Our View
Here’s Where We Would Consider Buying the Dip
Just when everything looks whacked out, the US index markets have their largest one-day rally in over a month. All three indexes logged their biggest one-day point and percentage gains since June 24. They have risen more than 6% from their lows in the middle of June, but are still down sharply on the year.
It seems like traders are trying to use the bank earnings as a good way to gauge the health of the markets right now. According to Bank of America’s Chief Executive Brian Moynihan, consumers’ resilience and health remain strong. I fully expected that the market would rally in the summer and with July being the third-best month of the year for the S&P. Now it seems like earnings are giving investors some of their confidence back to start buying some stocks.
Maybe I’m too old school, but I can’t shake the reminder of the 1970s bear market, which only produced a 17% gain over the decade amid high inflation. I’m not saying we’re looking at another lost decade, but I do look at this as a 10-round boxing match that is still in the early rounds.
Our Lean
I told Bret yesterday that I totally blew the “Lean” yesterday. We can’t shoot 100% and I know that. On Tuesday, I was going to use one of MrTopStep’s trading rules that says ‘the ES tends to go sideways to higher after a big drop.’
I said we could bounce, but didn’t expect a 100+ point rally on ~90% upside breadth. That said, nothing surprises me when it comes to the S&P 500. Especially this year.
Most people I talk to think the markets are going to go up, and after yesterday’s big rip they very well could continue up…for now. However, I do not think the lows are in. Inflation is still raging, next week the Fed will raise interest rates by 0.75% to 1% and energy prices are still going up.
Our Lean is to use the MrTopStep trading rule I mentioned above but go the other way. After a big up-day, the ES tends to go sideways to down. That doesn’t mean if the ES pulled back enough I wouldn’t be looking to buy a dip, but I think that would have to be a 50 to 70-point pullback before I was interested on the long side. That is roughly 3900.
Daily Recap
The S&P put on quite a show yesterday. The ES traded up to 3878 on Globex and opened at 3874.50 on the 9:30 futures open. After the open, the futures rallied 5 points, pulled back 11 points to 3868 at 9:45, and exploded higher. That marked the session low, as the ES plowed higher. It rallied in the first seven 30-minute windows of the day and in 11 of the 13 30-minute windows of the session.
There’s no point in covering each little dip and each big rip. Every 5 to 10-point pullback was bought yesterday. At 3:30, the ES traded ~3930, 7 points off the recent high and 9 points off the session high. The ES traded up to a new session high at 3943.25 just before the MIM came out at 3:50 with $880 million to buy, which grew to more than $3 billion to buy. The ES closed at 3936.50 and settled at 3945.25 at the 5:00 futures close after a bullish reaction to Netflix’s earnings.
In the end, the rally was a giant cash buy program that started before the opening and raged all day. In terms of the ES’s overall tone, it was all buy-stops once we cleared 3920 and all buy programs before that. In terms of the day’s overall trade, volume was steady all day at 1.61 million contracts traded.
- Daily Range: 114 points
- H: 3948
- L: 3834
Technical Edge
- NYSE Breadth: 89.6% Upside Volume
- NASDAQ Breadth: 69% Upside Volume
- VIX: ~$24.50
Game Plan: S&P 500, Nasdaq
It’s been a roller coaster week — and it’s only Wednesday.
Tuesday was a great example of needing to be flexible. Yesterday I reminded traders not to be stubborn and watch any short profits they may have had evaporate — and worse, turn to losses.
This market can work on both sides, but you can’t get married to a position that’s moving in the wrong direction. It’s also a reminder to scale out, even taking ½ the position off when we get a nice move in our direction.
S&P 500 — ES
Yesterday, we said that for a bounce to have any meaning, the ES had to clear the 3865 to 3875 zone, putting 3900 in play, then 3920 to 3925. I did just that and exploded even higher. It was incredibly impressive given the bearish action we had on Monday.
There’s been a “change in tune” with the market, certainly. Support has held near 3740 for several weeks now and yesterday was an impressive reaction.
But let’s not forget that resistance has held for weeks now too. The ES is in a key spot right now, as it collides with the 10-week and 50-day moving averages and sits in the middle of its 50% to 61.8% retracement zone and several weeks worth of highs/resistance.
We have said for a bit now that 3920 to 3950 is a key area on the upside. Tuesday’s high is 3948 and I don’t think that’s a coincidence. Above 3950 could put 3987 then 4000 in play.
On the downside, 3900 to 3920 is a key support area. Below that and traders must be more cautious.
Trading the S&P 500 Futures
Above is an hourly chart of the ES (which includes the day session and overnight session).
I would love to see a dip down to the 3900 area. Between 3898.50 and 3910, we have a number of measures. It includes Monday’s high, last week’s high, and the 50% and 61.8% retracements to yesterday’s regular-hours range. It’s also about where the 10-day ema comes into play on the 4-hour chart.
A dip to this zone would put the ES about 40 to 50 handles off yesterday’s high and about 55 to 65 points off the Globex high. For buyers, this zone looks like a reasonable R/R if we see it.
S&P 500 — SPY
Like the ES, the SPY is impressive but still faces a key area here with the 50-day and 10-week moving averages.
For longs, they want to see SPY hold above the $390 level. If it can, bulls remain in control. If the SPY continues to press higher and can sustain above yesterday’s high (at $392.87), then $396.50 could be in play, followed by $400 and $401.44.
Nasdaq — NQ
The 12,215 to 12,275 zone remains resistance until proven otherwise.
I said if the NQ can clear this zone, then the 12,500s are in play and that still remains the case. Daily-up over 12,328.50 that doesn’t reverse lower puts the 12,500s on the table.
On the downside, 12K is virtually must-hold support for the bulls.
For buyers, I want to see the 12,120 to 12,180 zone hold. That’s the equivalent zone we looked at on the ES 1-hour chart above.
Nasdaq — QQQ
We finally got our $296.50 test in the QQQ and with a close over, it’s looking impressive.
On the upside, see how it handles the gap-fill at $299.23, then $300. Above $300 and we could see $304.50 to $305.
On the downside, bulls want to see $291 to $292 hold as support. That’s Tuesday’s low and the 50-day moving average.
UUP
We did really well with the Dollar all throughout the month of June. The type of “set it and forget it” trade where it continued to print profits as long as we didn’t micromanage it.
After some exhaustive price action, it could be setting up again. I’m watching the $28 to $28.25 zone as a potential buying opportunity and at least for now, prefer the bottom of that range. Keep this one on your radar.
NFLX
Keep an eye on the June high near $207.40. Above is an improvement, but below is not a good look.
Oil
Last week, we were looking for a bounce out of the low-$90s and we got it, taking profits near $97, then looking for $100 and the 10-day, which we are getting now.
Those who prefer to look for more upside can hold their last ¼ to ⅓ position against a break-even stop and look for last week’s high and the declining 10-week moving average near $104.
Go-To Watchlist — Individual Stocks
*Feel free to build your own trades off these relative strength leaders*
- Numbered are the ones I’m watching most closely.
- Bold are the trades with recent updates.
- Italics show means the trade is closed.
Trade Sheets: Down to 2 individual holdings against B/E or profitable stops. Good position to be in.
- MCK — We have hit two trim zones so far on MCK. Feel free to cash the last ⅓ of the position as you see fit. $335 to $340 is a potential upside target if it continues higher. Moving stop-loss up to $315 | Given the consolidation, I am thinking of holding my last ⅓ for a push to $348 to $350.
- $335 hit on Monday, up to you on how to manage from here. I’m holding the last ⅓ against a profitable stop-loss.
- DLTR — Hit our second target of “$169.50 to $170+”
- Down to ⅓ position and looking for $175 to $177 as our final target. Riding against a stop-loss at $162.50. More conservative traders who want to guarantee a profit can ride against a $165 stop.
Relative strength leaders (List is cleaned up and shorter!) →
- DLTR
- MRK
- COST
- PEP
- ABBV
- UNH
- JNJ
- XLE
- VRTX
- DG
- IBM
- MCK
Economic Calendar
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