Our View
The situation unfolding in Eastern Europe only adds to the recent uncertainty. No one knows what tomorrow will bring and it’s keeping the markets on edge. That’s to go along with all of the other issues we had on hand a month ago and before Putin decided to invade Ukraine.
Seemingly everyone is taking Ukraine’s side at the moment. Countries are raining sanctions down left and right on Russia and Russian oligarchs. The Russian stock market is getting pummeled, being excluded from SWIFT, rejecting central bank activity from Russia, travel and all sorts of other assets are being frozen.
The hope is that this forces Russia to negotiate into some sort of peace deal, but at this rate, Putin is creating a lot of enemies and undoing decades worth of progress between Russia and European countries.
Our Lean
Some traders think the low is in and the ES is going to move a lot higher. I even saw someone post that the ES is going to 5500. I admit that I didn’t see the big two-day rip, but I assure you, the ES is not going to 5500 right now, nor is it going there this year.
I agree there is going to be a big year-end rally, but the markets have a long way to go between now and then. I think it’s important to remember the 1973-74 stock market selloff I talked about a few weeks ago. That was a tough bear market, where the S&P rallied sharply after a big drop, then sold off down to new lows. That’s what I think is going to happen. There is just too much inflation and uncertainty to start taking about 1,300 point rallies.
Our lean: There is a high probability that the ES fills the gap from last night, but also high odds the ES settles lower on the day and down on the week.
Daily Recap
- Total Range: 156.75 points
- H: 4384.25
- L: 4227.50
- C: 4380
- Volume: 1.95 million
Technical Edge
- NYSE Breadth: 80.9% Upside Volume (!)
- NASDAQ Breadth: 77% Upside Volume
What a powerful two days it has been. The S&P 500 has gained 6.6% from Thursday’s low, while the Nasdaq has jumped 8.8%. The move in the futures has been slightly more extreme. What’s unfolding in Eastern Europe is sad, scary and so incredibly unfortunate.
I am not a geopolitical expert by any means, but we can see what happens when egos get in the way of rational decision making. Our hope here is that we can go back to simply worrying about inflation, rate hikes, supply chains and Covid.
Game Plan
We had a nasty gap-down in U.S. equities overnight and a huge gap-up in crude oil. So far, those moves are relaxing a bit, with the ES and NQ futures down about 1% and oil up 4.5% (vs. up 8.2% at the high) and fading from ~$100.
With a wide range already set, we need to see where the momentum rests. Does February get one last day of “oomph” on the upside?
Gold
Even if we exclude everything else in this newsletter, the trades we’ve had in gold make it all worth the price of admission, IMO. The rejection off ~$1961 resistance, then support at ~$1880 and the 10-day have played out beautifully.
From here, I want to see how this sets up. Do we embrace the “risk-on” rally we saw in equities late last week or will “risk-off” remain the theme?
Over Friday’s high of $1925 would have me feeling better about gold making another push to resistance. Below $1925 and I am a bit more cautious in the short term.
Daily-down below $1884 could put $1855 and the 21-day in play, if $1880 doesn’t hold as support again.
S&P 500 — ES
- Feel free to extrapolate this layout to the SPY.
The S&P is currently in an “ABC” type correction. The question — and worry — is, does it become an “ABCDE” type correction?
As the ES bounces off the overnight lows, bulls are wondering just how far it can rally.
The upside levels are:
- 4344 — 50% retracement
- 4384 — Friday’s high
- 4391 to 4400 — Last week’s high and the 61.8% retracement
Downside levels of interest:
- 4300
- 4251 to 4260 — O/N low & the Q4 low
- 4212 — Jan Low (last day for monthly-down threat, FWIW)
Nasdaq — NQ
- Feel free to extrapolate this layout to the QQQ.
There are two areas to watch on the upside this week and two on the downside.
The upside levels are:
- 14,120 to 14,200 — Admittedly a wide range, but can go level by level from declining 10-day ema, 50% retracement at 14,143 and last week’s high at 14,196.
- 14,400 to 14,430 — Q4 low, 61.8% retracement, declining 21-day sma.
Downside levels of interest:
- 13,706 & 13,683 — January low and overnight low
- 13,465 — A sustained break below puts last week’s lows in play.
Individual Stocks & Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
The current volatility has created a scenario where attractive individual setups are tough to come by. Plain and simple, the overnight gaps are difficult to work with and the elevated VIX and news-driven headline moves make the indices a more attractive playground for traders at the moment.
If the NQ really starts to roll over, look at high-growth stocks that have the potential for daily-down rotations. That’s names like ROKU, PINS, NVTA, TDOC, etc.
I will operate without any sort of bias today. If we continue higher, names off the GO-TO list will be my play. If the selling picks up, I will sell without thinking twice.
I read this yesterday in regards to trading a tape like this: “Eat like a bird and shit like an elephant today.”
Translated, it means: “Pick lightly and when wrong, get the hell out.”
Go-To Watch List:
- KO
- ABBV
- BMY
- Defense — RTX, GD, LMT, NOC
- Energy — FCX, CNQ, CVX
- SYY
- TU
- COOP
- MAT
- Gold
- CCK
- BRK.B
- H and MAR
- TECK
Economic Outlook
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