Reminder: If you didn’t get a chance to watch yesterday’s video, it’s worth a quick watch today. It’s only a few minutes long and laid out our view on the S&P 500.
Cheers!
Our View
How Back Is It?
In the world of, “the market giveth and the market taketh away,” yesterday was a stark reminder of how fast things can go from good to bad.
The ugly truth is that despite strong seasonal trends, the Dow, S&P, and Russell are all down 4% on the month with three sessions left in April. The Nasdaq continues to lead the way lower.
Yesterday the Nasdaq posted its largest one-day percentage decline since September 2020 and is now down more than 12% in April, its worst month since 2008. Yes, even worse than March 2020, where it closed lower by 10.1% (although at its low, it was down 22%). Lastly, the Russell 2000 finished the day at its lowest close since December 2020.
Year-to-date:
- S&P is now down 12.4%
- Nasdaq is down 20.16%
- Dow Jones is down 8.5%
- Russell 2000 is down 15.8%
The biggest issue? All of the same problems continue to persist. China’s lockdown measures due to Covid are negatively impacting the supply chain. Inflation remains high, and even if it may have peaked, it’s having a negative impact on earnings and the consumer. The Fed is not only tightening but it’s doing so at an accelerated pace. And oh yeah, there’s still a war going on in Ukraine.
I have been around a long time, but I have never seen anything like what’s going on today.
Our Lean — T+2
I think the ES fell too much after the 4:00 cash close. The S&P cash settled at 4175.20 and the ES settled at 4153, a discount of 22.2 points.
In other words, the ES is cheap vs. fair value, which means the ES should rally to realign with the SPX cash. Will that rally last? I don’t think so. There is so much downward momentum it may be difficult to reverse.
Further, with the markets down so much on the month, there could be some month-end rebalancing and it’s also T+ 2. But I’m not counting on much from the bulls right now.
My lean is, I cannot rule out short-covering rallies — whether they last a couple of hours or a couple of days — but I still see lower prices on the horizon. If the ES breaks 4120, we could see another quick drop. As I said, I can’t rule out some type of bounce going into the end of the month.
Daily Recap
After Monday’s bullish reversal, the ES opened near 4266 but the bulls had no control. Shortly after the open, the S&P rotated below last week’s low of 4247.50, gave a quick pop back up to 4253.50, and then rolled over.
Amid that decline, 4200 was support at 11:30 and gave the bulls a 30-point bounce. However, the rally was sold and the ES undercut the low, bottoming near 4195 at 1:30 and bouncing 25 points — giving us a lower high.
From there, the market fell 40 points into the 3:50 cash imbalance, which showed $380 million for sale. The ES gave us a modest bounce from there, climbing 8 points, but then flushed lower by 23 points into the close. It traded 4168 on the 4:00 cash close, down 122 points or 2.85% on the day.
In the end, the selloff wiped out Monday’s rally and a lot more. That rally was another example of what dead cat bounces look like; I call them “false starts.” In terms of the ES’s overall tone, the only thing I can say it was EXTREMELY weak. In terms of the ES’s overall trade, volume was high at 1.95 million contracts traded.
- Total Range: 166.75 points
- H: 4303.50
- L: 4136.75
Technical Edge
- NYSE Breadth: 88.6% Downside Volume (!)
- — 3rd 80%+ downside day in the last 4 sessions
- NASDAQ Breadth: 77% Downside Volume
We received some great feedback on the video we posted yesterday because it helps illustrate the structure of the S&P 500.
In this type of tape, traders have to be ready for several outcomes. Yesterday we were watching for either:
- A daily-up continuation rally, or
- A weekly-down rotation
Right out of the gate on Tuesday morning, the latter played out and put us in a bearish setup shortly after the open. Now we need to reassess.
Game Plan
We’re getting a pre-market rally and while I’m not against getting long necessarily, I don’t like gap-up approaches in a bearish tape. I just don’t. The risk is simply too wide for us to chase a higher open, so we need to see how it sets up after the open.
As it pertains to individual stocks, some members have been asking if there are more setups on the way. I’m sorry to say, but right now there are slim-pickins on the individual stock front!
We got lucky and had a nice window for a few weeks where we were able to hit them. However, when the VIX goes above $25-plus, individual stock picks usually take a back seat to the trades on the indices.
That’s just the way it is right now, unfortunately. I can’t in good conscience post setups just for the sake of posting setups. The quality has to be there and right now, there is simply little to no quality setups until the volatility settles down.
S&P 500
We got the move down to the area we were watching in a fast-moving “ABC” correction. From here, I’m watching rallies to the 4220 to the 4240 area. If we bounce that far and fail, 4200 remains in play, while the 4150 area remains vulnerable.
On the upside, above last week’s low of 4247.50 could open the door back to the 4290 to 4300 area and the declining 10-day.
On the downside, a break of this week’s low at ~4136 could put 4107 and the 2022 low in play near 4100.
SPY
Same situation. I’m leery of rallies to the $421 to $422 area. If it pushes through and holds, then we could see a return back to last week’s lows near $425.
On the downside, the SPY closed 3 cents off the low — not exactly an encouraging sign.
If we break that low at $416.07, let’s see how it trades. Does it break the low with force? If so, who’s to say the $410 to $412 zone isn’t in play? If it dips below $416.17 and quickly reclaims it, maybe they brew up a reversal. Maybe.
Bonds
Bonds have had a bid (thus yields have been falling a bit), yet tech hasn’t had any buyers. That’s not a great sign.
TLT left us with a doji close yesterday, but technically ended the day above the 10-day and last week’s high. I had to close my short position with a loss, because the parameters of why I was short were no longer valid.
If we go daily-down below $121.76, I will look at another potential shorting opportunity.
Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
Numbered are the ones I’m watching most closely. Please look at these closely, as there are several updates (the most recent of which are noted in bold).
A huge number of our B/E stops were hit last week, leaving us with virtually no trades left on the books. Some runners may be in play with WMT and TGT.
- TGT — $250 trim spot hit → A full exit is okay. Otherwise look for $265-ish on remaining ⅓ of position. Stop-loss either at B/E or raised to $235. Your preference.
- TGT — trade update from Monday’s entry → Exited ½ on a.m. bounce (as highlighted in Tuesday’s Game Plan) and stopped at B/E. Not much meat on this bone and exited for now.
- WMT — Trim at $158 → B/E Stop. Inside week. Now looking for inside-and-up rotation over $158.29. If so, it puts $162 in play for small trim, otherwise $165 to $170 is our longer term target.
Relative strength leaders (List is cleaned up and shorter!) →
- AR
- ABBV
- PEP
- KO
- MCK
- BMY
- JNJ
- AMGN
- DLTR
- DOW
- VRTX
- XLP — Consumer Staples
- PG
- COST
- MAR
- PANW
Economic Calendar
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.
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