Our View
You will never hear me bad-mouth traders, but I have seen some of the so-called new trading arenas.
The first is cryptocurrency trading, which they say over 300,000 accounts were closed during the recent selloff. The other is Robinhood, which has lost 69% of its value from its IPO price of $38 a share — and far more from the high — while thousands of accounts closed during the recent stock market selloff.
Down markets are tough on all investors, but I think this has something to do with what I call “fab trading,” where thousands of investors all jump in with very little knowledge (either technical or fundamental) in the products they are trading. I want to make myself very clear though: I’m not saying the newbies shouldn’t be trading. I’m saying some type of training would go a long way, especially when it comes to risk control.
It’s all fun and games when people make fast money, but when things turn around and the losses mount, educated traders know how to exit. This is critical to staying in the game and conserving capital.
Many years ago the PitBull said his best trades were not the winners, but exiting the losers.
There are many reasons why new traders fail, but the two mains one are:
- They are undercapitalized for the size of the trades they make (position size).
- Not cutting losses soon enough and/or holding on too long.
We all have weaknesses as traders. One of mine is having good trade ideas but getting out too quickly — both when the markets go against me or if I have a profitable trade. It’s a difficult balance that I’m constantly working on. Doing it in the futures market is even harder, where every 10 points is $500 (in the ES) and they move while you are sleeping.
But it all boils down to inverting the two main reasons why new traders fail: Keep your position size small enough to where “it’s just another trade” and you can sleep at night (figuratively or literally, depending on your hold time), while letting your winners run and containing the losses.
Our Lean
The trend is your friend and right now that’s selling the rallies. It doesn’t matter if it’s a 70-point rally or 150-point rally, the price action is all about the failed rallies.
When will this end?
I don’t know, but all you have to do is look at how much the S&P has rallied since the Covid-19 low in March 2020. Some say the “great unwind” has begun, but I’m sticking with my call for a +15% decline and for the S&P to close near its highs at the end of the year. That second part is a long way off, though.
Our lean is to sell the pops and if the ES is at or near its highs after 2:30, look for some type of late-day rip.
Daily Recap
The ES came into the session hot, up almost 50 handles from Wednesday’s settlement. It rallied to 4422 and faded back to the 4380 area until support gave out just after noon.
From there, the ES rallied up to 4332.25 at 3:08 and then dropped down to 4299 at 3:15 as the early MIM showed over $1 billion to buy. On the 3:50 cash imbalance, the MIM showed $1.1 billion to buy and traded 4318.50 on the 4:00 cash close.
After 4:00, the ES popped 26 handles after Apple reported record sales in the holiday quarter and beat earnings expectations. The ES settled at 4344, up 5.25 points or 0.12% on the day. In the cash session, the ES fell about 0.5%.
In the end, it was a sell-the-rally-and-hold type of day. In terms of the ES’s overall tone, it was weak shortly after the gap-up open. In terms of the ES’s overall trade, volume was lower at 2.23 million contracts traded (although still above average).
In terms of the ES’s overall tone, it was fine until 1:00 then turned extremely negative after the Fed headlines and Powell spoke. In terms of the day’s overall trade, it was steady but exploded after the Fed, with total volume of 2.36 million contracts traded.
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.
Technical Edge
- NYSE Breadth: 69% Downside Volume
- NASDAQ Breadth: 80.4% Downside Volume (!)
The QQQ and SPY finished lower every day last week and have declined in all but one session so far this week. They are both gapping down now, with the futures lower by about 1%.
Can they turn things around, like on Monday?
Update: The futures erased most of their losses shortly before 9 a.m. but the question above still remains intact.
You all know I prefer a gap-down vs. a gap-up when we’re in a down tape. Just look at yesterday, where the SPY gapped up 1.13% before closing lower by 0.5% on the day.
Game Plan
There hasnow been talk about all sorts of rate hikes this year — not just four. BofA says it expects one 25 bps hike in each of the next seven meetings. The odds are creeping up for a 50 bps hike in March (the favored outcome is still a 25 bps hike) and odds are creeping up for 100 bps worth of hikes to come by September rather than November.
In short, the market has to account for these potential outcomes and so far, that has resulted in selling pressure. Meanwhile, sentiment is worsening but still not yet in “panic territory.”
S&P 500 Futures and SPY
This chart should be ingrained in every reader’s head by now. Earlier this week I called it our roadmap and that’s exactly what it’s been.
If you take the bias out of it all, what do you see?
I see a chart that broke below its 200-day, made a low, bounced, and failed to reclaim the 200-day and last week’s low. That’s the short story.
Now gapping down to the $427.50 area in the pre-market, we must see if the SPY can hold the Q4 low at $426.36. If it can, bulls will be looking for a bounce, first to the 50-week, then last week’s low.
If it can’t bounce, this week’s low may be in play and if that’s the case, the selling pressure will have to escalate to get it there.
Nasdaq – QQQ
The Nasdaq is even worse. See if it can reclaim the Q4 low today on the back of Apple’s results.
If it can’t and selling pressure picks up, this week’s low could be in play.
Individual Stocks — TSLA, CAT, AAPL
We have been keeping things pretty light this week, with just a handful of trades. If that’s what it takes to win, then that’s what we’ll continue to do.
TSLA
Tesla is gapping down slightly on the day after falling 11.5% on Thursday. If it can gap down and preferably tag the 200-day, see if we can get a quick reclaim of yesterday’s low.
That could be an optimal R/R setup, especially if the overall market can rally too.
CAT
A similar setup with CAT, which is gapping down slightly after a top- and bottom-line beat. A break of this week’s low or tag of this area and a rebound up through the 50-day could get the stock moving higher.
A break of ~$204 that’s not reclaimed could put sub-$200 in play.
AAPL
Last but certainly not least is Apple, which delivered strong results on Thursday night. After eight straight daily declines, Apple is up slightly after earnings, but it’s gapping into this week’s resistance area, the 10-day moving average, and just above last week’s low.
If it fades from here, don’t be too surprised.
I’m not an AAPL bear necessarily — in fact, it holding up and/or rallying would be a huge boost to sentiment and the Nasdaq — but we’re in a sell-the-news type of environment right now.
Let’s see if it can finish green on the day.
Go-To List: Keeping It Short
- NVDA — again — One to watch for stabilization around the 200-day
- PG — keep an eye on Wednesday’s and last week’s low ($156.38 and $156.04, respectively). PG gave us a nice trade last week, can it again? Wednesday’s low comes into play near the 50-day. An undercut and reversal could be a good R/R.
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.
Disclaimer: Charts and analyses are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.
Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck
Economic Outlook
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