Earnings and Econ reports will be a focus until then.
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Don’t Forget: The Long-term performance of the S&P 500, some longer-term setups, and 5 red flags that showed up before the 2022 bear market.
Our View
I know there are some big earnings and economic reports, but I think the ES has a cloud hanging over it: The two-day Fed meeting.
Most people think the Fed will increase rates by 0.75% tomorrow and 0.50% in December. The former is all but a certainty, while the latter is more of a 50/50 situation. Traders are waiting for clarification from Powell about what the rate-hiking rhetoric will be going forward.
Will the Fed remain aggressive or will it begin to pause after four 75 basis point hikes in a row? This is for the December projections:
I keep a spreadsheet that has some of these projections written down over time. I like to see how the market is adjusting to rate-hike expectations. Well, let me run a few figures by you.
- On August 7th, the market was pricing in rates of 3.25% for December and 3.25% for February 2023.
- On September 7th, those rates climbed to 3.75% for December and 3.75% for February 2023.
- Now those rates stand at 4.25% for December and 4.75% for February 2023.
The point is, the rhetoric is now becoming “higher for longer” rather than “lower for longer” — even though all anyone is focused on is a pivot from the Fed.
According to Reuters, “Goldman Sachs economists said the U.S. Federal Reserve could bump up interest rates to as high as 5% by March 2023, 25 basis points above its earlier predictions, Bloomberg News reported on Sunday.”
That’s also 25 basis points ahead of consensus estimates, although the Fed Funds rates are pricing in a 30% chance of that outcome as of this morning.
Our Lean — Danny’s Take
Yesterday’s Lean hit the nail on the head — sideways to lower action following Friday’s big rally — and the Technical Edge section surgically plucked 25 to 30 points out of the S&P futures.
Traders & Faders, let me tell you, that puts us in a great position ahead of the FOMC announcement. That’s as we now have a few dozen S&P points in our pocket to work with and lets us come into the event knowing we are already ahead.
Coming into Tuesday — the first trading day of November — the ES is already up 40-something handles, while the dollar retreats and bonds rip. Our Lean: We obviously have to be aware of a sell-the-open possibility on a gap-up like this, but pay particular attention to last week’s high near 3924. It’s the line in the sand this morning, in my opinion.
Above it now, a break back below this mark could give us a little fade to work with against a tight stop, as the Globex high is only 4 points higher.
If the ES retreats ahead of the open, a post-open rally could get us another fade trade if we push through the globex high and fail to hold it.
Technicals to come in a separate email.
Daily Recap
One-word summary: Chop.
The ES traded down to 3884 on Globex and opened Monday’s regular session at 3883.25. After the open, the ES rallied up to 3894.75, and sold off down to 3872.25 at 10:09, and rallied back up to 3889. From there, it dropped back down to 3872.25, a lower low.
After several small dips, the ES traded up to 3904.50 at 11:58 and dropped 21.50 points down to 3883, then rallied back up to a lower high at 3900. In essence, there were selling the 20 to 30-point rallies and buying the 20 to 30-point dips. As the afternoon wore on, the ranges become a little bit tighter.
The ES traded 3888.75 as the 3:50 cash imbalance showed $2.7 to $3 billion to sell and sold off down to 3880.75 at 3:55. It traded 3882.75 on the 4:00 cash close and settled at the same price on the 5:00 futures close. In the end, it was exactly like what we said it would be in the “Lean” — the futures traded sideways to down after Friday’s big rally. In terms of the ES’s tone, the larger part of the move down was done on Globex and chopped in a 30-point range for most of the day. In terms of the ES’s overall trade, volume was steady at 1.88 million contracts traded — light for the recent action.
Technical Edge
- NYSE Breadth: 51% Upside Volume
- Advance/Decline: 47% Advance
- VIX: ~$25.75
Apologies on the late charts. Had some technical issues on my end. Cheers
S&P 500 — ES
Yesterday was a chop-day/theta burn ahead of the Fed’s rate decision on Wednesday. I wouldn’t be surprised if today is too.
On the daily chart, the ES continues to chop around at a key area, failing to break lower but stuck at the 50% retracement and key pivot from the summer.
If it can clear 3925 and more importantly, sustain above it, then bulls may jam this up to 4,000. If not, 3875 to 3880 remains in play on the downside.
A break of this zone puts the 10-day and 50-day moving averages in play near 3835.
ES — The Trade
On the left is the 30-minute chart and on the right is the H1 chart. The dashed line is last week’s high — the line in the sand.
We are seeing a nice trade back below this marking this morning, with a Globex high up around 3928.
If we continue to pullback on the open, see if the ES can find support in the 3913 to 3918 area. That’s the 10-ema range on the chart above. If not, 3900 could be on tap.
On a rally, we could have a fade-trade setup on a push up through the Globex high and a reversal back below it. At the very least, that gives us a low risk short to work with, although if breadth is strong and the bulls want to run, it could steam higher so don’t be stubborn.
Remember, the ES is already up about 1% ahead of the open.
SPY
Last week’s high is $389.52 and the SPY is set to open near $390.15.
To me, that at least has me staring at last week’s high as a potential pivot. In reality, an open above this level and a trade down through it could give us a small fade-trade to work with, with 50 to 60c in risk assuming the SPY doesn’t run too much post-open.
Otherwise, we’ll sit back and wait to see if anything else develops. We nailed yesterday, so no rush to today’s party.
Go-To Watchlist
*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.
Open Positions
- GIS — Down to ⅔ at least, but ½ position here is now okay. B/E stop. Next trim is $82.50 to $83, then $85 to $86.
- UUP — should trim at least ⅓ on this morning’s gap-up open if you have not yet trimmed. Carrying a ⅔ to ½ position if we hit $30 is reasonable.
- Nice bounce from our entry but short-term overhead hurdles exist (10-day & 21-day, plus the gap-fill at $30.07).
Relative strength leaders →
Top Picks (these have been Robust lately):
- LNG
- MCK
- CAH
- CI
- CCRN
- GIS — Weekly-up
- LPLA
- REGN
- ENPH — it’s back on the list.
- VRTX
- UNH
- MRK, AMGN
- XLE — XOM, CVX, COP, BP, EOG, PXD
- TJX
- NOC
Economic Calendar
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