Use Stops / Learn To Trade Another Day
Before I post the View and Lean I want to tell a quick story.
Yesterday a follower on Twitter emailed me. He wanted to know if I had time to call him so I dialed his number and he picked up and after a few minutes of chatting I knew it wasn’t going to be good. The first thing he said was. “I’m sure you have heard all sorts of blow-up stories in your life.”
As you can imagine, I have.
He went on to tell me that he turned $10,000 into $150,000 from December until February but lost it all when the ES rocketed higher. I asked him if he used stops. He didn’t. Instead, he continued to add to a losing position in the ES. He also said he turned his financial situation upside down and is 41 years old and in debt for the first time in his life.
Usually, I am understanding. The fact that a small 1-to-3 lot trader can take $10,000 and make it into $150,000, lose it all, and not use some type of risk controls or stops is mind-blowing. I wanted to tell him he had no right to trade anymore and that over the last 15 years of trading he didn’t learn one damn thing — but he never really let me talk.
In the end, he asked me if trading micros was a good idea.
Look, some people just don’t get it and no matter what anyone says, they think they are going to get their money back. The odds of that are slim to none.
Moral of the story: Be smart, trade less, and pick your spots better. And if you do take a whack, take a step back. Don’t blow up money you can’t replace.
Our View — Goldman And The ‘R’ Word
Yesterday the Goldman Sachs team reiterated its best- and worst-case stock market scenarios for 2022.
Led by chief US equity strategist David J. Kostin, the team reiterated its expectations for the S&P 500 to close at 4700 by year-end — up just 4% from current levels. However, that would be a slight decline from 2021, as the index ended the year at ~4766.
That’s the best case.
The worst-case — the “recession scenario” as Goldman calls it — puts the S&P down to 3,600, a 21% slide from current levels. In regards to the inverted yield curve, Goldman said that “inversions on their own don’t typically sink stock portfolios.” However, high inflation alongside an inversion could “prove too much for stocks, pushing them into bear territory.”
Our Lean
There are nine months left in the year and we have inflation raging, talk that the Fed will start increasing interest rates by 0.50% and Q1 earnings start next week. I don’t see an end to the current oil situation, nor do I see using the US strategic oil reserves as a way to shore up the oil shortage.
I am cautiously bullish and think buying weakness is the right trade for now, but I also think that could change at any minute. The markets act like they want to keep going up. I’m not saying new highs, but I’m saying the current trend can continue. I don’t think it will last all month and I do think there will be some dips.
However, the Dow has an average gain of 2% in April so I think the pullbacks will probably be bought for now.
That’s the zoomed-out view. Zooming in for Our Lean, it would not surprise me that we pull back a little today. Any 20 to 30 point drop should be a buying opportunity, especially if the pullback happens in the 10:30 to 11:30 time frame. As always, use stops.
Daily Recap
The ES opened the regular session at 4542.25 and pulled back down to 4533.75. Just before 10:00, it shot up to 4557.75. After the high, we had a quick pullback down to the VWAP area near 4544.50, about 13 points off the high. However, the spike kickstarted a slow but steady grind higher for the day. By 3:49, the ES had ground its way up ~4575.
The ES traded 4573.50 as the 3:50 cash imbalance showed $201 million to sell and traded up 4580 on the 4:00 cash close before settling at 4576 on the 5:00 futures close, up 38.50 points or 0.85% on the day.
In the end, the low volume — thin to win — and new money going into stocks helped grease the wheel on the upside. In terms of the ES’s overall tone, every dip was bought. In terms of the ES’s overall trade, volume was the lowest in weeks at 1.1 million contracts traded.
- Total Range: 52.25 points
- H: 4580
- L: 4527.75
Technical Edge
- NYSE Breadth: 66.5% Upside Volume
- NASDAQ Breadth: 74% Upside Volume
Bulls made a solid stand yesterday, pushing many key names and indices above Friday’s high and closing strong on the day. Twitter traded well and ignited social media stocks. TSLA and AAPL again pushed higher — the two leaders in tech amid this rally.
Tech continues to be a leader off the lows and as such, I will be focused there and on the current leaders (energy & materials).
Game Plan
Yesterday we were watching AAPL, STLD, and BRK.B. Only Apple triggered from the group and how to manage it will be included as No. 1 on the watchlist below.
I will just say that as traders, you must be fluid and/or wait for your ideal environment if you’re not fluid.
If you’re a long-only trader, buying during those big drops is very difficult. It’s easier to be patient and wait for the uptrend to form, even if it takes several weeks. Otherwise, you must recognize who’s in control (longs or shorts) and play to that trend until it changes.
S&P 500 — ES
What a great response we’ve had on the ES and SPY so far. After dipping to the 10-day, the market found its footing, then went daily-up on Monday.
Now struggling with the 61.8% of the current range and the February high/resistance area, we have some clear levels.
The ES needs to get above 4580 to 4588 to unlock last week’s highs near 4630.
Upside levels:
- 4580 to 4588
- 4630
On the downside, I’m really watching 4547 to 4555, followed by the 10-day.
Downside levels:
- 4547 to 4555
- 10-day
SPY
Similar situation and beautiful rotation on Monday. Now we need to clear $458.25 to give us $461.50 to $462. Above that and $465 is in play.
On the downside, watch $453.50 to $454 first. Below that puts the 10-day in play.
NQ
Still struggling with the 200-day on the daily. Watch the Globex high at 15,198. If it clears this and holds, last week’s high could be in play (the 15,250 area). Above that is the 61.8% just above 15,300.
On the downside, watch the 14,945 to 14,960 zone. Below that puts the 10-day in play.
NVDA
A little sloppy finding its footing, but daily-up over $275.60-ish that holds could put $280 to $283 in play. That’s followed by $288 to $290.
XLB
Back-to-back inside days. Daily-up over $89.25 could kickstart next rally leg. Would eye the $90.50 to $91 area as the first trim spot.
PINS
More of a day-trade here, but watching the $26.75 to $27 area and the 10-ema on the H1 chart. Twitter news really got this one going and it went weekly-up yesterday. A dip to last week’s high and the 10-ema could give us a low-risk opportunity.
Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
Numbered are the ones I’m watching most closely. Please look at these closely, as there are several updates (the most recent of which are noted in bold).
- AAPL — Hit our first trim spot at $178 — down to ½ to ⅔. Small trim at $179.50 to $180, otherwise look for $182-ish.
- Watching XLB closely for dips! Leading stocks in materials include FCX, NEM, DOW, CTVA, NUE
- TU — trim at least ⅓ to ½ here. Look for $26.90 to $27 for another ⅓ to leave runners or another p½ to exit completely.
- AVGO — Daily-up with short-leash. Conservative trim at $640, more aggressive longs can go for $643 to $645.
- PANW — Next trim spot is $645 to $650
- DLTR — $165 is the upside target.
- MCK — Got the 10-day test. Daily-up over $307 could put $310+ in play.
- MKC — Finally got the breakout over $100. Trim spot No. 1 between $103 and $104.
- COST
- VRTX
- BMY
- CCK
- Energy — FLNG, XLE, APA, CNQ, CVX, ENB, PXD — etc.
- ABBV
- BROS
- ADM, MOS
- PANW
- AR
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.
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