Our View
After a nice early rally… the ES stumbled lower after SoftBank Group reported a record quarterly loss of more than $23 billion, which weighed on global tech stocks. Some big names have taken some big hits this year…Cathi Woods is -57%, Tiger Management -50%, and hundreds of hedge funds are underwater. When I talked to the PitBull about the losses, all he said was “it’s incredible.”
It’s almost too hard to believe that some of these mega funds could be off so much. Did they buy more or just hold what positions they had? My guess is they added on top of already losing positions. I remember being on the floor during the credit crisis and all the billions in losses as AIG, Bear Stearns, and Lehman went out of business. The amount of selling surrounding that event was mind-blowing.
I was actually the guy that helped take down all of AIGs S&P 500 index positions. It was a sight for sore eyes.
Today a big volume day in the ES is 2.5 million contracts up to 3.5 million, but at the height of the credit crisis there was an extended period of over 5.5 million a day up to its all-time record high at 6.69 million and the S&P pit was still doing big volume. I followed the volumes so closely I had 75 days of ES volume on a trading card and I remember how the volume lept from 5 million to 5.5 million and then up to 6 million and above.
When the market finally did bottom, I told some of my desk customers that “This is it,” I think we hit bottom. But after a 100 to 150 point rally, I thought it was going back down. Little did I know that 666 low would turn out a 600%+ gain over the next 13 years…
I’m hoping that will be the case with this decline. But we need to get to a bottom before we can start focusing on multi-year upside levels.
Our Lean
I can’t say the S&P closed all that well on Monday, but if the current uptrend is still intact we should either see high prices on Globex or on a dip today.
My lean is to buy the early pullbacks until that trend no longer works. You have to be willing to be flexible and listen to what the market is telling you.
The PitBull told me he’s “on a sell signal in the ES and a buy signal on the VIX.” Who’s going to be right? More than likely both of us!
As for levels, here’s what I’m watching.
- On the downside (in this order): 4128, 4110, 4100 to 4096 and 4076 to 4067
- On the upside 4155 to 4160, 4175, 4190 to 4193, 4205 and 4224.50
Daily Recap
After trading up to 4177.50 just before 9:00, the ES opened at 4164.25 at 9:30, down-ticked to 4160.50, then ripped 27.50 points to the session high of 4188 at 10:00. After that though, the ES was out of juice. It pulled back 14 points over the next 20 minutes, bounced 11 points to a lower high of 4185 at 10:40, then tumbled 50 points over the next two hours until it bottomed at 4135 at 12:30.
From there, the ES rallied 18.5 points to 4153.50, dipped 13 points and rallied 11, then nose-dived 22 points down to the session low at 4129.25 at 2:50. An hour later, the ES traded 4142.50 as the 3:50 MIM imbalance showed $600 million to buy.
The ES traded 4141.50 at the 4:00 cash close and settled at 4150.75 on the 5:00 futures close, down 5 points or 0.12% on the day.
In the end, the bulls burst out of the gate, then tripped and fell. In terms of the ES’s overall tone, it was choppy and had a consolidation feel. In terms of the overall trade, volume was slightly below average at 1.49 million.
- Daily Range: 58.75 points
- H: 4188
- L: 4129.25
Technical Edge
- NYSE Breadth: 69% Upside Volume
- NASDAQ Breadth: 65% Upside Volume
- VIX: ~$22
Will the market eventually care about Macro?
I’m a price-action guy all the way. While I find the macro stuff fun for weekend bullshitting, I am a “price first” type of analyzer. That said, you do start to wonder if and when there will be consequences to real-world developments.
Remember a few weeks ago when the Fed raised rates by 75 bps and most of FAANG missed on earnings or revenue (or both)? Yet the markets pushed higher. Despite more misses, guidance cuts, and a jobs report that implied the Fed would be more hawkish, markets continue to tip-toe higher.
Nvidia came out mid-quarter and slashed its outlook. Micron followed up a day later. These are not good signs and yet, the market is shrugging it off. The 2/10 year spread — which isn’t a slam-dunk recession indicator, by the way — just hit a new low, but equities don’t seem to care.
As I noted in a separate piece yesterday, bonds could be flashing a possible warning sign. But until all of these issues manifests themselves in price action, there’s not much for traders to go on.
Game Plan: ES Futures, SPY, QQQ, NQ Futures
S&P 500 — ES
No need for a different plan every day. Until the ES can break 4170, bulls have a ceiling. On the downside, 4080 is support.
Yesterday’s “look above” and reverse back down did suggest some caution from the buyers, but I suspect it is more related to a pause ahead of the CPI report than anything else.
In June, we had similar action as the 4150 to 4200 area was resistance. The ES was consolidating ahead of the CPI print, then broke lower following the release. I don’t know if the same pattern is setting up, but it’s something to watch.
S&P 500 — SPY
Earlier I mentioned macro vs. price action and this is why. If you back out all the noise — earnings, the Fed, what people are saying on Twitter, CNBC, etc. — and just look at the chart, the situation is pretty clear.
$416.50-ish was support in the first quarter, resistance in the second quarter and is acting as resistance now.
If we get above and stay above this level, it’s bullish. If we get rejected by this level and break below short-term support (like the $407 and the 10-day), then it’s bearish!
It took me a long time to realize that most often, “simple” pays off the most.
Nasdaq — QQQ
It’s not an analog and it’s not identical. But the action yesterday reminded me of the action in mid-November. That’s when the QQQ pushed to all-time highs, then reversed and ended below the prior day’s low — a bearish engulfing candle.
Yesterday’s action was quite that bad. But for the first time, it reminded me of that day, which a good friend of mine called “a day to take notice.” And he was right.
I don’t know that we’re in that same scenario now, but the hope and FOMO that came into Monday morning was pretty palpable, especially considering meme short-squeezes and initial rally in growth stocks.
First and foremost, the QQQ has to hold the 10-day moving average and $313 to $314 as support. If it can’t, $300 and the 21-day are in play, followed by $296.50.
If it can hold above initial support and ultimately clear the $325 hurdle, then we could be looking at higher prices to come. Especially if we don’t collapse on the CPI report.
Nasdaq — NQ
The NQ is not unsimilar to the QQQ. On a pullback, it has to hold the 12,900s and the 10-day for the active sequence to remain intact.
In fact, I am a buyer on a test of this area, as there’s no reason to bet against support in a bull trend until it fails (even if that trend is only a counter rally amid a bear market). Once support fails, then we can change gears.
On the upside, 13,350 to 13,360 is resistance. If the NQ can get above and stay above this zone, 13,650 to 14,000 could be in play.
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.
Trade Sheets: Now have 2-3 live trades, all with breakeven or better stop-losses. Great stress-free position to be in as we try to squeeze a bit more of upside out of this move.
- MCK — finally got out $348 to $350 target. I am out the last bit here, but with a profitable stop-loss at $325 (entry in the low $300s), anyone who wants to press for $355 to $365 with their last ¼ to ⅓ position can do so. Cheers
- PEP — We got out Target cNo. 2 at $177. Either all out now or down to ⅓ of a position if playing for a breakout. Stop at $172 (above B/E).
- UUP — $28.60 to $28.80 is ideal first trim zone, but bulls can trim ¼ at $28.50-ish if they’d like, as the UUP runs into the 10-day ema.
- CHNG — volatile session on Monday, but held where it needed to. In fact, that spike down gave us a level to measure against. I’m using a stop-loss in the $23.20 to $23.35 area.
- Looking for $24.50 to $24.70 for first small trim, (i.e. ¼ to ⅕ position trim). More aggressive traders can look for $25+ for first trim
Relative strength leaders (List is cleaned up and shorter!) →
- O
- CNC
- HRB
- ENPH — kickstarted the rally in Solar
- TAN
- FSLR
- MSTR
- LNG
- PWR
- CHNG
- COST — trade is live
- PEP — trade is live
- BA
- UNH
- XLE
- MCK — trade is live
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.
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