The jobs report really changed the tune on Wall Street.
Follow @MrTopStep and @BretKenwell on Twitter and please share if you find our work valuable.
Our View
The week ahead is long with earnings and short in regards to economic reports, but the highlight of the week will be the Federal Reserve. Chairman Powell is scheduled to be interviewed with David Rubenstein, the billionaire founder of Carlyle Group, at the Economic Club of Washington, D.C. on Tuesday (found online, here).
I think the big question on traders’ minds is whether the indices are at a level where the markets will keep going up or if this rally is just another dead-cat bounce — albeit, a big one.
Morgan Stanley’s top equity analyst Mike Wilson — a prominent stock market bull, but who’s been bearish more recently — attributed the recent gains to the January Effect from the Stock Trader’s Almanac, a market theory that implies securities’ prices increase in the month of January more than in any other month after a year-end sell-off.
Separately, we’ve now got the Fed sweating that payrolls report from Friday. Jeffrey Gundlach — the “bond king” — says the bond market is pricing in a rate cut by the end of the year and that he trusts the market over the Fed.
On the flip side, Minneapolis Fed President Neel Kashkari (a voting member) said, “I’ve spent enough time around Wall Street to know that they are culturally, institutionally, optimistic. They are going to lose the game of chicken, I can tell you that.”
Will the Fed let ego get in the way, just to satisfy winning this “game of chicken?”
Our Lean
As I said in Friday’s lean, I think the ES is short-term overbought. As for today’s lean, I am looking to sell the rallies and while there will be bounces from the pullbacks, my bias favors the downside right now, so I’m selling the rips.
No one seems to be talking about it, but the ES is not only running back into multi-month resistance, but it has now retraced 50% of the peak-to-trough losses (from 4805 down to 3502). It’s early, but I think we start going back down and the match that lit the fuse is last Friday’s explosive NFP number.
There are a few levels I think are important. On the downside, 4105 and 4085 are key. Below that puts 4050 in play. On the upside, let’s see if the ES can regain 4135 to 4140. That’s followed by 4155 and 4170.
MiM and Daily Recap
The ES sold off down to 4132.50 after the jobs number showed an increase of 517,000 in January and the lowest unemployment rate since 1969, while the ES traded at 4139.25 on Friday’s regular session open. It went straight up to 4194 in the first 2 hours and started a selloff all the way down to 4140.75 at 1:45. From there it chopped lower, trading 4135 at 3:00.
At 3:50, the ES traded 4141.50 as the cash imbalance showed $216 million to sell. It jumped to 4151, then traded 4147.75 on the 4:00 cash close. It settled at 4147.75 on the 5:00 futures close, down 45.5 points or down 1.09% on the day.
In the end there was a big opening rally that failed. In terms of the ES’s overall tone, it acted weak late in the day. In terms of the ES’s overall trade, volume was high at 2.26 million contracts traded.
Technical Edge
- NYSE Breadth: 26% Upside Volume
- Advance/Decline: 26% Advance
- VIX: ~$19.50
For swing traders, today’s a great reminder that we need to have some patience. Let’s see how the market handles this gap-down. Within the opening hour, I expect a decent bounce, but it’s what happens after that will matter.
Basically, will they gobble this dip up or will the rally fizzle?
Second, we’ve been in need of some consolidation after this major run. It’s a good thing to see the market cool off and it will be key to see what kind of “cooling” it will materialize into.
S&P 500 — ES
The weekly chart above shows pretty clear resistance in the 4175 to 4200 area. That said, the ES built a higher low in December and is now back above downtrend resistance (blue line) and the 50-week moving average.
Clear positives.
It’s also above all of its daily moving averages, as shown below, including active support via the 10-day ema.
Now the ES finds itself in a bit of a tough spot. The poor earnings results out of FAANG and the implication for higher rates following the roasting hot NFP report do not seem to bode well for the future.
That said, one can look at the two charts from above and conclude that there have been some really nice technical developments.
My question now becomes: Will the ES find buyers at active support (the 10-ema) and if not, will it again put in a higher low, (avoiding a retest of the ~3,800 area)?
This is sort of a “bigger picture” look rather than an exact trade setup, but I have an open mind — both long and short — about how we could progress and I think that’s the best way to approach this.
SPY
For SPY, let’s keep it simple: Below $410 and it’s “hands off” until we test the 10-ema. Upon testing active support, we’ll see who grabs control — the buyers or the sellers.
If the buyers, $410+ is back on the table. If sellers, ~$400 is likely in play.
QQQ
4-hour chart above and the recent momentum has been in tech. We should fill the $303.43 gap near the open.
If selling accelerates, the 10-ema on the 4H chart comes into play near $302, with the 50% retrace for last week’s range just a touch lower. I’m looking at this spot as a potential buy zone (for a trade) this a.m.
Open Positions
- Numbered are the trades that are open.
- Bold are the trades with recent updates.
- Italics show means the trade is closed.
(Any positions that get down to ¼ or less (AKA runners) are removed from the list below and left up to you to manage. My only suggestion would be B/E or better stops.)
From this latest round, that includes TLT, DE and FSLR.
- NKE — Down to ⅓ or less as NKE cleared $130 yesterday. B/E stop or $126 is fine. Either exit the rest or hold for a potential runner as Nike bases nicely.
- NFLX — Fish for $369 to $370+ on the final tranche. ($379+ high on Friday)
Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
Relative strength leaders →
- AQUA
- AEHR
- MELI
- GE
- WYNN, LVS
- NVDA, NFLX, TSLA, SHOP
- SBUX
- AXP
- BA & Airlines — AAL, DAL, UAL
- TJX, ULTA, NKE
- CAT
- HCCI
- XLE — XOM, CVX, COP, BP, EOG, PXD — (Weekly Charts)
Economic Calendar
None.
