But we could have a long trade on our hands.
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Our View
There was a big rip and dip from late Friday to this morning, and I have to tell you I am not the slightest surprised by the drop. The main reasons are just two very important things.
The first is that the S&P cash closed at 3839.50 and the ES is 28.50 over the cash — fair value is 22.17 or 6.20 points over fair value. However, at 3900 in the ES (the Globex high), the ES is 60.50 points above where the S&P cash closed. The second part of the 34-handle gap up. When the ES is trading at a 60-point premium to the S&P cash, the sellers/algos and gap trading systems come flying to take advantage of the gap up.
You don’t see things like that very often, but this is something you should stick into your trading toolbox.
Our Lean — Danny’s Take
After four straight down weeks, the odds do tend to favor a rally. That said, the trend has not been very favorable for the bulls and just because we’re flipping the calendar doesn’t mean the trend has flipped yet.
I want you all to “meet” my good friend Rich — AKA @Handelstats — as we will be incorporating his stats and info into the newsletter on a much more frequent basis this year. You may also remember him from the interview we conducted earlier this year.
I asked him about January and what the stats say and here’s what he came up with.
You’ll notice that since 1970, the S&P 500 has enjoyed an “up month” 56.6% of the time. However, that has not been the case over the last 15 years. Since 2008, the S&P 500 has actually declined 60% of the time, posting just 6 wins and 9 losses for the month of January over the last 15 years.
The Santa Claus Rally is defined as the last five trading days of December and the first two trading days of January. So far, the SPX is up about 0.4% with just two sessions left to go. January also tends to be quite strong in pre-election years.
That all said, Our Lean is that while the stats for the month lean bearish, the odds for me tend to favor a rally in the short term. We are coming off a four-week losing streak while the bulls are trying to get something going.
The only problem? The rallies keep failing.
If we fade off the open, watch the 3965 to 3970 area. If we see that zone, I’m looking to buy an early dip and catch a bounce. If we rally to 3900 to 3910 early in the day, stay on alert for a potential fade, even if it’s temporary. It would be a natural spot for overnight longs to take some profit.
3920 is a big, big level to watch. It’s resistance for now, but above it and the floodgates could open with buy stops above.
MiM and Daily Recap
After trading up to 3881.50, the ES sold off down to 3842.25 on Globex on the last trading day of 2022 and opened Friday’s regular session at 3843.75. After the open, it was a bumpy ride for the first few hours, with the ES mostly contained to a 20-point range between 3834 and 3854. Going into 1:00 pm ET, the ES was struggling with the 3848 area, then abruptly fell 27 handles down to the session low of 3821.50 just after 1:15.
After a bounce, the ES made a higher low at 3823, which set up the late-day “romp.” The ES traded 3856 as the 3:50 cash imbalance showed $6.1 billion to buy, down-ticked, and traded 3861.25 on the 4:00 cash close. After 4:00, the ES traded up to 3871 and settled at 3868 on the 5:00 futures close, down 10.75 points or 0.28% on the day.
In the end, there were tons of cross-currents between the bonds and the indices. All I can say is it feels like we have been trading in the same range for weeks. I said in the room several times not to sell weakness and don’t buy into the rips and that was correct until late in the day because of the $6.1 billion to buy. In terms of the ES’s overall tone, it really felt that it was being held hostage to the JPMorgan 3835 put. In terms of the ES’s overall trade volume stood at 1.297 million contracts traded.
Technical Edge
- NYSE Breadth: 42% Upside Volume
- Advance/Decline: 43% Advance
- VIX: ~$23
The S&P 500 is trying to start the new year off on the right foot. And while an opening rally is underway, keep in mind that four straight down weeks have knocked the index below most of its key daily and weekly moving averages.
Let’s see how today settles. New year, new mindset. Let’s not begin the year with unforced errors and taking on low-risk setups.
S&P 500 — ES
Daily chart of the ES above, as it tries to gap up and push through last week’s high of ~3900. If it can do that and take out the Globex high of 3907, please keep a close eye on 3920.
You likely know this level as a key pivot mark, but it’s also where the 21-day and 50-day moving averages come into play.
If the ES can clear 3920 without reversing lower, it could open the door to 3985.
On the downside, keep an eye on 3970 and the 10-day moving average. Below both measures puts 3940 to 3945 in play.
ES — Zoomed In
Further, ~3970 is of interest on the 4-hour chart too.
Approximately, it marks the current H4 low, as well as the rising 10-ema. Coming into play near Friday regular hours and Globex highs, I want to see how the ES handles itself in this area.
SPY
On Thursday, the SPY tagged its declining 10-day moving average for the first time in 10 days. After a gap-down on Friday, it recovered nicely and is now trying to gap higher on Monday.
That gap-up has the SPY trading near the 10-day and Thursday’s high of $384.35. Keep this level in mind as your pivot today.
Above $384.35 can be looked at as bullish, opening the door toward ~$387. Above $387 and the $390 zone (with the 21-day and 50-day moving averages) looms large.
If the SPY can’t hold up above $384.35, it may be worthwhile to remain cautious.
Open Positions —
- Numbered are the trades that are open.
- Bold are the trades with recent updates.
- Italics show means the trade is closed.
- UUP — Ideally needed a close back over last week’s high of $27.95 and we closed AT $27.95. Long against $27.75 is fine with a ¼ to ⅓ trim at $28.15 to $28.25. Ideally looking for $28.40+
- TLT — Slow start but we’ll see. Adjust first trim to ~$102 — the gap-fill and 10-day ema. ¼ to ⅓ normal trim.
- For now I’m using $98 as my stop. On the upside, I’m fishing for $103.40
Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
Relative strength leaders →
- SBUX — nicely weekly-up setup after 10-week ema reset.
- DE — gap-fill & 10-week would be attractive for potential longs
- SMCI — weekly up over $85.85
- HON — weekly
- CAH
- LNG
- LMT, RTX, NOC
- MET — weekly
- GIS
- CI
- MCD — weekly
- FSLR — $140 is the 21-week SMA and retest of prior resistance
- VRTX, UNH, MRK
- XLE — XOM, CVX, COP, BP, EOG, PXD (Weekly Charts)
Economic Calendar
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