75 points

• H: 4484.50
• L: 4422.75
• V: 1.38 million | Below 20-day average of 2.06 million

Technical Edge

• NYSE Breadth: 54% Upside Volume 
• NASDAQ Breadth: 49% Upside Volume 

We’ll call it for what it is: A difficult environment for swing traders. 

One day a setup looks great, and the next day the stock is down 3% to 5%. It forces traders to be fast — fast to book ⅓ to now ½ of the position at the first target and fast to hit the exit when their stop is violated. 

Yesterday I wrote: “The market is not rewarding patience, it’s punishing stubbornness.” 

And at the risk of sounding like a broken record, I write that again today. It is absolutely prudent that traders maneuver with a smaller position size to protect against the whipsaws of the market and to also protect their mental capital. This is a mental game, so it’s vital we protect this capital. 

We must also be more selective, taking only the highest-quality setups. 

Game Plan

You see this very strategy playing out in the Game Plan on a daily basis. We have a handful of individual trades, but usually just one or two at a time. Some have worked great (ABBV, AMD, ZTS, etc.) and others have been duds (like UPS). 

Contrast that to parts of December and Q4 where we constantly had a good flow of trades. 

Instead, the indices have been a great guide for us vs. individual setups. The ES & NQ (or SPY & QQQ) followed our levels with some precision yesterday, bouncing off the prior day’s high in both instances. Here are the levels for today.

S&P 500 — ES

• Feel free to extrapolate this layout to the SPY.

The upside levels are:

• 4468 to 4470 — Tuesday’s high, Wednesday’s close and the 50% retracement of the current range
• 4485.50 — Yesterday’s high/daily-up trigger
• 4497 — 61.8% retracement of current range
• 4510 to 4520

Downside levels of interest:

• 4436 — O/N Low
• 4423 — Wednesday’s low/daily-down trigger
• 4393 — Last week’s low

Nasdaq — NQ

• Feel free to extrapolate this layout to the QQQ.

Upside Levels:

• 14,600 to 14,620 — Tuesday’s high, Wednesday’s close, O/N High 
• 14,672 — 61.8% retracement of current range, Daily-Up trigger. A clear move above this level could open up a nice run of potential short-term upside

Downside Levels: 

• 14,442 — O/N low
• 14,367 to 14,381 — Q4 Low and Wednesday’s low (Daily-down trigger)

Individual Stocks & Go-To Watchlist —

*Feel free to build your own trades off these relative strength leaders*

Go-To Watch List — 

1. TD — Inside & Up day paid nicely yesterday. B/E stop from here. 
2. DE — undercutting y’day low in premarket now. Could be a bouncer. Reports EPS tomorrow a.m.
3. ABBV — 261.8% extension is $147-ish — Trimmed some yesterday, down to final ⅓ of position. Stop raised to $142.
4. CVS — inside day sitting on the 50-day. Daily-up over $104.25 could put 10-day and 21-day in play. 

_____

• BROS 
• TSN
• WFC, MET — MS 2x daily up over $104.50
• Energy — HAL, OXY, SLB, etc.  
• BRK.B
• H and MAR — Airlines looking better too
• PM 
• COOP
• TU
• MAT
• V & MA — Resetting now. See if a bid comes in soon
• MKC
• TECK
• UPST — one of the few growth stocks actually working

NVDA

I am watching Nvidia, with a 2x daily-up setup over $265.85. It reported earnings and is down slightly in the premarket. 

I am hesitant to write this one because, even if we get the 2x daily move, we have to keep last week’s high near $269 and the declining 50-day at $270 in mind. That said, it’s one you may want to keep an eye on if it can get going quickly. 

Otherwise, keep an eye on yesterday’s low and the 10-day. 

AAPL

Keeping it simple. Daily-up over $173.35 could put $175 to $176 in play, then possibly weekly up. 

Above $173.35 also means AAPL is above the 10-day, 21-day, 50-day, daily VWAP, and 61.8% retracement. 

F

A longer-term trade I am watching is Ford if it gets to the $16.50-ish area. 

Economic Outlook

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 analysis 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!