Nasty Rug-Pull Erases Thursday’s Rally

PCE was mild this morning

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Our View

In 24 hours, the ES rallied from Wednesday’s closing low of 5561.25 to Thursday’s high of 5663.75, a gain of 102.5 points, and then sold off 66 points. In these types of markets, everyone loses. When they rally, they squeeze out the shorts and run the buy-stops. When the ES falls, it forces out the longs and runs the sell-stops. 

It’s what the PitBull coined as ‘water in the bathtub.’ It’s been a vicious game of false starts that I do not think is going to change anytime soon. Back in the 80s, when I was involved in UBS program trading or S&P index arbitrage, it used to make the PitBull go nuts. He said that the S&P would be ruined by program trading, just like the XM was, and wanted to take out a half-million-dollar ad in the Wall Street Journal condemning program trading in the S&P. 

He said it gave the computers an unfair advantage and created false moves that took people out of their positions. They say without algorithmic and high-frequency trading, there would be no volume, but I disagree. Despite its inefficiencies, the S&P pit used to handle 150k to 180k contracts a day in the pits, and program trading only made up 30%. By the time the UBS desk stopped using the pit, it had risen to 60% or 70%, compared to 90% today. 

I asked ChatGPT about the negative effects of high-frequency trading (HFT) on the markets, and this is what it said:

Algorithms and high-frequency trading (HFT) can have negative effects on the stock market, including:

The PitBull can complain until the day he dies, but that’s not going to change the direction of algorithmic and HFT trading. Now that AI is out there, it will be seeking its market share, which won’t be coming out of the remaining 10%. It truly is the battle of the bots.

Our Lean 

When the markets start ripping, I think they will keep going up and they did until the NQ ran into a brick wall up at the 19,693.50 high. In two bars the NQ dropped from 19,634.00 to 19,400.50 in a matter of minutes. The whole drop from 19,693.50 down to the late low at 19.337.00 was a 356.5 point drop — in other words, vicious. 

Our Lean: The PCE number is out and it’s not enough to alter the Fed’s rate-cutting path. It’s the last day of August and so we could also see some fund flows into equities. We’re set to gap higher, but I don’t want to buy the gap-up. Instead, let’s see how a 15-25 point drop is handled and go from there. Remember, we’re going into a long holiday weekend near the end of summer and ‘thin to win’ can take over. Ultimately, I’d like to buy the dips today and ride the ES higher, but yesterday’s action is a reminder that volatility can pop up at any time. 

MrTopStep Levels:

MiM and Daily Recap 

The ES traded up to 5635.75 on Globex and opened Thursday’s regular session at 5630.50. After the open, the ES traded up to 5632.75, then pulled back to 5624.50, and rallied to 5637.50 at 9:37 a.m. It sold off to 5620.50 at 9:54 and then rallied 25.75 points to 5646.25, dropped to 5628.00, and rallied 31.25 points to 5659.25. After this high, the ES pulled back to 5641.75 and then rallied to a high of 5663.75 at 12:51. It sold off to 5648.50, then rallied to 5655.50, pulled back to 5646.50, and rallied again to 5655.75.

The ES and NQ saw a sharp move due to the largest program of the day—a sell program that pushed the ES down to 5598.00, a 57.75 point drop from print to print in just a few minutes. After this low, the ES rallied 28.5 points to 5626.50 at 3:30, traded down to 5611.00 at 3:48, and traded at 5608.75 as the 3:50 cash imbalance showed $1 billion to buy. It sold off to 5602.75 at 3:57 and traded at 5610.25 on the 4:00 cash close. After 4:00, the ES rallied to 5620.75 at 4:30, pulled back to 5616.75 at 4:51, and traded at 5618 on the 5:00 futures close, basically flat for the day.

In the end, this trade is chopping people up — including me. In terms of the ES’s overall tone, the only thing I can say is, bid, bid, bid, sell! In terms of the ES’s overall tone, the late selloff was big, but the early rally was bigger.

Technical Edge  

Economic Calendar

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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!