Our View
Thursday’s CPI number was really bad and the market was reacting that way, but by the time the ES opened at 9:30, it was oversold. Despite the big rally, it was another dead-cat bounce.
I’m not going to do a big View today. I think if you look at yesterday’s Lean — “Our lean is to buy the early pullback and sell the rallies” — I called it perfectly, but today is FRYDAY and I suspect there will be a whole lotta shakin’ goin’ on! So buckle up and get ready or get out of the way.
Our Lean
Of all the days of the week, Friday can be one of the trickiest.
First off, it’s the last trading day of the week and the desks that get big orders need to get them executed before the bell. The other part — and maybe the more important part — is the discount between the S&P 500 cash and the S&P 500 futures. On the 4:00 cash close, the S&P cash settled at 4504.08 and at 7:45 a.m. the ES was trading 4487, for a discount of roughly 17 points. (This discount was much larger at the overnight lows).
In most cases when it’s like that, bids come flooding in on the open. Some of these bids will actually be used to do index arb sell programs and the other bids that come in are from the algorithms.
Once the ES bids come flooding in, the bots start bidding up the futures while the algos and HFT bots start searching for what I call the “nearby stops” that were placed by accounts that sold at low prices and can’t hold over the weekend.
This trade works especially well when there are over 300,000 contracts traded on Globex. Sometimes this trade is worth 10 to 20 points, and sometimes more. However, if it’s like yesterday it was worth over 65 points from the opening print.
If this fails and the ES starts going down hard after the open, my guess is we bounce into the European close. Ideally, we want to sell the rallies, but my concern is with yesterday’s big late-day drop and the futures trading lower on Globex, there may have to be a shakeout before going back down.
In simple English, buy if there’s early weakness near the open and sell the rallies. The key level we are looking at is 4440 on the downside. If that fails, it opens the door to 4410 and 4370.
Daily Recap
The ES sold off down to 4512.50 on Globex after the CPI report and opened Thursday’s regular session at 4516.75. After the open, the ES ‘sky rocketed’ up to 4582 at 10:40, then sold off down to 4547 at 11:30.
It rallied to a lower high of ~4570, then rolled over hard as it retested the Globex low just after 1:30 and hit a new low of 4504.75. That was followed by a meager rally up to ~4527 at 2:00 and after that, they just kept selling the rallies.
The ES sold off down to 4495.50 just after 3:00 as the early MIM showed $321 million to sell. That sale grew and the ES traded 4476 — down more than 100 handles from the high — as the 3:50 cash imbalance showed $2 billion to sell. Despite this, it was able to rally, closing at 4498 on the 4:00 cash close and settling at 4495 on the 5:00 futures close, down 86 points or 1.9% on the day.
In the end, the gap down and high Globex volume set up an opening buy program that pushed the ES up almost 70 points only to reverse and fall more than 100 points.
In terms of the ES’s overall tone, it was all buy programs and buy stops early, but that was followed by even larger sell programs on the way down. In terms of the ES’s overall tone, it was WEAK! In terms of the ES’s overall trade, volume was high at 2.33 million contracts traded.
Technical Edge
- NYSE Breadth: 68.5% Downside Volume
- NASDAQ Breadth: 73.3% Downside Volume
Brutal action on Thursday. I am only surprised that they were able to rally the markets back to the pre-CPI highs, but with the way that bonds were trading, I’m not surprised that equities rolled back over (more on this in a minute).
I mentioned it earlier this week and will reiterate it again: I think traders need to keep the bonds up on their screens during the day. They are too big of a driving force on stocks right now.
I keep five of them on hand: ZB, ZN, ZT, TLT, and TNX.
Those are the 30-year, 10-year, and 2-year futures, the TLT ETF, and the 10-year yield (TNX). This is also a helpful site for bond yields vs. prior timeframes (WoW, YoY, etc.)
Game Plan
Let’s just go right to the S&P.
S&P 500 — ES Futures
- Feel free to extrapolate this layout to the SPY.
I feel like a broken record right now. How much have we been talking about 4580-4586 on the upside and 4510 on the downside?
Take a few minutes and study this chart, because I think it’s important. It highlights the importance of knowing your levels before going into battle.
Notice how the S&P futures dropped to the 4510 area around 9:00, only to bounce all the way back up to resistance and roll over again.
The ES tagged this week’s low in the Globex session and is now bouncing ahead of the open. From here, let’s see how it handles — surprise! — the 4510 to 4512 area.
If we push above it, the 50% retracement of yesterday’s range is around 4530, and the 61.8% retracement from yesterday’s high to the overnight low is 4534.50. So somewhere in there is where I’d be watching if we get a decent rally off the open.
Below Thursday’s 4476 low and a retest of the Globex low near 4455 is in play.
Bonds
I’m skipping the Nasdaq today to highlight bonds and I’m keeping the commentary light to let the charts do the talking.
Take another minute and study the above layout. Notice how equities — specifically the Nasdaq on the chart above, but the ES did too — roared back to life in the opening hour, while bonds really did not get much of a bid.
Notice the dark arrow at the 10:30 mark. Bonds were rolling over to new lows and the Nasdaq was pushing to new highs!
Keep these up on your screen. It may not be a direct correction, but it’s at least worth knowing how the bonds are trading.
Individual Stocks & Go-To Watchlist — TSLA, UPS, TD
I am not looking to rush much today. I want to see how the indices will trade. After yesterday’s action, the ES and NQ, (or SPY and QQQ) will be my main go-to vehicles today.
TSLA
Tesla is concerning me a bit here, because it keeps getting rejected by its short-term moving averages and the $950 area. That said, it’s not exactly breaking down.
If the markets can’t find their footing today, keep an eye on yesterday’s low. A break and failure to reclaim could open the door to more selling pressure here.
Maybe that puts last week’s low in play.
On the upside, TSLA needs to hold $900 and reclaim the 10-day.
UPS
I outlined UPS yesterday, but want to do so again today. We have exactly what we want: A pullback to the 10-day and the breakout area near $220 after strong earnings.
This is one of those high-probability setups. If we fail to bounce, it’s just one of the good setups that fails and we move on. But I love setups like this.
TD
This has been a banger of a trade since we snagged it on the weekly-up rotation lost week in the low-$80s. Up 7 of the last 9 days — and down 0.19% and 0.12% on the down days — this has been an excellent performer.
If we get a dip down to the $83-ish area, we could have a buy-the-dip scenario on hand. That’s the 10-day and a retest of the breakout area.
Go-To Watch List
Feel free to build your own trades off these relative strength leaders
So much of this list continues to trade really well. Quite pleased with the developments here and please feel free to take 5 minutes and flip through the charts of these names. They are our current leaders!!
- UPS
- BAC, WFC and other banks are trading well. These 2 are trying for monthly-up rotations. | ASB, MET, MS
- VRTX —
- Energy — HAL, OXY, XOM, CVX
- AAPL — Great place to book some profit yesterday. Let’s see if we get the bigger rotation on the weekly timeframe.
- ABBV — Continues to do well. 261.8% extension is $147-ish
- CVS — can it find its footing after earnings dip?
- DE
- BRK.B
- TD — continues to perform incredibly well.
- V & MA — Resetting nicely. See if a bid comes in soon
- BROS
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.
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
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