The Fed, ECB and Bank of England all raise rates.
Follow @MrTopStep and @BretKenwell on Twitter and please share if you find our work valuable. 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
Powell didn’t say anything we didn’t know already and the ES flunked because of it — bulls were looking for a soft pivot and they didn’t get it. After falling behind the 8-ball, the Fed is overshooting. There are more rate hikes coming in 2023 and the Nasdaq just fell apart as a result.
I know there are a lot of moving parts, but higher rates are a big problem for the Nasdaq. While there have been constant rotations, the ES isn’t acting so badly. It is doing exactly what it’s been doing for the last two weeks — chopping back and forth.
There are three scenarios for year-end:
- The ES starts doing some back and fill next week and starts going up
- The ES takes out support at 4000 and trades back down to the 3920 area
- It just keeps doing what it’s doing, running all the upside and downside sell stops and going nowhere in the process (did you know, the ES is flat over the past month?)
Our Lean — Danny’s Take
After a big move Tuesday, we opened Wednesday lower at 8:30 Chicago time (9:30 ET for you New York time-zoners) and we rallied 45 handles from the opening, and then we closed below the opening level of 4054.
If we were to open higher today, anything above 4032 is a sell and if we open below 4032 — which seems evident — we are a buy.
What are we doing? Not enough people look at the futures vs. the cash.
If the ES opens below the cash close print, I would look to buy the open. I know this may not sound right, but this trade setup has been very profitable. If both fail and we fall back into the chop, my guess is we drift up a bit.
Keep an eye on the NQ. If it’s weak, the ES will go for the ride lower too.
MiM and Daily Recap
The ES made a low of 4044.50 on Globex and opened Wednesday’s regular session at 4051 and rallied up to 4080 at 10:21.
After the rally the ES pulled back down to the 4071.50 level at 10:40 and rallied back up to a new high at 4086.50 at 11:44. As expected it was a slow grind leading up the rate hike. After the small drop, the ES rallied up to 4091 at 1:58 and sold off down to 4055 at 2:00:03, rallied back up to the VWAP at 4071.25, then sold off down to new lows at 4031.75 at 2:02.
The ES sold off down to 4022.25 at 2:09, rallied back up 4045.50 at 2:14, then dropped down to 3997 at 2:34. The ES rallied up to 4025 at 2:41, then dropped down to a higher low at 4004.50 and after some back and fill, it rallied up to 4071.50 at 3:15 and traded 4012 at 3:36. The ES traded 4029.75 and the 3:50 cash imbalance showed $487 million to sell, shot up to 4041.75 and traded 4029 on the 4:00 cash close. The ES settled at 4038 on the 5:00 cash close, down 24.5 points or 0.6% on the day.
In the end, it was a 25-handle chop up until the Fed headlines. In terms of the ES’s overall tone, the weaker NQ led the ES lower. In terms of the ES’s overall trade, volume was high, but most of it came from the ESZ/ESH spread and total volume was 1.88 million contracts traded.
Technical Edge
- NYSE Breadth: 37% Upside Volume
- Advance/Decline: 42% Advance
- VIX: ~$21.40
As to be expected, yesterday was a bit of a wacky session. The dollar fell, rates fell, bonds rallied and the VIX tumbled 6.5%. Normally, these are good things for equities. However, buying stocks directly clashes with the old mantra of “don’t fight the Fed.”
The Fed just raised interest rates by 50 basis points, then so did the Bank of England this morning, along with the ECB. The tightening cycle is alive and well and the Fed continues to want a restrictive environment.
So what’s the TLDR?
Among other things, Powell said, “I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2%,” noting that he doesn’t see a rate-cut coming in 2023. The Fed also now sees a higher terminal rate too, ending 2023 at 5.1% vs. 4.6% in its previous outlook.
On the surface, this was a very hawkish tone from Powell & Co. — even after two cooler-than-expected CPI prints — and I don’t think stock traders should overlook that.
That said, the market — at least by yesterday’s price action — wasn’t buying what the Fed had to say.
So how do we navigate this mess? Levels.
S&P 500 — ES
I am going to keep things crystal clear here. A break of the multi-week lows is a bad look for the ES, which is coming into Thursday’s session under pressure.
So far, we have a very clean rejection from the declining 50-week moving average and downtrend resistance. 3920 to 3940 has been multi-week support, with last week’s low at 3914.
If we lose 3914 — and thus the 10-week and 21-week moving averages in the process — it opens up more downside. Specifically, I’m looking at 3875, 3840 and 3750.
On the upside, bulls want to see the ES regain 3997 — call it 4000. That gets it back above the 10-day and 21-day moving averages, as well as yesterday’s Fed-day low.
SPY
I have laid out two upside and two downside levels for the SPY. Obviously, the latter is playing out as it ultimately held the $398s at yesterday’s close, but is gapping below yesterday’s low.
That could put the $390 to $392 zone in play today. This area has been vital support. Should it fail, it opens the door down to the rising 50-day moving average, then the gap-fill near $381.
Open Positions —
- Numbered are the trades that are open.
- Bold are the trades with recent updates.
- Italics show means the trade is closed.
- TLT — Trimmed down to our final ¼ or ⅓ at $108.50. A complete exit is okay too. Those still holding can fish for the $110 to $111.50 area.
- Stops raised to profitable at $106.
- IBM — Down to ⅓ or less now and look to trim the rest between $153.50 and $155. Stops at B/E or better.
- CEG — Exit more at $93+. Looking for $95 to $96 for small trim (down to ½). Down to ⅓ if we see $97.50+
- Stops at $89 (essentially B/E)
- Ulta — “Down to ⅓ or ¼ or if we trade $482.50+” ended up being a great exit as Ulta faded more than 20 points from the high.
- Can Justify a reload risking ½ the profits from our first pass “IF” we go daily-up over $466.50. Otherwise, great trade and let’s let it be.
Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
Relative strength leaders →
- LNG — keep an eye $150
- CAH
- Retail — TJX, WMT, ULTA
- SBUX
- DE
- CCRN
- AMGN — $265 to $267 is the breakout level and the 50-day moving average.
- MET
- GIS
- REGN
- CI
- MCD
- ENPH, FSLR — solar has strength
- VRTX
- UNH
- MRK
- XLE — XOM, CVX, COP, BP, EOG, PXD (Weekly Charts)
Economic Calendar
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