Our View
Expanded Ranges
“These are not our father’s markets or charts.” I didn’t make up the term, but I sure helped coin it.
I did a lot of program trading on the floor for UBS and what really made the deal was the fact that I had both sides of the trade. If the ES was 1.00 to 1.50 points under FV (fair value) I would be bidding for futures for UBS and selling bids with big hedge funds and banks order flow. At the end of the day, I would count up all the buy and sell orders, then call the desk after the close to check out the trades to make sure everything was reported correctly.
This type of trading was condemned by the NYSE in 1987 for causing the crash. It was very controversial back then and the PitBull hated it. At one point he was very close to taking out an ad in the Wall Street Journal condemning program trading. He said several times, “Program trading will kill the S&P just like it did the XMI.”
But as an old Italian man from Chicago once told me, keep your friends close and your enemies closer, and that is exactly what the PitBull did…he used me for the flow.
He didn’t have to pick up the direct line to know there were programs hitting, but he would call me up and say “you doing sell programs?” I would say yeah and a second later the phone line would go dead.
Up until the 2000 tech bubble, the daily ranges were 10 to maybe 15 points and as program trading started to take up a higher percentage of the S&P volume, the ranges started to increase too. However, they really exploded during the 2008 credit crisis with 50 and 60 point moves being commonplace that went on for months.
Then the Flash Crash moved the ES 100 points in 40 minutes. Every time these events occurred, the volume and ranges expanded. This happened again in March of 2020 when Covid-19 hit and the S&P sold off over 30% in a matter of weeks. Once the ES started to recover, the ES went through another range expansion, this time to the upside.
But none of the above compares to some of the 100 to 150 point ranges we’ve seen since the beginning of 2022. Clearly, there is no time in the history of the stock market that compares to the current market swings. Some say that when the markets get like this, the algorithmic and high-frequency programs dial back the algos. I say that’s total bullshit.
The news-headline algos now completely dominate the market’s ups and downs and I am 100% sure this is hurting the smaller, retail accounts. Sure, the wins are larger but so are the losses. If you are not willing to risk more and hold longer it may be a good idea to scale back your trading until volatility drops.
I personally like the big ranges, but yesterday’s price action was a standout: Rally 100 points, sell off 100 points, and then rally over 100 points, then drop 80 and rally back. This doesn’t include all the 20 to 40 point moves either.
There are no more ticks…no .25 bid at .50 offer, it’s all 1 to 5 point clips getting in and getting out and if you are not fast or you hesitate too long, it’s 10 to 20 point clips. There is no way to control your risk. It’s a high-class problem when the ES or NQ is going your way, but it’s a tragedy when it doesn’t.
I said it earlier in the year and I’ll say it again: I do not see this ending anytime soon. Maybe after some rate hikes and new lows it will abate, but I think this could drag on into the summer and maybe into the fall.
Our View
This is a headline pulled from the Wall Street Journal:
In Ukraine Crisis, Putin Confounded Diplomatic Efforts by Western Leaders
A parade of Western officials sought to stop Putin from attacking Ukraine, but they found a leader whose position only hardened.
While I did jump on the invasion bandwagon late last week, I always had it in my mind not to forget about the “green men” that showed up in the Donetsk region of Ukraine in 2014 and how Putin would not even admit their existence.
Putin has created a new style of war that includes not going to war — he just moves his army in and declares the areas as part of Russia. For weeks, Putin entertained a parade of European leaders who sought to prevent him from invading Ukraine. How many times did President Biden say the invasion was imminent while Putin sat back and outplayed the world? It was a charade to mask his true intentions and everyone bit into it.
Our Lean
I can’t rule out another rip today, but I do not think it will hold. Nothing has changed. In most cases, the day after a big rally is a sell. On the upside I have two levels in mind: 4340 to 4350 and 4370 to 4380.
That said I want to sell the rallies and look for the ES to close on the low of the day.
Daily Recap
The ES traded down to 4250, rallied to 4350, and opened at 4322.25 on Tuesday. After hitting a low near 4308, it climbed 50 handles to 4358.75 at 10:30. From there though, the sellers stepped in hard — remember, this is the trend and it’s why we said to sell the morning rally.
In 30 minutes the ES had already shed 39 handles, but it was nowhere near done with the selling. In all, the market fell in 13 of the next 15 15-minute trading windows and in 7 straight 30 minute windows, falling for a total of 97 points, bottoming at 4261.50 shortly after 2:00.
After the low, the ES quickly rallied up to 4281.50, dropped down to 4264.25, and then shot up to 4289.50 all in 3 to 4 minutes. This type of action continued through to the close and highlights the volatility I spoke of at the top of today’s Print.
At 3:50 the ES traded 4299 as the final cash imbalance showed $2.97 billion to sell, sold off down to 4284.25 at 3:53, and rallied up to 4301.25 at 3:55.
The ES traded 4303.50 on the 4:00 cash close and settled at 4312.75 on the 5:00 futures close.
In the end, it was another big phony rally that squeezed the shorts and then dropped hard. In terms of the ES’s overall tone, it was weak pretty much all day. In terms of the day’s overall trade, volume was high: 505,000 contracts traded on Globex and 1.569 million contracts traded on the day session for a grand total of 2.07 million traded.
Technical Edge
- NYSE Breadth: 80.7% Downside Volume (!)
- NASDAQ Breadth: 73% Downside Volume
The Fed Funds Futures are having a hard time nailing down the Fed’s rate-hiking agenda. Given that Powell & Co. have acknowledged that geopolitical issues may influence their decision, we’ve seen the market waver on how many rate hikes we will see this year.
The odds currently still favor just one hike (25 bps) in the next meeting.
Regardless of March, it’s clear that the market is trying to find its footing despite a bevy of bad news at the forefront. Over the last few quarters, it’s clear this is a demand area (4275 in the ES, $428 in the SPY).
The question is, will it remain a level the bulls can defend or will they succumb to the selling pressure?
Game Plan
On the one hand, the market has actually been somewhat resilient here. Down a little less than 10%, the S&P is staring down a bear market in growth stocks (and many tech holdings), a potential war in Eastern Europe, and potentially seven rate hikes in the next 12 months.
That said, the trend is lower at the moment and until that changes, it’s hard to shift into “bull mode.”
S&P 500 — ES
- Feel free to extrapolate this layout to the SPY.
From a long perspective, I don’t like gap-ups in bear markets. We’ll see if today is any different, but a gap-up would have me looking for selling opportunities rather than buying opportunities near the open.
The upside levels are:
- 4335 – O/N high
- 4391 – daily up
- 4440 – has been resistance and near where we find the declining 10-day.
Downside levels of interest:
- 4321 – last week’s low
- 4310 – O/N low
- 4260 – recent support
- 4212.75 – January Low
Russell — IWM
- Feel free to extrapolate this layout to the RTY.
If the IWM could have reclaimed prior range support, it would have done wonders for the bulls. However, it couldn’t.
Breaking lower out of that rising wedge look now, let’s see if we get a retest of the $192 area. If so, it puts the January low in play near $188.
On the upside, reclaiming the 10-day and 21-day moving averages could put the $206 to $209 area back in play.
Individual Stocks & Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
The specific setups I’m watching are numbered, while the non-numbered tickers are the stocks I am looking at for short-term opportunities with nothing specific in mind.
Go-To Watch List:
- TU — Long from 10-day yesterday. Would like to trim around $25.20. B/E stop
- CCK — Looking for a test $118.50 (recent resistance turned to support?) and a tag of the 10-day.
- COOP — watching for 10-day ema reset
- MAT — really nice reset. Let’s see if we get a bounce from here.
- GC (Gold futures) — Looking for a backtest of the $1875 to $1880 breakout area. Combo with the 10-day would be nice (Chart below)
- ABBV
- KO
- MET, TD
- Energy — HAL, OXY, SLB, etc.
- BRK.B
- H and MAR
- PM
- MAT
- V & MA
- MKC
- TECK
- UPST — one of the few growth stocks actually working
GC
Economic Outlook
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