Our View
Over the past few days, traders have been snapping up technology stocks like wildfire. Clearly, the NQ has been the leader — in both directions.
When the NQ went offered (for sale), so did the ES, and when the NQ went bid (buying), so did the ES.
After taking a beating at the start of the new year, the S&P is less than 2% off its record high and down 0.90% in 2022, while the Nasdaq is down 2.9% YTD.
There is talk about the stock market returning to normal after the onslaught from the Covid-19 pandemic, but I don’t buy that theory at all. The new normal is 1% and 2% moves almost daily — and by no means is that normal.
Our Lean
I know it can seem “too simple to be true” but our KISS approach this week has made a lot of traders a lot of money.
Our Lean is to sell the rallies today.
That doesn’t mean we won’t buy a 30- to 40-point pullback, but the ES is up 3.1% in the last three days and the NQ is up 4.4%. That’s a big move in a short span and it was right to sell the gap-up open this morning.
Picking the days when the ES stops out is next to impossible, but it feels overextended to me. If you’re a bull, you need to look for a few sideways-to-lower days and some back-and-fill action.
Daily Recap
The ES traded up to 4730.50 on Globex Wednesday morning and opened at 4723.50. After the open, the ES traded up to 4734.50, sold off down to 4716.25, and then rallied back up to 4736.75 at 10:00 a.m. (after a buy program into the half-hour, just like we’ve talked about).
After a slight dip, the ES rallied up to 4738.50, dropped more than 40 points down to 4696.75 at 11:17, and traded back up to 4722.75 at 11:42. From there, the ES sold back off down to the 4710 area, traded up to 4726.25 going into 1:00, and dropped more than 20 points down to the 4705 area just after 2 p.m.
Once the S&P gapped higher, pulled back, and bounced, it was pretty slow and choppy.
The ES rallied back up to 4716 at 3:18 and then drifted back down to the 4708.75 area at 3:26. After the dip, the ES rallied back up to 4721 at 3:47 and traded 4717.50 as the 3:50 cash imbalance showed $506 million to buy.
While it traded up to 4724.25 at 3:55, the ES dipped back down to 4717.50 on the 4:00 cash close and settled at 4718.75 on the 5:00 futures close, up about 15 points or 0.3% on the day.
In the End
In the end, it was a choppy trading session. In terms of the overall tone, the ES acted firm but the leader was the NQ. In terms of the ES’s overall trade, volume was steady at 1.528 million contracts traded.
As we all know, there’s no crystal ball when it comes to trading stocks, options, or futures. But the Market Imbalance Meter may be as close as it comes. Knowing how the “Big Money” is placing its bets can give our trading room a big wave to ride — or a warning sign to stay out of the water. Come check it out now, risk-free for 30 days.
Technical Breakdown
- NYSE Breadth: 61.8% downside volume
- NASDAQ Breadth: 46.2% downside volume
“The question now becomes, do we get a Day 3 — that is, a third follow-through day — or will there be some chop?”
Well, we did get a Day 3 follow-through rally with the initial gap-up. Then the market mellowed out a bit after that. It was a great multi-day rip and now it becomes a question of whether the market does some back-and-fill here (with Opex next week and a short trading week) or if it powers higher like it did on the last pullback.
Game Plan
This is not the market we have been used to over the last 12 to 24 months. Old tech is beating growth tech (IBM, ORCL, CSCO, HPQ, etc.) Energy stocks are dominating. Financials are doing pretty well (and start to report earnings tomorrow) and so are value stocks like PG and KO.
Our goal as traders is not to get married to a certain group, but to find the ones that have momentum and trade the best setups.
I understand that these aren’t the “most exciting” stocks, but making money in the stock market is what matters in this context and it’s what we’ll continue to do.
If the stocks on your radar aren’t doing well, find a different radar!
S&P 500
Above is a weekly chart and below is a daily. Both are of the SPY. Two things are evident to me when I look at this chart.
- The trend is still intact and has been ridiculously strong.
- At some point, we have to wonder when — not if — we get a deeper dip.
The reality is pretty straightforward. Over the long-term, stocks favor the upside, rising roughly four out of every five years since the 1950s. That said, we haven’t had a 10%-plus pullback since March 2020.
As we close in on two years from that point, I think it needs to be in the back of our heads that it’s possible we experience a larger dip this year.
A 10% to 12% correction would be healthy, but it doesn’t have to wreck the trend. For example, if it happened right now it would take the SPY down to the 50-week moving average and possibly the Q4 lows.
When we look at the chart above, there could still be more upside — possibly up to the 261.8% extension. However, as we continue to ride the 21-week moving average, consider how many times it has tested this measure in the last six weeks vs. how many times it tested it prior to Q4 2021.
That’s waning strength, in my opinion. Again, it doesn’t mean the rollover will happen tomorrow. But it’s something to store in the back of our mind.
The bottom line from the weekly view is that the trend may be waning but it’s still intact.
When we look at the daily, we see the SPY is up big from this week’s low and it’s also back above all of its daily moving averages, the daily VWAP measure and last week’s low at $464.65.
In the short-term — i.e. today — I’m keeping an eye on yesterday’s low. If the SPY loses this mark, it will also lose the 10-day and 21-day moving averages, putting the 50-day and last week’s low in play.
To lose all of these levels puts this week’s low back in play.
On the upside, a sustained move back over the $473.60 area could open the door to the $477 to $479 area.
Individual Stocks —
We had an incredible couple of trades yesterday.
ARKK faded from resistance right on cue, while GM actually gave us the undercut of the lows we were looking for and we were able to take a huge reversal with it as it bounced hard from the lows.
When we get a couple of nice wins, it lets us sit back a little bit and get even pickier for the next setups. Speaking of which:
Energy and financials are dominating, but yesterday a lot of these names looked to be running out of steam. It could be a pause day and they resume higher this week or it could be a temporary peak and we get a nice reset in these sectors.
Start with the XLE and the XLF, then work your way through the list of these names.
For energy, man, it includes basically every stock. You want to sniff out the strongest trends and/or the highest quality stocks for when they do dip. I’m looking at PXD, FANG, DVN, SLB, COP, CNQ, and XOM, among a few others.
On the bank side, the regionals really stand out. The ETF for that is KRE. In total, I have my eye on ASB, TD, STL, MET, BAC, among a few others.
If we do all the charts for these stocks, this newsletter will run out of space (literally),.
So keep those on a watch list somewhere and look for tests of the 8/10-day moving averages. More aggressive traders can do that with the 4-hour chart. Keep in mind that the banks will start reporting earnings soon.
Just some follow-up on a few names from yesterday: PG and UNP both gave us an inside day. I would prefer dips in these names — PG to the 10-week and UNP to undercut the low and test the 50-day — but for now they may go inside-and-up.
I don’t consider that as high quality for an R/R setup in this scenario, given the move in the S&P and with possible overhead resistance from the short-term moving averages. As always though, the choice is yours.
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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