Our View
I don’t care what anyone says, we have never seen these types of moves ever. Not in the 1987 crash, not in the 2000 tech bubble, not during the 2008 credit crisis, and not in the 2010 flash crash.
There has never been a time when the Nasdaq falls 868 points from its high to the session low, then rallies 818 points into the close. Nor have we seen the ES rally over 200 points in just a few hours.
When I was doing the UBS S&P program trading at my desk in the S&Ps, the PitBull warned me that program trading killed the XMI and that someday it would ‘kill’ the S&P/stock market.
I think yesterday was what he was talking about.
3.7 million ES contracts were traded on Monday, while algorithmic and high-frequency trading make up 75% to 80% of the daily volume. If that was the case yesterday, it means 2.960 million contracts came from program trading. I’m not saying that’s an exact number, but rather, these programs dominate the index futures and stock market.
At the very least, it would help explain the extreme moves. They say these programs supply liquidity — and I’m sure they do — but I’m also sure they are not designed to help traders; they are there to distort the moves and make it more difficult for people trading their own money and for them to profit off individual traders.
Our Lean
I was calling the S&P much better through the first two weeks of the month, but it has been difficult sledding over the past few sessions. Ordinarily I can come into the session with a plan (the one I write here) and work off that. Of course there are times I deviate from it and need to adjust — that’s just called trading.
In an environment like this though, it’s not easy to come in with a plan and stick to it. Again, how often does the ES fall 200+ points from the Globex high to the day’s low, then rally 200 points by the close?
That said, I have been reading it very well during the day session. If you look at yesterday’s Twitter feed I had several good calls — not all of the moves — and nailed the late-day 100-point rally. If you are someone like me that likes to scalp and not take on too much risk, these are not the best markets for that. However, I also hold longer when the ES goes my way.
Our lean, I don’t think the big rips and dips are over.
I don’t think it’s a weakness to say “I don’t know.” In fact, I think it’s a strength and a sign of being humble. I honestly don’t know how the market will trade with the Fed just 1.5 days away and anyone that says they do know is most likely full of you-know-what.
Let the market open today and see what it does.
Does the ES rally after the open and work off this gap-down or does it rally slightly and then roll over? We have to keep the recent trend in mind even if it’s still prone to a stop-run on the upside.
Lastly, don’t rush or force anything. These ranges are wide and we all need to wait for a fat, slow pitch down the middle we know we can hit. Stay safe out there, traders.
Daily Recap
The ES had an overnight high of 4427.50 but opened at 4325.25, down more than 100 points. There’s a reason we said in yesterday’s technical section that we don’t like gap-ups during a downtrend.
After the open, the ES traded up to 4340.50 — a meager 14 points — dropped down to 4263 at 10:09 and then rallied back up to 4315 at 10:45, about 10 points shy of the open.
At 11:51, the ES sold off to new lows at 4234.50, down almost 150 points on the day and more than 190 points from the Globex high. The ES rallied back up to the 4263.50 level and then dropped down to the low of the day at 4212.75 going into 12:30 — down ~215 points from the Globex high.
After the low, the ES rallied up to the 4237 area and made a higher low at 4218.75 before several buy programs pushed the ES up to 4297.50, 84.50 points off the low. After pulling back down to the 4266 area, the ES rallied back up to 4309 and chopped around in a wide range before another big wave of buy programs hit.
That pushed the ES up to 4322.50 at 3:00 before it shed 20 points, pulling back to 4302.50, then rallied up to 4341.50 at 3:16. Just because a short-covering rally was in motion does not mean the ranges weren’t wide. Case in point, the ES dropped down to 4316.50 just a few minutes later, at 3:20.
The ES rallied back up to a new daily high at ~4346 at 3:27, pulled back 20 points, then rallied up to another new high at 4375 at 3:40. A 24-point dip was bought as the ES was then pushed up to 4384.
On the 3:50 cash imbalance, the MIM showed $2.4 billion to buy and traded all the way up to 4406 at 3:53, dipped to 4386.50 then rocketed up to 4410 at 3:59 and traded 4404.75 on the 4:00 cash close.
After 4:00, the ES drifted slightly higher but settled at 4407.50 on the 5:00 futures close, up 26.50 points or 0.6% on the day.
In the End
In my 39 years on the floor, I have never seen anything like yesterday. In terms of the ES’s overall tone, it was some of the worst price action I have ever seen, followed by the largest intraday rally I have ever seen — in what, 3.5 hours?
In terms of the ES’s overall trade, volume was extremely high at 3.707 million futures 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: 54.5% Downside Volume
- NASDAQ Breadth: 53.2% Upside Volume
Man, what the hell do we say about that session?! The market was puking lower and lower and lower and…
Then finished green?
That’s so incredible — so incredible in fact:
Yesterday, I said:
“A gap-down open at least gives bulls a chance to push the momentum back the other way. That’s rarely the case on a gap-up, as the sellers really lean into the indices and erase the gains.”
That being said, yesterday’s action is not exactly what I had in mind when I wrote that — I absolutely did not expect the market to finish green on Monday. Not a chance. Downside breadth was running at about 94% downside volume on the NYSE shortly after 12 p.m. on the day.
The question now becomes, how much of this rally sticks? The S&P and Nasdaq futures are down about 1.5% as of 9:30 p.m., but we’ll have to see how they’re trading in the morning. UPDATE: About the same to slightly worse (7:00 a.m.)
At Monday’s low, the Nasdaq was down about 18.5% from the highs and the S&P was down 12.4%. In my opinion, the markets are adjusting to the Fed’s planned rate hikes and more hawkish stance.
For what it’s worth, the expectations are not for a hike on Wednesday, but for a hike in March.
Game Plan
“The further the S&P goes in one direction, the tighter the rubberband gets — eventually we’ll likely see a snap-back rally.”
That was from yesterday and it absolutely proved true. Again, I’m not pounding my chest and saying I expected a green finish in the market — I didn’t — but I can’t say I’m surprised by a face-ripping rally.
I hate saying this — I really do — but today’s action makes it tough to navigate because the risk levels are now so wide vs. the recent lows in most assets. A gap-down doesn’t make it easier.
We are in the reaction business, not the prediction business. If a trade comes across that’s a juicy R/R with reasonable odds, by all means give it a try (especially with a smaller position size!) But now is not the time to force trades if they’re not there. I have no shame in saying I’m sitting twice as long, passing on twice as many trades and only looking for the good ones that come by.
If we had a gap-up, we could honestly start sniffing for some short trades into resistance. But so far we have a massive rally off the lows and now a big gap down. Not easy.
I was hoping the market would be somewhat calm as I came to visit with @MrTopStep but clearly the ES and SPY couldn’t contain themselves.
S&P 500
Yesterday we were looking for the SPY to find support somewhere between the Q4 low and the 50-week moving average. While it overshot these levels intraday, it ended up holding by the close.
As for the SPY, I’m still keeping an eye on last week’s low at ~$438. If we happen to open above that level (not looking likely as of now) and lose it, it could open up the SPY for more downside.
Below last week’s low (and the 50-week), and I think the Q4 low at $426.36 has to be on our radar. Below it puts Monday’s back low in play.
When levels break in this type of tape, there is only one way to play: Buy the reversal if we get a quick reclaim or get the hell out of the way.
On the upside, I’m watching the 200-day. If we can go daily-up and reclaim the 200-day, it becomes a question of how far can we go?
$450 sounds like it might be a stretch, but it would send the SPY back to its prior support zone from November and December and it’s the 50% retracement of the current range.
Nasdaq
As for the Nasdaq, you can see how Monday’s rally is being greeted. Back below the Q4 low now, we have to see if it can reclaim this level.
On the upside, a daily-up move could put the declining 10-day and 200-day back in play, and/or the ~15K level. If the Q4 low is resistance on the upside, it could set us up for more downside.
The risk range here is incredibly wide thus far.
Individual Stocks
XOM gave us a decent trade off the open, going 2:1 on our R/R, but soon rolled over with the rest of the market. Energy overall did pretty good in the afternoon, but what didn’t do good yesterday?
I want to keep an eye on energy again, because oil prices are up right now (vs. a 1.6% dip for the S&P futures) and the XLE & Co. are only down slightly in the pre-market.
A daily-up rotation that sticks could be worth a shot on the long side, but we will need some participation from the S&P 500 to get any lasting momentum. For example, XOM is down 16 basis points in the pre-market right now. This sector could remain as a go-to space for trades today.
PEP
I don’t know if we’ll retest yesterday’s low, but PEP has been a defensive leader. If we do get a retest of the low, it may set up as a decent R/R reversal if ~$169 is undercut then reclaimed. Keep in mind, that’s also the 50-day.
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.
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
