Our View
There are always big short-covering rallies during bear markets and large declines. The main question is, is the turbulence over? Mondays have been busy days this year. Last Monday, the Dow Jones dropped 1,000 points and then rallied 1,000 points.
I think what we saw on Friday’s close was a well-planned rebalance backed by a mammoth MOC buy that caught the short sellers extremely offside. We all know there are hundreds of billions of dollars waiting to buy the dip and Friday’s late rally was a perfect example of how money is put to work.
It was also something we were looking for.
It’s almost impossible to “predict” the roadmap for the session, but in Friday’s Opening Print, we were looking at the potential for the ES to close near its highs.
At 2:50 I said I think it will, even though it was 24 handles below the session high. But 70 minutes later, the ES went out at the highs, up about 70 points from that tweet. If you can avoid big losses, you only need a trade or two a week like this to be successful.
According to the Stock Trader’s Almanac, February is the “weak link” amid the best six-month stretch for stocks. The average February gain for the Nasdaq is 0.70% in a midterm election year, but has finished higher in just six of the last 12 occasions. The Almanac doesn’t show anything special for the last trading day of January, but the first trading day of February has the Dow up 15 of the last 18 occasions.
Our Lean
After the S&P had its best day of the year on Friday, the main question is: Will the ES follow through on the upside? My guess is we see some early weakness to buy then rally again late in the day as more money is put to work on the close.
I don’t think it’s going to get too crazy today, but if the ES were to gap higher I would be looking to sell the open or the first rally above the gap up.
MrTopStep has a trading rule that says the ES goes sideways to down after a big rally and from Friday’s low to the high, the ES rallied 143 points.
The key area for the ES is 4435 to 4445.
Busy Week Ahead
One-fifth of the companies in the S&P report earnings this week with some very big names reporting: AMZN, UPS, XOM, GOOGL, FB, F and GM, among others.
On the economic front we’ll have the Chicago PMI, US Manufacturing PMI, Vehicle Sales, Construction Spending, ISM, MBA Mortgage Applications, ADP Employment Change, Challenger Job Cuts, Jobless Claims, Markit US and the January Labor Report, which will likely be affected by the surge of Omicron.
Daily Recap
Friday was another wild trading day on a list of many recently. After trading down to 4266.25 on Globex, the ES short-covered and opened at 4331.50. From there, it rallied 20 points in the first few minutes of the session, tumbled down to 4283.50 around 9:45, then retested this level about 15 minutes later.
The ES worked off the selling pressure, rallying to 4380 at noon before a series of sharp pullbacks sent it to 4355 (followed by a 20-25 point bounce), then down to ~4323 just after 2:30.
From there though, it ripped off six straight gains into the close on the 15-minute chart — and perhaps it would have been more if the rally had come earlier. The ES traded 4404 as the 3:50 cash imbalance showed $4.46 billion to buy, which fueled it to 4424 on the 4:00 cash close and settled at 4419.75.
In the End
In the end, the S&P snapped a three-week losing streak. The late-day buy program led to one of the largest MOC buys in quite some time.
In terms of the ES’s overall tone, it went from weak early in the day, followed by several hours of chopping up and down in a 30-point range, to rallying almost 60 handles in the final hour. In terms of the ES’s overall trade, volume was steady all day at 2.19 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: 70.9% Upside Volume
- NASDAQ Breadth: 80.1% Upside Volume (!)
Game Plan
Our favorite group lately — energy — will start reporting earnings in earnest this week, with XOM kicking things off on Tuesday before the open. I won’t carry a long position into the report (just as a heads up).
However, how this group behaves will be important to watch, as energy is really the only sector that’s been holding up this year and it’s not even close.
After Friday’s explosive rally, we really need to see how the market is going to handle the month-end gains and see how it trades today. I never like to be in a rush on a Monday morning.
It almost feels like a gap in either direction with “revert” back towards Friday’s close and then we’ll have to go from there. If that’s the case, let’s see if it reverses/rebounds or if there is a follow-through on the fade.
S&P 500
There is still a path up to $450 in the SPY, but it will need to clear last week’s high near $444, as well as the 10-day and 200-day moving averages. Above $450 and one can make a case for $457.
On the downside, the $428 to $430 zone proved to be solid support for the index. $440 to $442 remains resistance until proven otherwise.
For now, that is the range we’re in.
Nasdaq – QQQ
13,800 to 14,000 proved to be solid support in the NQ last week. No matter how many times this area was tested, it continued to hold. That has to give bulls some sort of confidence, no?
At least we have a line in the sand.
In the short-term, let’s see if we can hold the Q4 low. If we can’t, the NQ may see another test of the 14,000 area (or lower). Above this level keeps last week’s high and the declining 10-day moving average in play.
If the NQ can clear both measures, it opens the door to the 200-day moving average and the 15K level.
(The same logic can be applied to the QQQ).
Individual Stocks — Watching AAPL, NVDA, F
We ended up getting an “easy” trade in TSLA on Friday, with the reversal back up through Thursday’s post-earnings low. Bulls could have either waited for the trigger at $829 or they could have taken it earlier based on the 15-minute reversal in the opening of the session.
I like the latter. While it’s more nimble, the R/R tends to be better. And even though I trade those setups with smaller position size (because it may need two or three attempts to get going), the payoff tends to be better when you know what stocks to focus on — which is what this newsletter (and specifically this section) is all about.
So what’s left now?
AAPL
This one is tough. After a strong reaction to earnings, AAPL has rallied right into a major area. Sitting between the 50% and 61.8% retracement, AAPL stock is just above the 50-day and running into the declining 21-day moving average and the daily VWAP measure.
What we really want to see is Apple not give up its gains here. If it can maintain the 10-day moving average — and better yet, the $167 to $168 area — this could become a go-to stock for bulls.
NVDA
I’ll be watching NVDA this week, along with AMD earnings on Tuesday evening and the SMH.
NVDA held up well around the 200-day, but we need some further upside rotation for it to mean anything. Weekly-up over ~$240.60 and over the 10-day could net us ~$20 a share in a hurry, up to $260.
A break of Friday’s low puts last week’s low in play.
Ford
Ford has been a tricky trade lately and reports earnings on Thursday evening (GM on Tuesday evening).
An undercut of last week’s low and range support does have me interested. On the upside, keep an eye on $21. Not only is that last week’s high, but it’s where the 50-day and declining 10-day moving averages come into play.
A sustainable move above $21 could quickly put $22.50 or more in play.
A break of last week’s low and/or last month’s low at $18.61 could eventually put $16.50 on the table (but would likely need a poor earnings reaction to make it happen).
Go-To List — Still Keeping It Short
- ABBV continues to do quite well on the long side (reports Wed)
- CVS hit new highs on Friday. Remains a go-to trade
- BRK.B trying to firm up, recently closed above 10 & 21-day moving averages.
- TD — decent relative strength and potential trade setup this week.
- V & MA — both climbed about 10% on Friday on better-than-expected earnings. Down about 1% in the premarket; maybe we can get some Red-to-Green moves.
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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