Danny’s View — Market Is Spooked
Let’s face it, the new Omicron variant has spooked the S&P 500 and caused a big leap in volatility. The VIX traded all the way up to $30.68 early in the day but settled at $27.75.
The elevated fear gauge has played a big part in the huge swings we have been seeing, as risk has gone up significantly.
Due to technical difficulties, we were not able to get Jeff Hirsch from @StockTradersAlmanac in the MrTopStep chat yesterday, but we will today. In addition to my other questions, I also want to ask him what happens after the S&P falls sharply on the first trading day of December.
I really believe in the end-of-the-year seasonal stats and I firmly believe that Santa will come to town. I understand that confidence gets shaken after big one-day drops, but I think you also have to remember where the ES started out in 2021 — near 3750 for those wondering.
We knew the rallies were not holding leading up to the most recent dip and the ES finally broke out of its big back-and-fill pattern and dropped hard.
Trader Dave @realtraderdave was pushing the long side hard yesterday morning and believes the rally could last a few more days. I agree, but the recent trade has been what we call “up a day, down a day price action.”
If that’s the case today, I suspect that the ES won’t go straight up like it did yesterday. Remember, we have the jobs report to navigate at 8:30 am.
Our Lean
From Wednesday’s 4497.75 low to yesterday’s high at 4593.75, the ES has rallied 96 points. I truly want to think the coast is clear, but the VIX is too high for that right now — as is the volume.
I know most people don’t like the increased volatility, but it’s also an increase in scalping opportunities.
I am long the ES from 4535.50 and hoping for another rip, but also prepared for another dip! Our lean is to sell the early rallies — especially if the ES gaps higher on the open — and buy the pullbacks. My only concern is some type of late-day walk away.
Have a safe weekend and we will see you next week.
Danny
Danny’s View: The Opening Print Recap
I have a real hard time getting bearish when the S&P falls sharply. I also have an even harder time getting short when the ES sells off like it did on Wednesday. I fully admit I didn’t see it coming, but as the headlines hit, it wasn’t hard to figure out.
After the first real drops, the ES fell to a big discount vs. the S&P cash, which kicked in the sell programs and pushed the futures into hundreds of sell stops.
After closing at 4507 on Wednesday’s 5 pm-close, the ES traded up to 4552 on Globex, up 54 points, but opened the regular session at 4510. Clearly, there was some nervousness coming into the session.
After the open, the ES dipped down a few points to 4606.25 at 9:33, then rocketed higher up to 4666.50 at 10:06, up 56 handles in 26 minutes. Then we had some wobble.
The ES was able to make new session highs at 4566.75 but ultimately pulled back to a low of 4523 in the 10:30 window, ~44 handles off the highs. Despite strong breadth, there was a lot of two-way action in the market.
The ES resolved higher despite the morning volatility, hitting a new session high at 4587 at 12:30. From there, we got a 22-handle dip down to 4565 at 1:30, then a 29-point rally to the day’s high at ~4594 at 3:30. That’s also where the ES tagged this week’s VWAP and was instantly met by sellers.
The ES traded 4588 at 3:50 as the MIM came out heavy again, this time with $3.798 billion for sale and the futures dropped down to 4572.25 at 3:51. The ES traded 4577.50 on the 4:00 cash close and settled at 4585.25 on the 5 pm futures close.
In the End
I’m not sure if yesterday’s rally was just another short squeeze or if it was new buying. Over the last four sessions, total MOC selling is close to $18 billion. I have not seen that much cash selling in a long time.
In terms of the ES’s overall tone, the ES was firm and held on every pullback. Breadth was strong. In terms of the ES’s overall trade, volume was high at 2.52 million contracts traded. It’s the third straight session we’ve had more than 2.5 million contracts change hands.
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Technical Breakdown
NYSE Breadth: 82.9% upside volume
NASDAQ Breadth: 66% upside volume
The back-and-forth action continues, but it was really encouraging to see the NYSE breadth hold up through yesterday’s up-and-down action. An ~83% upside day was solid, but the fact is, volatility persists.
The VIX hit its highest level since January, while volume for the S&P futures is at ~10 million for the week — and we still have an NFP Friday to go!
If we eclipse 11.68 million — so we need about 1.7 million contracts to change hands today — then it will be the highest-volume week since March 2020. Let that sink in.
For the month of December, the S&P 500 is currently up 22 basis points. I know it doesn’t feel that way, though.
The question still remains: Do we have more downside left in this correction or is it a healthy shakeout before a potential year-end push? Yesterday I wrote:
We are technically oversold at the moment. The question is, can a snap-back rally be sustained or will the market simply use the rallies as selling opportunities?
Today could go a long way in terms of answering that question.
The recent headline action has been tied to Omicron, but I think the bigger story here is the Fed. A more hawkish stance from the Fed is not something the market wants to hear and if that tone continues, we will be vulnerable to knee-jerk reactions lower from Powell & Co. This will be something to keep an eye on going forward.
SPY
I am going to keep the technical summaries pretty short here. We have gone over the charts all week, so there’s no sense in rehashing them again.
Above is the SPY. Its biggest job today will be a close over last week’s low, at $457.77. For the ES, that 4577.
A close below that mark today will leave us in a weekly-down rotation going into the weekend. Below $455.30 and we will end the week in a monthly-down rotation too. That’s not the end of the world, but it will leave the two-day low at ~$450.30 vulnerable.
Above last week’s low and the SPY will have to contend with the declining 10-day moving average, currently near $460.50. Above that and the $464 to $465 area could be in play.
QQQ
Essentially the same story here for the Nasdaq. Bulls need the QQQ above last week’s high at $389.77 — call it $390.
As long as it remains below that mark, this week’s low at $384.34 remains vulnerable. Below that could put the $382.75 level in play, along with the 50-day.
Back above $390 could put the 21-day moving average in play near $395, followed by $400 to $401 resistance.
Individual Stocks
Today’s the NFP jobs report, so the early trade could be a little sloppy. There are only a few days a month where I really pause and don’t step in unless the setup is very good.
Those days include the NFP report, Fed days, and monthly and quarterly Opex days.
The homebuilders traded incredibly well yesterday, something we highlighted in yesterday’s newsletter. The XHB ETF closed higher by 3.4% on the day and went two times daily up over Tuesday and Wednesday’s high. Let’s see if we can get a further push higher in this group now.
As far as individual stocks go, Home Depot and Ford have my attention, but my main focus today is going to be on the SPY and QQQ (or ES and NQ depending on your asset preference).
HD
If it can clear the four-day high near $410.80, a push into the $414 to $415 area could be in store next. On the downside, $400 and the 10-day moving average have been support. If that changes, bulls will need to reassess.
F
Essentially trapped between $20.50 on the upside and $19 on the downside.
A daily-up rotation over $20.11 could put $20.45 to $20.60 in play. A breakout over last month’s high at $20.79 could put $21.25 on deck, followed by a potential longer-term target near $23.
Disclaimer: Charts and analyses 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!
Economic Outlook
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