The S&P has fallen 4.5% in two straight weeks.
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Don’t Forget: We recently noted the long-term performance of the S&P 500 (and what that means for investors and traders), and we also took a look at some longer-term setups for those interested.
Our View
As our long-time readers will recall, I was a prominent voice of “buy the dip” during the Fed’s easy money over the last 12 years. But now it seems like the dip buyers are fighting the Fed.
We don’t fight the Fed and it’s why — after a tough January — we have not been very bullish this year.
When you have the longest bull market in history it was an easy-money trade, but the buy-the-dip mentality has been a total blow-up in 2022. As of Friday’s close, the ES is down 23% and is on track for its largest annual decline since 2008. Those losses accelerated last week as central banks around the world raised interest rates and caused big moves in stocks, bonds, and currencies. The S&P index is now down about 10% in the last two weeks, but it’s not just stocks!
The 60/40 portfolio is down almost 20% this year, on pace for its worst performance in nearly a century. This is killing people’s 401Ks.
I have a very hard time finding the ‘silver lining’ right now and it’s causing me to question my end-of-2021 call that the S&P would fall over 15% and rally at the end of the year — and so are many big Wall Street firms that have recently lowered their year-end targets.
Our Lean — Danny’s Take
There are five trading sessions left in Q3. I know some will continue to buy the dip in stocks, but this is a sell-the-rallies market. I know some people are saying the low is in, but I don’t think so. The PitBull said the ES could trade down to 3000 quickly and that’s true if we start to get that “panicky price action.”
What we really need to see is how the ES reacts to Friday’s low near 3660, if we see it. As we trade lower overnight, this is either going to be a rotation down through the low or some type of reversal.
Remember, bear markets like to rally early in the week. Will that happen today? It’s tough to say, as the VIX continues to climb. We’re in the last week of September, which is historically the worst stretch for the market on a seasonal basis.
If we do rally, I think it will be an opportunity to sell eventually and I do not think we’ve seen the low.
Daily Recap
The ES sold off down to 3715 on Globex and opened Friday’s regular session at 3733.75. After the open, the ES sold off down to 3711, rallied up to 3726, and traded down to 3702.50 at 10:04. After the low the ES fell into a 14-point range for the next 50 minutes.
The ES traded down to a new low at the ‘big figure’ of 3700 at 11:02, rallied up to a lower high at 3716.75 which started the next leg down to 3676 at 12:32. After the low, the ES made new lows at 3660.25 going into 3:00. After the low, a buy program hit that pushed the ES up to 3692.75 at 3:17 and then sold back off down to the 3681.25 level at 3:26 and it was that low that set up the push back 3708.25 at 3:45.
The ES traded ~3701 as the 3:50 cash imbalance showed $439 million to sell, traded back up to 3707.50 at 3:55, sold off down to 3696.25 at 3:56, and traded 3709.50 on the 4:00 cash close. The ES rallied up to 3713.50 at 4:02 and settled at 3711.50 on the 5:00 futures close, down 60.50 points or down 1.60% on the day.
In the end, it was NOT a good day for the Spoos. In terms of the ES’s overall tone, buying the dip has not worked out very well, in fact, 2022 is the worst year for buying the dip since the 1930s. In terms of the day’s overall trade, volume was high at 2.82 million contracts traded.
- Daily Range: 123 points
- High: 3783.25
- Low: 3660.25
Technical Edge
- NYSE Breadth: 9% Upside Volume (!)
- NASDAQ Breadth: 26% Upside Volume
- VIX: ~$32
Game Plan: S&P Every Which Way
With the VIX back up over $30, we need to exercise some caution here. That’s also going to make it difficult to justify putting on short-term trades in individual stocks.
Set to come into Monday with a gap-down, we could be looking at a scenario where they may try to bounce the market early in the day/early in the week, but again, with an elevated VIX, we must exercise caution.
If things get “panicky,” that’s when we get the big moves to the downside.
We’ve had five 80%+ downside days in the last nine trading sessions, with two of those sessions in excess of 90%+ downside days. That’s a lot of distribution.
Bonds are again trading lower in the pre-market, as the TLT flirts with new 2022 lows. On Friday, bonds helped lead the rally, but if they continue lower and if the dollar continues higher, equities are going to struggle.
S&P 500 — ES
There was one great trade to nail in the ES on Friday and that was selling the early rally into the 1H downtrend, something this group planned for before the open. Other than that, it was mostly a trend-day down until later in the afternoon.
Now looking at the daily chart above, the ES made almost no attempt at all to find support in the 3740 to 3750 area. That’s what I like to call “deliberate price action” — as it deliberately sliced right through a key zone.
Now trading lower on Globex, we’ll find out if Friday’s low will hold or if they’ll want to push this down to new contract lows below 3639.
ES — Zoomed Out
As we talked about a few weeks ago in our video, the 3500 to 3575 area continues to look more and more interesting if we break the lows.
Down hard in two straight weeks, the ES may muster up a bounce. However, I would really like to see this zone tested. It’s simply got too many key measures here to ignore and I think it would do the market some good to see new lows and how we react.
ES — Zoomed In
For now, the 4H trends continue to point lower, as the Globex high was rejected from the 10-ema.
That said, yesterday’s low has held for now.
If we retest that low near 3660, see the response. Do we undercut it and reclaim it for a potential short-term reversal as a cash flow trade? Or do we rotate below and stay below?
That will go a long way in determining today’s action. If it’s a reversal, we’ll have a low to measure against. If it’s a rotation, we know the selling isn’t over yet.
SPY
The SPY chart highlights a lot.
Look at the little blue arrow from last Friday. The week ended on a nasty gap-down that maintained a bulk of the losses but bounced off the lows. The next session (Monday) we opened lower, but then powered higher, essentially filling the gap from the prior day.
Sound familiar?
We ended the week on a nasty gap down and are now set to open lower. Do we get a quick red-to-green move today like last week? I can’t say it’s impossible.
On the downside, watch Friday’s long-wick low at $363.29.
Like the ES, we have to see how an undercut of this level is handled (if we trade below it). Do we undercut this zone and reclaim it, setting us up for a possible reversal? Or do we get below and stay below this mark?
If it’s the latter, the $362 low is in play, along with the 200-week moving average just below.
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.
Notes:
- All done with the dollar trade for now. Currencies are getting volatile and we want to book our gains and hold tight.
Relative strength leaders →
Top:
- ENPH — holding the breakout near $269
- LNG — nearing the breakout near $150
- MCK — holding the breakout near $340
- CAH — holding the breakout near $64 and the 50-day/10-week moving averages
- FSLR
- TAN
- ALB
- TSLA
- VRTX
- CYTK
- XLU
- XLE
- BMRN (weekly/monthly)
- PWR
- CHNG
- CELH
- UNH
Economic Calendar
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