Our View
The Fed continues to become more hawkish and that has been clear in the days leading up to Wednesday’s FOMC Minutes.
The Fed has even been using some of its more dovish members to relay the news. Why are they doing this? Because they are concerned about inflation and are trying to orchestrate a soft landing. The Fed can’t just come out in its Minutes release and say it wants several 50 bps rate hikes and wants to reduce its balance sheet.
Instead, they have to prep the market, because it will throw a tantrum otherwise. Regardless, the times are a-changin’. Rate cuts are turning into rate hikes, while quantitative easing — QE — is being replaced by quantitative tightening — QT — as the Fed looks to reduce its balance sheet by roughly $95 billion a month vs. adding to its balance sheet.
At last week’s high, the S&P 500 was down 3.75% from the all-time high. With everything going and a hawkish Fed to boot, something’s not adding up.
Our Lean
Yesterday’s lean didn’t really come to fruition. We said that if the ES opens in the 4480s, we could look for a push back to 4500-ish. It didn’t happen, as the ES opened around 4477 and never really got going.
On the phone yesterday, Bret and I were talking about how tricky it is to balance different timeframes while trading. Meaning, traders are trying to trade the current rally knowing full well that the S&P shouldn’t be within 4% of its high under the current circumstances.
Our Lean today is to sell the early rallies and buy the pullbacks. It’s possible the ES rallies today, but I’m just not sure it will hold. Keep an eye on the bonds as they are key to the direction of the index markets, (more on the bonds in the technical section).
Daily Recap
The ES opened at ~4478 and rallied up to 4485 before the sellers stepped in with force. From the highs, the ES fell about 31 points, bottoming around 4455. Ahead of the Fed Minutes release at 2:00, the ES mostly chopped around, with each rally going higher but ultimately failing, while 4455 held as support.
The ES first climbed 14 points off 4455 support to 4468 at 10:40 and sold off. Then it rallied 18 points to 4474 at 11:50 and sold off again. Finally, it had one last push in it, rallying ~23 points to 4478.50 into the 2:00 announcement. After the headlines hit, the ES spiked to 4495, then plunged to 4444.50, taking out the session high and the low in one 15-minute bar.
From there, the ES soared 55 points to new session highs at 4499.50, with last week’s low acting as resistance at ~4500. The ES dipped 36 points down to 4463 at 3:30, then popped 26.50 points to 4489 just ahead of the 3:50 cash imbalance reading. It came in at $1.6 billion to buy, but the ES faded 15 points from the late-day push and closed the 4:00 session at 4475.50.
In the end, the ES fell 0.98% on the day. In terms of the ES’s tone, it just couldn’t hold the rallies. In terms of the ES’s overall trade, volume was higher than usual, at 1.73 million contracts.
- Total Range: 84.25 points
- H: 4528.75
- L: 4444.50
Technical Edge
- NYSE Breadth: 70% Downside Volume
- NASDAQ Breadth: 75% Downside Volume
As a trader, you have to be careful (or at least cognizant) of how event-driven and headline-driven algos work. Look at yesterday’s Fed announcement reaction.
The horizontal lines dictate the session high and low coming into 2:00. Notice how in less than 15 minutes the market popped through the highs, reversed, ran through the lows, and reversed again.
In other words, the market/algos ran the buy stops on the upside and the sell stops on the downside before settling down a bit.
I don’t have a problem with the action; I’m not blaming anyone. In reality, it is what it is. I just want to point it out for those trying to navigate sessions like this, because it can be tricky on Fed days!
Game Plan
I want to see if we are looking at a simple “ABC” correction in the S&P, as laid out below. I’ll also be watching bonds for a tell on the market. For tech especially, the rally will have trouble holding if TLT and bonds continue to move lower. That will be a problem.
Recently, Cathie Wood said it would be a mistake for the Fed to raise rates too quickly. At the same time, JPMorgan’s Jamie Dimon — considered by many to be Wall Street’s best banker — said the Fed may need to be more aggressive than investors and the market realize. Some of his thoughts:
“I believe that this could be significantly higher than the markets expect…If the Fed gets it just right, we can have years of growth, and inflation will eventually start to recede.”
“In any event, this process will cause lots of consternation and very volatile markets…The Fed should not worry about volatile markets unless they affect the actual economy. A strong economy trumps market volatility.”
S&P 500 — ES
Yesterday we were keeping a close eye on the 4447 to 4450 area. The ES bottomed just shy of that at 4444.50. As you can see above, that gave us an ABC dip down to the 21-day.
Maybe we can get an undercut of yesterday’s low and a tag of the 21-day. That could be good for a bounce on the long side. However, a break of 4444 and failure to reclaim it could put the 50-day on deck.
On the upside, 4500 (last week’s low) needs to be reclaimed, followed by the 10-day.
If the ES can’t reclaim 4538 and 4560 — the 50% and 60% retracement of the current “C Leg” — then we could be looking at a larger correction still in play.
Main Upside level to watch:
4500-ish
Main Downside level to watch:
4444
TLT
As of about 8:00 ET, the TLT is down about 50 basis points and trading just above yesterday’s low.
While equities have bounced, this has not. That doesn’t mean they can’t rally, but having bonds back would be a tailwind. Right now to me, it’s a headwind.
For that to change, TLT needs to reclaim the March low at $127.65 — which rejected the stock yesterday. Above that puts its short-term moving averages in play, which have been resistance.
Let’s see how yesterday’s lows hold. If they fail and TLT rolls over, it will likely weigh on stocks — especially the QQQ and NQ.
Bigger picture: I see support in the $120 to $124 area.
Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
Numbered are the ones I’m watching most closely. Please look at these closely, as there are several updates (the most recent of which are noted in bold).
- Watching XLB to see how it consolidates these gains. Break lower or remain a leader?
- PANW — Next trim spot is $645 to $650 — careful. $595 stop.
- MCK — $310 Trim Spot hit → Stop now at break-even. If we clear $310 before stop-out, $315 to $316 is next trim spot.
- MKC — $103 to $104 Trim Spot hit → Stop now at break-even or ~$99. Look for another small trim at $105+
- DLTR — Daily up at $156.60 — NEEDS to reclaim 10-day as well. $160 to $161 first target, second target $165
Look at how strong these stocks have been!! In a market rife with volatility, head-fakes and downtrends, these names are trending higher. That’s why I always say “feel free to build your own trades off these relative strength leaders!” They are dominant.
I have been wanting to do a video on these names, but I’ve been sick all week. If I can’t do a video in the near-term, perhaps I will do a separate newsletter post!
- COST
- ABBV
- TU
- VRTX
- BMY
- Energy — FLNG, XLE, APA, CNQ, CVX, ENB, PXD — etc.
- ADM, MOS
- PANW
- AR
- AMGN
- ABC
- UNH
Economic Outlook
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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