Our View
If you think the selloff is serious now, just wait for July. The US stock market is getting rocked and there is absolutely no indication that it’s going to slow down anytime soon. I used to say this all that time: We live in an ever-changing world where nothing stays the same for very long.
The things we used to make money with don’t work anymore and the things we find that do only last as long as it takes to be coded into the algo. There has never been a period where the ranges were so large and didn’t let up. As we go into Friday, the ES isn’t only down 6 weeks in a row, it’s also down 4.67% in the last 4 days. From last week’s high to this week’s low, it’s down more than 10%.
This is getting scary. Usually, after the S&P falls sharply, it bounces. However, it just hasn’t been able to put a sustained rally together.
There are only a few certainties in the stock market and the first one is easy: No one knows for sure what the S&P is going to do next. The other certainty is that the S&P never does what most people want it to do when they want it to.
We are now in the wash-out phase. Based on the current price action, the markets look lower. I am going to say it again, all the rallies are dead-cat bounces and I’m not changing my view. I don’t care if the ES rallies for 5 hours or 5 days, at some point it’s going back down.
Our Lean
Did you know that AAPL has now lost $417 billion in market cap since last Wednesday’s rate hike? Tech hates higher rates and is the center of the weakness. It’s shocking how much some of the big names have sold off.
Today is FRYday and I expect another big day of rips and dips. The PitBull mentioned that today could see some mid-month rebalancing. All I know is after the ES rallies 50 to 80 points, it’s usually exhausted. A lot of folks think the ES is bottoming or is going to bottom.
What I think is after a 6-week rout where the ES is down over 650 points (and fell over 775 points), the ES is overdue for a pop. The ES has run a lot of sell stops on the downside over the last few days and now it’s time to run the buy stops.
Daily Recap
The ES opened Thursday’s regular session at 3897.50 and rallied up to 3910.50. From there, it sold off down to 3872.75, a ~40 point flush, then rebounded back up to 3916.25. The choppy range didn’t stop there. It flushed another ~40 down to 3877 — a higher low — then ripped 64 points up to a new high at 3941 and traded 3910 at 10:34.
This was all in the first hour of trading!
From there, we hit new highs at ~3961.75 at 11:10 and the bears took over. They drove the ES down to 3885 just after noon, a 77-point drop. A 42-handle rally sent the ES back to ~3928 at 12:45, before sellers stepped in once more and drove the ES down to new lows, hitting 3855 at 3:00 — another drop in excess of 70 points.
At 3:50, the ES traded 3899, up 44 points off the low as the MIM revealed $1.4 billion to buy, triggering a further rally up to 3930, 75 points off the low. The ES closed at 3928 on the 4:00 session and settled at 3910 at 5:00, down just 3 points on the day.
In the end, the markets were weak but the buying showed up late as the MIM came out big to buy. In terms of the ES’s overall tone, it was weak and was totally held captive by the Nasdaq. In terms of the ES’s overall trade, volume was steady all day at 2.32 million contracts traded.
It was the highest-volume day since March 8. The ES has traded 2 million+ contracts each day this week. If we do so again on Friday, this week will have the highest weekly volume since late January.
- Total Range: 127 points
- H: 4050.50
- L: 3923.75
Technical Edge
- NYSE Breadth: 68% Downside Volume
- NASDAQ Breadth: 81% Downside Volume
- VIX: ~$30
Trade the market long enough and you get a secondary “feel” for what’s going on. You can “feel” the fear when the market is going down; “feel” the tension when it’s choppy, “feel” the exuberance when we’re in a raging bull.
You can also “feel” when the rubber band gets stretched too far in one direction. Yesterday that tension neared a breaking point. We saw ARKK rally 10% at one point in the session, with many growth names flying 15% to 20% at one point.
They eventually halved those gains by the close as the ES traded to new lows at 2:30 pm, but they still finished higher on the day. I know those stocks are still broken, but you can feel the market’s “urge to surge” and tear up those who have flipped from long to short and gotten too far offsides with the short trade.
Could we be looking at some type of dead-cat bounce?
Game Plan — S&P, Nasdaq, Bitcoin, Individual Stocks
With the VIX above $30, I have not spent much time on individual stocks. It’s just not the right environment and as much as I hate sounding like a broken record, the reality is simple: We have avoided a lot of pain in these names and that’s worth a lot — both financially and mentally.
When the volatility comes down, as it did in late April, there will be trades to take again. For now, though, a bulk of my effort is going into mapping the S&P 500, which is going to be a major driver of individual stocks anyway.
S&P 500
Unless we take out 4099 today, it will market the S&P’s sixth straight weekly decline. That hasn’t happened in many years, so we are due for a bounce on the long side.
Above you can see that I have (quite literally) traced the recent trading action, drawn in blue. In each of those scenarios, we achieved the 50% retracement — the halfback trade. However, we did not achieve the 61.8%.
So I think that’s something we need to be looking for if the bulls can gain steam. In Globex, the ES is contending with and pushing through that two-day low area we talked about early in the week, between 3953 and 3970. It’s also worth mentioning that yesterday’s high was in this zone too.
If we can build above 3970, then 4000 is on the table. Above that puts 4050 to 4055 in play — which is last week’s low and resistance this week. That’s also where we find the declining 10-day.
If achieved today, that would be a 125-point move from yesterday’s close, a 3.2% burst. The 50% retrace is up near 4080, with 4100 just above it. Man, there are so many overhead hurdles.
The risk today is obvious: We are gapping up. A gap-and-crap situation will be a big blow to the bulls’ case.
SPY
It’s crazy we could rally 3%+ from Thursday’s close and more than 5% from yesterday’s lows and…just get back to last week’s low at $405 and this week’s resistance.
If we get to the $405 level in the next day or two, it will be a huge test for SPY.
On the downside, a break of $395.80 has our attention if the gap starts to lose strength. Below $389 and this week’s low is back on the table near $385.
QQQ
Tech wants to rally. The question is, can it?
Above is a four-hour chart. Let’s see if the QQQ can clear yesterday’s high at $295.75 and the declining 10-ema. The same really goes for the SPY, by the way.
If it can, $300 is in play. That’s followed by a potential push to $305, which was resistance this week, last week’s low and it’s roughly where the declining 10-day moving average comes into play.
NQ
Doji-daily-up formation setting up on the daily. If the NQ can stay above yesterday’s high at 12,133, bulls can gain momentum. In that case, it could put the 12,500 area in play next.
Go-To Watchlist
*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.
- AR — Was looking for $35 on First Target. Hit $34.90. Anything above $34 was good for a trim. → Now B/E stop-loss on this one.
- ABBV — Weekly up → $148.75 seems like a reasonable stop-loss level. $150 for more conservative traders. On the upside, I’d love $160 to $162 as our first time. More conservative traders can trim at $157.
Relative strength leaders (List is cleaned up and shorter!) →
- AR
- WMT
- PEP
- KO
- MCK
- BMY
- JNJ
- DLTR
- DOW
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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