Decline adds new meaning to the old proverb, sell in May and walk away
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Our View
You just can’t make this stuff up!
Wednesday the ES sold off ~50 points and rallied an astonishing 160 points. Then on Thursday it opened lower and tanked over 200 points from the prior high. Clearly, these are not our father’s markets or charts!
I said early last week that the 100- to 150-point ranges were back and that the ES would eventually “spin off the tracks.” The current decline may give the old trading proverb, “Sell in May and walk away” new meaning this year.
For over four months, the ES has sold off. Along the way, there have been bounces but yesterday’s selloff felt like a total breakdown. There was a ton of margin selling and it started right on the open and went right into the close.
The VIX jumped from an early low at $25.78 and traded at $33.20 late in the day. Crude fell from $111.37 to $106.45, while gold and silver jumped. The NQ fell more than 840 points, while the YM (Dow) tumbled 1,400+ and the bonds got hammered. That’s really what triggered the selling, IMO. Bitcoin was hit hard — down almost 8% — and mortgage rates climbed to 5.7%.
Why am I writing about all this? Because it’s not just the stock market that’s moving. Every asset class from iron ore to fixed income is moving. Has the train rolled off the tracks? Hell yes it has!
Our Lean
Like everything else, the job numbers will be sucked into the S&P and swallowed up this morning. The futures are a complete debauchery and even if they rally 300 points it’s not going to change my opinion. It’s just putting off the inevitable.
As for trading the jobs number, MrToPStep has a trading rule that’s called “Counter Trend Friday.” This trade works especially well if the ‘crowd’ is short and the ES gaps down on the open with Globex volume of 350k to 400k contracts traded. How the trade works is to buy the lower open or the first dip after the lower open.
The reason? Jobs Fridays tend to be counter-trend days and the traders that sold at low prices and can’t hold over the weekend put buy-stops in above the market. Then short-covering pushes the ES into the nearby stops and triggers an even larger rally. If the trade works, we would get out of the long and look to get short into the rally.
If the ES gaps higher we would look to sell the open with a tight stop. If these trades work we want to be flat by 11:00 and come back at 2:00 and try to figure out the close.
My gut says after yesterday’s decline, we could see some type of pop.
According to @almanacTrader, the 2022 action is tracking fairly close to the bear markets of 1960 and 1970. “We are not implying the 36% bear market losses from the 1968 top to the 1970 bottom are in the cards, but we suspect that we have not found bottom just yet.”
Daily Recap
There’s no need to do a huge blow-by-blow of yesterday’s action. The ES rallied up to last week’s high near ~4300 on Wednesday and couldn’t push through. It opened Thursday’s session at 4251, down 52 handles from the late-Wednesday high. It up-ticked 1 point and was slammed, falling 70 handles in the opening hour.
The ES fell in seven straight 30-minute windows and 13 straight 15-minute windows. Eventually, it bottomed near 4115 shortly after noon, down 136 points from the open. The ES bounced ~50 points to 4169 at 1:00, but that rally was sold too, as it fell 70 points to new lows just after 3:30.
The ES bottomed at 4099 as it essentially retested the 2022 lows. The ES entered the 3:50 window at ~4107, up 7.5 points from the low. However, it rallied 38 handles in the final 10 minutes even as the cash imbalance showed $72 million to buy then rolled over to $2.9 billion to sell. It finished at 4144.50, down 152 points or 3.4% on the day.
In the end, it’s actually simple: It was mass liquidation with bonds and stocks crashing. In terms of the ES’s overall tone, it was the worst price action I have seen in a very long time. In terms of the ES’s overall trade, volume was brisk at 2.32 million contracts traded.
- Total Range: 201.50 points
- H: 4300.75
- L: 4099.75
Technical Edge
- NYSE Breadth: 91.5% Downside Volume (!!)
- Back-to-Back weeks of 80%+ downside volume
- Working on a third straight weekly of 80%+ downside vol.
- Back-to-Back weeks of 80%+ downside volume
- NASDAQ Breadth: 88% Downside Volume (!)
- VIX: ~$33
I should have been more forthcoming yesterday, but the truth is, I didn’t expect such a beating. For the Nasdaq, I wrote: “After yesterday’s action, we just want to see how this shakes out.”
What it should have said is something more like, “We are pumping the brakes today after such a big rally on Wednesday, in order to see how this shakes out.”
Further, you may have noticed that I didn’t map out the downside levels on the indices. The fact of the matter is:
- I didn’t expect such a huge fall, and
- If the ES didn’t hold 4250, I wasn’t interested in trading it.
I tried two dip-buys early in the session and that was clearly a mistake. It took most of the session for me to erase those losses, but at the end of the day, I still lost money and it was a lot of work.
Game Plan — S&P, Nasdaq, Bonds, Individual Stocks
We have the payrolls this morning, an elevated VIX and the S&P sitting at its YTD low. Would our best outcome be another 80% or 90% downside day to force some kind of capitulation? It would be painful, but perhaps it would be best.
With the VIX above $30, I have a hard time putting money to work in individual stocks. That said, MCK is still trading well (and now to a B/E stop), Walmart is holding in and so is DLTR.
If you are inclined to trade these individual holdings, remember to use smaller position sizing to account for the wider swings!
Otherwise, we’ll look to keep things light today with the jobs report and lots of Fed speakers (see calendar below).
S&P 500
The ES is chopping around last week’s low and the prior 2022 lows near 4100. If this area fails as support, the 4056 low is on the table.
Below that and 4,000 or lower is in play. Back in March, we laid out a scenario where the 3,000s are in play for the ES in a video. I will look to do another video soon now that this busy week (Fed, jobs, etc.) is in the books and we can discuss that scenario once more.
On the upside, the ES needs to clear 4150. Above that could put 4200 in play — the 50% retrace of yesterday’s decline.
SPY
The charts are messy but the levels are clear. The SPY is trading ~$412 as of 8:00 am ET.
On the downside, a break of last week’s low at $411.21 that doesn’t reverse puts yesterday’s low in play at $409.44. Below that (and without a reversal) puts Monday’s low on deck at $405, followed by the gap-fill near $400.
On the upside, a move above $414 could open the door up to the $417.25 to $419 range — the 50% and 61.8% retracements of Thursday’s decline.
Bonds — ZB
We have been talking about the 200-month moving average in the bonds for a while now and it’s what has kept us bearish on the TLT and ZB contract (the latter shown above).
No time on this chart have we seen the 28.75% decline we’re seeing right now, except in 2000. That’s when the ZB contract fell 31.8%.
As we keep this info in the back of our mind, could we be nearing some sort of support around the 2018 low and the 200-month moving average? Perhaps.
An undercut/flush below 136.16 and bounce could have a potential long setup in the cards.
Individual Stock Trades
DLTR
We technically got the undercut of Monday’s low and a slight bounce, but there’s not much cushion to work with here.
Remember, you do not need to trade individual stocks with the VIX above $30. But DLTR is one to keep in mind, especially if we tag the 10-week/50-day, bounce, and reclaim $160.15. That would have my attention.
MCK
For those that snagged MCK in the low $300s and got off a trim around $320, kudos. That was some good trading.
For those that missed MCK — me included! — there’s a potential setup if we trade back down toward $300 and tag the 10-week/50-day sma and can bounce.
Again, just one name to keep on the radar in these volatile times.
Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
Numbered are the ones I’m watching most closely. Bold are the trades with recent updates.
- WMT — First target is $155 to $156 for ⅓ to ½ trim. Next tranche at $158 to $158.50. Stop still at $150.
- MCK — (I Missed MCK. for those that didn’t, $320 was the trim spot from the setup earlier this week. → Now B/E stop, with the next trim spot at $323 to $325, followed by $328 to $330.
Relative strength leaders (List is cleaned up and shorter!) →
- AR — booming to new highs.
- WMT
- PEP
- KO
- MCK
- BMY — inside week thus far.
- JNJ
- DLTR
- DOW
- VRTX
- MAR
Economic Calendar
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