US Credit Rating Downgrade Hits Futures
Bonds hit new 2023 lows
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Our View
The VIX is getting a bit of life, popping back above $15 as headlines hit regarding the US credit downgrade from Fitch. Since June, the VIX has closed above $15 just once.
“Fitch Ratings has downgraded the United States’ long-term rating to AA+ from AAA, echoing a move made by S&P Global Ratings, which cut its rating for the U.S. in 2011 after a different government standoff.”
Of course, this caused an overnight flush. At the Globex low, the ES was down about 50 points from its 4:00 p.m. ET print. So far, they are buying the dip, but the ES is still down about 22 handles or 0.50% as of 7:30 a.m. ET.
It’s been a quiet start to August until that news dropped. Now we’ll see if that will be enough to “shake the tree” and get us a larger pullback or if it will be business as usual for the S&P, which has rallied for five straight months.
Elsewhere, bonds remain quite weak. The 10-year yield ended the day above 4% yesterday, while the 2023 high is up near 4.09%. It’s closed above 4% just five times this year. This has /ZB and the TLT at their lowest levels of the year, as some begin to wonder if and when a 4%+ 10-year yield is going to be a problem for equities.
Tomorrow, we get earnings from AAPL and AMZN.
Our Lean
Our friends at Stock Trader’s Almanac helped us navigate yesterday’s historically weak trading session. Yesterday, the 4590 area held as support, but the ES struggled with regaining 4608 and then bumbled around for most of the session after that on low volume.
With last night’s credit downgrade, we’re seeing a big move this morning below the 4580 to 4590 area, with the ES trading all the way down to 4552 overnight. From here, the action is a little trickier.
Overall, I think we can get a larger selloff over the next 7 to 10 days, but I also thought that before the credit news hit yesterday. It’s possible that will be the “excuse” for the S&P to sell off going forward. That said, the trend has been so strong and so bullish that it’s likely that there will be dip-buyers along the way.
Our Lean: The ES is hanging in around the middle of its Globex range, which makes the opening trade tough. So I want to fade the initial move, whatever it is.
Specifically, if they rally the ES off the open, I am a seller and am initially looking at resistance at 4580-83 and 4592-95. If they sell the open, I want to buy the dip and am initially looking at support in the 4550 to 4560 area.
MiM and Daily Recap
The ES traded up to 4621.75 in Globex and opened at 4599.50 on Tuesday’s 9:30 open. After the open, the ES grinded to 4609.25 at 10:00, which ended up being the session high. From there, the ES quickly puked ~17 points down to 4591.50 at 10:15, popped to a lower high at 4603, then back-and-filled in a five point range between 4594 and 4599 for the next 1.5 hours.
The ES broke to the downside, trading to a session low of 4591 at 12:30, rebounded to 4601.50 at 1:00, pulled back 4596 at 1:35, then rallied to a “double top” at 4606.25. The ES traded down to 4598.25 at 3:40 and traded 4603 as the 3:50 cash imbalance showed $372 million to buy. From there, it traded up to 4605.50 and traded 4601 at 4:00. After 4:00, the ES traded sideways and settled at 4598.75 on the 5:00 futures close.
In the end, it was another “dog days of summer” session. For the regular session, the ES had a trading range of just 18.25 points. In terms of the ES’s overall tone, it was stagnant and not overly strong or weak. In terms of the ES’s overall volume, just 1.15 million contracts traded — welcome to summer.
Technical Edge
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NYSE Breadth: 33% Upside Volume
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Advance/Decline: 32% Advance
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VIX: ~$15
SPY
Sticking with the 1-hour chart on SPY, we’re trading $454.50 and are about in the middle of the overnight range. That makes the open tricky, as we don’t know which way they will run it first.
If the SPY rallies, watch yesterday’s low at $455.50. Does it “accept” price back above this level or does it “reject” price back below. My guess would be a rejection, at least initially, as we have been on a tear and this is as good of an excuse as any to take some air out of the market.
If they sell the open in SPY, watch the $453 area for any life, while knowing that the $451.50 area is a much more resilient support level.
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Upside Levels: $454.50, $456.50, $457.75
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Downside Levels: $453, $451.50
S&P 500 — ES Futures
While we go intraday on the SPY and SPX, let’s look at the daily chart here. Not sure if it will set up this way, but a dip down to 4580 could be attractive for active traders. That’s the 10-day moving average and the 61.8% retracement of the recent rally.
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Upside Levels: 4582-85, 4492-95, 4607-10
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Downside levels: 4550-58, 4545, 4523
NQ
I am sticking with the 1-hour chart we have used all week long. Why? Because it continues to work!
After holding the 15,800 area on Monday, that zone broke in Tuesday’s Globex and gave us a test of the 15,700-25 zone, where it bounced 120 handles from.
Overnight, the NQ broke this zone and traded down to our 15,600 zone (aka the 78.6% retracement). That area held, but now 15,700-25 is overnight resistance. Let’s see if this area is reclaimed or if it’s resistance.
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Upside Levels: 15,700-25, 15,790-800, 15,900-15
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Downside levels: 15,600, 15,520-550
QQQ
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Upside levels: $380.75, $382.75
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Downside levels: $379, $377.50, $375-76
Open Positions
Bold are the trades with recent updates.
Italics show means the trade is closed.
Any positions that get down to ¼ or less (AKA runners) are removed from the list below and left up to you to manage. My only suggestion would be break-even (B/E) or better stops.
** = previously mentioned trade setup we are stalking.
Down to Runners in GE, CAH, LLY, ABBV, AAPL, MCD & BRK.B. Now Add META, AVGO, UBER, CRM, AMZN, CVS, AMD, TLT and YM.
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DOCN — Long from $38.25 — Small trim at $39.75 to $40 and a second trim above $40.75. Trimmed more between $45 and $47 and down to ⅓ at $49.50+
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Should have us down to a ⅓ position. I think we may be able to get $53+ out of this.
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JPM — Many are long from $143-145. This is a longer term swing. Trimmed $153s, then $157.50+ on 7/24.
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Down to ½ position vs. Break-even stop. Can make small, ~10% position trim if we see $160+
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ARKK — Long from ~$46 — trimmed near/at $50. Still carrying ⅔ to ¾ of position. Trim at ~$52
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Adding back what we trimmed if we see $45 to $46
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WMT — went weekly-up from this week’s play — Trimmed above $157.55 and then $158. Down to ½ position with trim at $160+
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Break-even stop, down to ¼ position or less at $162.50
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Look for reset trade back down to ~$158!
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CRM — I’m long CRM from $227.50. Hard stop at $221.50. Look to trim near $230, then $232.50. If we regain our entry price, can also consider a trim there as it would be a “kick save” on the (so far) failed setup.
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** XOM — watch for the monthly-up over $108.50.
Go-To Watchlist
Feel free to build your own trades off these relative strength leaders
Relative strength leaders →
(Lack of updates here but these names remain my top focus list!)
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Growth stocks ARKK — DKNG, DOCN, UPST, SHOP
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LLY, CAH
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Energy stocks — VLO, SLB, EOG
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AI stocks — NVDA, AMD, AVGO, ADBE, SMCI
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Mega cap tech — MSFT, AAPL, META, CRM
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Select retail — CMG, ELF, LULU, COST
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Homebuilders ITB — TOL, KBH, DHI
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BRK.B
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ABEV, DXCM
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Cruise stocks — RCL, CCL, NCLH
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DAL, DT, AMAT
Relative weakness leaders →
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DIS → new 52-week lows
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CF, MOS
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PFE (all vaccine gains now gone)
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EL, FL, DG
Guest Post
Topic: PTG/Taylor 3 Day Cycle
Author: David D Dube’ (a.k.a. PTGDavid)
Website: https://polaristradinggroup.com/
Prior Session was Cycle Day 1 (CD1): Another quiet summer trading session as price continued to balance within a sideways range bound zone. Being a Cycle Day 1 low was established at 4591. Prior range was 30 handles on 1.147M contracts exchanged.
…Transition from Cycle Day 1 to Cycle Day 2
This leads us into Cycle Day 2 (CD2): Cycle day 1 Low (4591) was established late in the session, which suggests potential further price weakness for CD2 (today). Range bound markets are a tough call for direction, since most breakout attempts are failures, only trapping unsuspecting traders. Additionally, low volatility and sub-par summer volumes adds another layer of potential directional confusion. Best course of action is to be patient, reduce position size and let Mr. Market validate the next directional breakout on expanding volumes and range.. As such, scenarios to consider for today’s trading.
Bull Scenario: Price sustains a bid above 4590, initially targets 4605 – 4610 zone.
Bear Scenario: Price sustains an offer below 4590, initially targets 4575 – 4570 zone.
PVA High Edge = 4605 PVA Low Edge = 4597 Prior POC = 4600
*****The 3 Day Cycle has a 91% probability of fulfilling Positive Cycle Statistics covering 12 years of recorded tracking history.
For more detailed information for both bullish and bearish projected targets, please visit: PTG 3 Day Cycle and/or reference the Cycle Spreadsheet below:
Link to access full Cycle Spreadsheet > > Cycle Day 2 (CD2)
Thanks for reading,
PTGDavid
Economic Calendar
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!
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