Is the Selloff Over? Bulls Have to Prove Themselves

After a 4-day dip, the ES erased 70% of those losses on Friday.

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Our View

While we talk a lot about the US economy and interest rates, we do not spend much time on what I call the ‘Gang of Four’ — China, Russia, Iran and North Korea.

I am 100% sure when Vladimir Putin invaded Ukraine in February 2022 that he had no idea his forces would still be fighting and dying at an alarming rate and losing thousands of pieces of military equipment in the process. I’m also sure that when Putin met with Xi in China, that both countries’ “state planners” had already known that our economy was going to take a big hit after the Covid-19 pandemic and that the war would deplete the US military’s stockpiles (according to the WSJ).

I’m not a war advocate for a lot of reasons, but if we did go to war over Taiwan I thoroughly believe the US would be out-gunned in the China Sea where the Chinese would overwhelm our forces, sink our carriers and shoot down our jets. Then what?

Or what if Putin does set off a battlefield nuke in Ukraine? What then?

I suspect the US would do nothing. But as I have said several times, I don’t think the US going to war will start in Asia. I think it will start in the Middle East with Iran — which will drag in nearby countries, along with Russia.

I’m not trying to speculate needlessly on geopolitical issues, but whether I say anything or not doesn’t change the fact that they’re occurring. At the end of the day, I blame most of this on the US government’s lack of foreign policy.

This week, top US diplomats will travel to Saudi Arabia to try and mend the soured relationship. While it may not end up bad, the lack of trust on all sides will prevent any real re-engagement.

I have been saying for months that a major event will happen this summer and at this point, there are several to choose from.

Our Lean

After Thursday’s selloff — and the four-day selloff — bears were saying the “real selloff has begun.” After the close on Friday though, “sell in May and walk away” was finished. So who’s right?

I think when you look at a wider timeframe chart, the ES is stuck in a big back-and-fill pattern that should lead to higher prices, but Morgan Stanley said last week that the range trade could go on for another six months.

As hard as that may be to believe, everything that moves the S&P seems to be event-driven, and lately, the index also seems to take bad news and make good out of it. Last week was the Fed, Apple earnings and the jobs report. This week, it’s the CPI report.

Our Lean: Sell the early rallies — especially if the ES rallies right out of the gate — and buy the pullbacks. Keep an eye on Friday’s high near 4165. Above that and I’m watching 4175 to 4180, then 4200-ish.

Also remember that many Mondays have been the low-volume day of the week and it could favor “thin to win” today for the bulls.

On the downside, I have 4120, then 4100 on my screens.

MiM and Daily Recap

The ES traded up to 4115 after Friday’s strong job report and it opened the regular session at 4114. After the open, the ES powered higher and rallied up to 4141.75 at 10:41, slowly pulled back to the 4127.25 level at 12:50 and not long after I posted this on Twitter, the ES traded up to 4147.75 at 2:09. From there, it down-ticked and went straight up to 4163.25 at 2:58 and then dropped down to 4152 at 3:48.

The ES traded 4151 as the 3:50 cash imbalance showed $611 million to sell, sold off down to 4147.50 at 4:58 and traded 4151.75 on the 4:00 cash close. After 4:00, the ES sold off down to 4146.75 and settled at 4149 on the 5:00 futures close, up 73.25 points or up 1.8% on the day. The NQ closed up 2.05% or up 266.75 points at 13,310.50 and the the CLK (May crude) closed at $71.32 or up 4.03%. Gold had a $54.00 range and settled at 2,024.90.

In the end, I have to go back to one of my main rules: It takes days and weeks to knock the S&P down and only 1 to bring it back. In terms of the ES’s overall trade, volume was lower at 1.49 million contracts traded.

Technical Edge

S&P 500 — ES

The ES fell four days in a row, but Friday’s big rally erased about 70% of the dip. That said, the ES is struggling with the 61.8% retracement near 4151.

Bigger Picture: Note the weekly chart on the right. It’s hard to ignore those two huge wicks out of the 4075 area. Bulls still have a big job though, which is clearing 4200 and putting 4242+ in play.

On the downside, a break of 4075 puts 4030 in play, while a close below 4000 could put the big 3800 to 3850 area on the table. That’s been support for the last 5 months and now it lines up with the 200-week moving average as well.

SPY

I don’t think we can ignore where resistance came into play, in the $414 to $416 area.

SPX

QQQ

NQ

Still stuck between 12,950 and 13,300.

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Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.

Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!