A Word From Danny Riley
The S&P futures have rallied 8.5% or 309 points from the June 17 low to the June 27 high — a span of just six trading sessions — causing many traders to ask, “is the bottom in?”
If you’re an optimist at heart and think the worst has passed, you more than likely think the bottom is in. If you’re a constant pessimist (not a lot of heart there), you’re more than likely to think the S&P is having another dead-cat bounce. So, which is it?
I remember being at my S&P 500 futures and options desk the day the S&P made its 666 cash low during the Credit Crisis. That day, I picked up several of the direct lines to the banks and hedge funds and told them I thought the low was in. Long story short, about 100 to 150 points higher I was saying that I thought it was going back down. While my main job was making sure the brokers in the pit were not front running my desk orders, I was also the guy that the big accounts would come to when they wanted to get a feel for what was going on.
I think the Opening Print has done exactly what it was set out to do — providing a feeling for the market, exactly like I did for some of the largest accounts in the world. It’s one thing to bullshit a small retail account, but that does not happen at the institutional level.
So back to the question, is the low in?
As a bull-market guy, my trading style is buying the ‘breaks’ or ‘pullbacks.’ But even though I’m a bull at heart doesn’t mean I’m blind to the downtrends in a bear market. The whole point of these dead-cat bounces is to suck in traders and make them think the low is in, only to pile-drive them down when things get ugly again.
I do think it’s possible that the market rallies and perhaps does so for the first two weeks of July. However, I do not think the low is in and — just as I have been saying since the first quarter — I believe we will bottom in September or October.
I have a very good feel for the market’s flow and while I think I have a good feel for the seasonalities, I’m not even close to my good friend, Jeff Hirsch of the Stock Trader’s Almanac. There have been countless times when I have seen the early July rally. I know how things end up, but I have to ask my very good friend and market mentor Jeff to talk about how the stats look going into the fall.
Seasonally Speaking — With Jeff Hirsch
As we navigate the 2022 bear market and this current rally, the market is entering a short-term bullish period in a sea of seasonal weakness. While we are hip-deep in the “Worst Six Months” of the year (May-October) and the “Weak Spot” of the 4-Year Cycle (Midterm Year Q2-Q3), the turn of Q2 at the end of June and beginning of July has some perennial bullish undertones.
July historically is the best performing month of the third quarter. However, the mostly negative results in August and September tend to make the comparison easy. Trading the three days ahead of the July 4th Independence Day holiday has historically been stronger than the days after the holiday. This has become more pronounced in the last eleven years.
July’s first trading day is one of the best trading days of the year with the Dow up 27 of the last 33 years. There is also the Nasdaq’s Mid-Year Rally over the last three trading days of June and the first nine trading days in July. The Nasdaq has been up 29 of the past 37 years with an average historical gain of 2.6% over this 12-day run.
The graph below clearly shows that the market is much stronger in the first half of July than the second half. Such strength inevitability stirs talk of a “summer rally,” but beware of the hype, as it has historically been the weakest rally of all seasons (page 76, Stock Trader’s Almanac 2022).
Coming off the worst start to a year since 1962, the market bounced back last week from its oversold condition with some help from the quarterly rebalancing. If the S&P can get through resistance around 3900, this bear-market rally could continue into the first half of July.
Over the past twenty-one years, July has on average begun with respectable gains. The second trading day has been weaker, but after this the major indexes tend to trend solidly higher through mid-month to around the thirteenth trading day. At this point, the major indexes have tended to weaken and trade sideways to lower to finish out the month.
Then, just as everyone gets bullish again on the “Summer Rally” hype, look for the perennial August/September/October weakness to strike and reawaken the bear.
Sizing up all the technical, fundamental, geopolitical, monetary, seasonal, cycle, and sentiment analysis in our 5-Disciplines approach — and summarized in our “Market at a Glance” — our best assessment is that after the bear-market rally runs its course, the market will likely bounce along sideways, testing the lows, setting 2022 up for a prototypical midterm bottom hitting its low point in late Q3 or early Q4 in the August-October period, just ahead of the midterm elections. Then we rally off that low into the sweet spot and beyond to new highs.
For now, support has been broken, stick to the system, cash is king, and wait for the fatter pitch.
Note today’s slimmed-down version of the Opening Print, due to the Special Report sent out earlier this morning. Please see the earlier email (sent around 7:45 ET) or see it here.
Thank you!
Our Lean
First, I want to thank Jeff for working with me on the Special Report.
Next, I want to welcome everyone to the last trading day of the second quarter of 2022, it’s been a very long, hard ride. In fact, it’s the S&P 500’s worst start to a year in more than 50 years! According to Michael Arone, managing director at State Street:
“We’re limping into the Fourth of July and the end of the first half-year, but a bad first half doesn’t guarantee a bad second half. In 1970, the S&P 500 fell 21% in the first half and then gained 27% in the second half, ending the year roughly flat.”
While I do not see that type of rally coming, future dead-cat bounces can’t be ruled out. As for today, I do not like the overall price action and think lower prices. Sell any 30- to 50- point rallies and look for the late day, end of the quarter “walk away.” But don’t forget, the first trading day of July is the most bullish day of the year!
Daily Recap
We have a slimmed-down version of the OP today due to the report linked above. But in reality, there was not that much to write about in yesterday’s session.
The ES traded in a 38.75-point trading range, chopping back and forth in a tractionless session. Despite 1.71 million contracts changing hands, the ES just couldn’t get going. It opened at 3830, flushed down through the Globex low at 3812, bottomed at 3801.25 and rallied to the Globex high at 3840. And that was the range for the rest of the day.
- Daily Range: 128.25 points
- H: 3840
- L: 3801.25
Technical Edge
- NYSE Breadth: 25% Upside Volume
- NASDAQ Breadth: 47% Upside Volume
- VIX: ~$29.75
Game Plan: S&P 500 (ES & SPY), Nasdaq (NQ & QQQ), Dollar
S&P 500 — ES
If I’m being completely honest, the ES does not look all that bullish at the moment, but as we saw yesterday, the rebalance can make things tricky.
It rallied hard off the June 17 low but was rejected by the 21-day moving average and the 50% retracement. The goal for the bulls was simple: Hold 3807 and the 10-day moving average.
So far, it’s doing neither, as it lost the 10-day on Tuesday, failed to reclaim it on Wednesday, and is now pushing lower in Thursday’s Globex session.
If we rally on the open, 3795 to 3805 and the 10-day are huge hurdles for the bulls. To clear them sets the ES up for more upside. But otherwise, a rally to this zone — roughly a 40-handle rally from current levels — looks more like a “sell” than a “buy.”
On the downside, keep an eye on the 3755 area, which is the 61.8% retrace of the recent rally. A break below and failure to reclaim it likely puts ~3705 in play.
S&P 500 — SPY
Like the ES, the SPY had one job to do: Hold $380 and the 10-day. And it failed.
Now we shift our attention lower, specifically to $374, then $369. Near the latter are the 78.6% retracement and a gap-fill level from last week. I don’t think we’ll see that today, but who knows.
Even if these areas hold as support, the SPY feels like it’s in no man’s land right now. If they fail as support, a retest of the lows could be in play.
Nasdaq — NQ
The NQ is — surprisingly — a little more encouraging than the S&P.
The NQ is sitting right on the 61.8% retracement and just below Wednesday’s low of 11,564. If it rallies from here, keep an eye on this level. If it’s reclaimed, the NQ could enjoy a potential rebound…one that could possibly see it rally about 100 points.
However, if it rebounds to this area and can’t reclaim and hold above yesterday’s low, the NQ is a short setup that could move lower.
Nasdaq — QQQ
As it pertains to the QQQ, it’s sitting right at yesterday’s low ($280.84) in the pre-market.
If we get a quick break below this mark (or open below it) and rally back up through $280.84, it could give bulls a nice cash-flow reversal trade — i.e. triggering a long position at $280.84 with a stop-loss at the session low assuming the session low is modest in comparison to our entry.
Remember, cash flow trades are looking for high R/R potential.
Otherwise, below $280.84 and traders should look for potential support near $277 and and $279.50.
UUP
More dollar strength this morning. Let’s see how it handles above $28 and if it can clear $28.21, which was resistance in back-to-back days. Ultimately we are looking for the move up to the $28.50 to $28.75 area.
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.
The VIX remains stubbornly high, which really creates a tough situation for trading individual stocks. Despite that, we continue to carry two “stress-free” trades and have had some luck with others by securing some profit and getting stopped out at our entry (break-even).
- DXY / UUP — Still carrying ¼ of the original trade (cost basis: $27.20). On the upside, I’m still looking for $28.20+ to trim more.
- $28.50 to $28.65 is the next meaningful upside target.
- On the downside, we will operate against a B/E stop-loss
- 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. $310 or even $315 is a reasonable stop (above B/E).
- XLE — Climbed methodically up to your first trim zone at the 10-day ema → Bulls who do not trust the rallies can be out of ½. (I am out of half for what it’s worth).
- B/E stop hit.
Relative strength leaders (List is cleaned up and shorter!) →
- *Look at the strength in health care*
- BMY
- MRK
- ABBV
- UNH
- JNJ
- XLE
- CLR
- VRTX
- DG
- IBM
- MCK
Economic Calendar
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.
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.
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