Our View

Despite the rally, earnings expectations (and earnings results) continue to fall. And now that the Fed’s easy money is evaporating, higher interest rates are taking over, along with inflation. For most traders, this is a worrisome situation…then you throw in the geopolitical risk with Russia and China. 

In the past when there were multiple problems, the markets seemed to digest them or make good of them over time. However, the current load is simply too much and it’s not just going to dry up and blow away. I think the most important part of this is there is going to be an earnings shrink down as profit estimates for companies are cut at a faster pace. 

According to FactSet, the third-quarter bottoms-up earnings-per-share estimate — an aggregate of consensus projections for individual companies in the S&P 500 — fell by 2.5% in July, the biggest reduction during the first month of a quarter in more than two years and a larger decline than the historic average. 

I understand that there have already been some big bounces and/or rallies on bad news. NFLX, TSLA, AAPL, F, etc. come to mind. I know Friday’s job number was great, but that’s not going to stop inflation and it will encourage the Fed to raise rates faster and/or higher.  

Fundstrat’s Tom Lee said Friday that the S&P could reach 4,800 by year-end, which is in line with my end of the 2022 year-end call…but right now I am concerned about the end of August, September, and October. 

Coming into 2022, I called for a 15%-plus selloff and a strong finish into year-end, but does that mean we’ve seen the low? Not necessarily. 

Our Lean

The S&P was down 26% and has rallied 13%. Is it going to keep going up? I think so, but I still insist the 50% retracement at ~4224 is critical. That’s followed by 4250 and then my ES brick wall at 4300. The bulls may feel good, but let’s not forget about the overall trend. 

This week is going to be another big week of corporate earnings and economic releases — with Wednesday’s inflation report being the most critical. I think there are a few patterns that have shown well for the upside:

  1. Every time the ES has a quick fall, it rallies again as the buyers step in.
  2. I still think any 50- to 70-point pullbacks are where you look to get in or reload on the long side. Until the trend changes, this is how I’m playing it. 

Remember, it’s the summer and a lot of people are not trading right now. The end of August and early September is when kids go back to school, so there are going to be a lot of folks taking time off until then, which in most cases creates lower volumes and is — in my opinion — a big reason we’ve seen this recent move higher. 

Be smart, trade less, pick your spots better, and USE STOPS. 

Daily Recap

From 8:30 ET to just after 8:50, the ES fell ~56 points after the stronger-than-expected non-farm payrolls report was released and hit a low of 4103.75. From there, the ES chopped in a 10-point range until the 9:30 open at 4108. 

The ES then exploded higher, rallying 45 points in the first 40 minutes, put in a lower high at 4153 vs. the 8:00 high at 4162. Over the next 1 hour and 20 minutes, the ES coughed up 41 points, nearly eliminating the rally, but then put in a higher low at 4112. 

The ES then rallied ~34 points to 4146.25 at 1:40, pulled back 20.50 points to ~4126 at 2:30, and then rallied 20.25 points into the 3:50 cash imbalance reading where the MIM showed $1 billion to buy. That pushed the ES to 4149 and it closed at 4146. At the 5:00 futures close, the ES settled at 4141.75. 

In the end, the jobs report slugged the ES, but it recovered a bulk of the losses as it staggered higher. In terms of the ES’s overall tone, the bulls bought the dip. In terms of the ES’s overall trade, volume was in-line with the average at 1.66 million but light considering the buy-the-dip rally. 

  • Daily Range: 62.50 points
  • H: 4166.25
  • L: 4103.75

Technical Edge

  • NYSE Breadth: 63% Upside Volume (pretty good for a down day)
  • NASDAQ Breadth: 55% Upside Volume
  • VIX: ~$21.50

The stock market has traded much better lately and even did so on Friday. We faced another potential geopolitical outbreak last week with China, but that storm seems to have passed — for now. 

The markets dipped on the jobs report in anticipation that the Fed now has the green light for a more aggressive, hawkish policy. I still believe the market is not pricing in enough hikes for the 2H of the year — just 100 basis points between now and year-end 2022 — but we will see how this manifests itself in the days and weeks ahead. 

Let’s start with a big-picture view and see if the bulls can maintain control. (A follow-up post will come later this morning). 

Game Plan: S&P 500, SPY, QQQ

S&P 500 — ES

The ES still has two very clear levels: The 4080s and 4170. 

Above is a weekly chart, taking a “bigger picture” look at the ES as we start a new week. Still, the two levels outlined above — 4070 resistance and 4080 support — remain in play. 

If we clear 4170 and do not reverse back down, 4200 to 4225 is in play. That zone will be key. 

On the downside, the 4100 area is short-term support. Below that could open the door for an eventual test of more stout support at 4080. However, I would love a test of the 10-day moving average, which has not been tested in 7 sessions (not including Globex). 

S&P 500 — SPY

We opened lower on Friday, but the SPY ran hard to the upside on decent breadth. Notice the lower volume on the chart above, though. 

Like the ES, we’ve gone 7 sessions without a test of the short-term 10-day ema. That highlights the strength of the recent move. 

On the upside, $417 to $421 is littered with several key levels. We have recent resistance, the 10-month ema and the 50% retrace of the 2022 range (in that order). If the SPY can clear this zone, it will be impressive and put the low- to mid-$430s in play. 

On the downside, keep a sharp eye on the $407 level and the rising 10-day. 

Nasdaq — QQQ

Solid action for the QQQ last week. I am mainly focused on whether the QQQ can stay above the $320 level. If so, perhaps the $330s are within sight. 

On the downside, a break lower puts the $311 to $313 zone in play, a level that bulls desperately want to see hold as support. 

Go-To Watchlist — Individual Stocks

*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. 
  • Italics show means the trade is closed.

Trade Sheets: Now have 2-3 live trades, all with breakeven or better stop-losses. Great stress-free position to be in as we try to squeeze a bit more of upside out of this move. 

  1. MCK — finally got out $348 to $350 target. I am out the last bit here, but with a profitable stop-loss at $325 (entry in the low $300s), anyone who wants to press for $355 to $365 with their last ¼ to ⅓ position can do so. Cheers
  2. PEP — We got out Target cNo. 2 at $177. Either all out now or down to ⅓ of a position if playing for a breakout. Stop at $172 (above B/E). 
  3. UUP — $28.60 to $28.80 is ideal first trim zone, but bulls can trim ¼ at $28.50-ish if they’d like, as the UUP runs into the 10-day ema. 
  4. CHNG — volatile session on Monday, but held where it needed to. In fact, that spike down gave us a level to measure against. I’m using a stop-loss in the $23.20 to $23.35 area. 
    1. Looking for $24.50 to $24.70 for first small trim, (i.e. ¼ to ⅕ position trim). More aggressive traders can look for $25+ for first trim
  5. O — I will go with an unusually tight stop-loss here at $71.75. If I get stopped on this, I want a small loss and will look to re-enter around $70.50 and $70.75 — the breakout zone.
    1. On the upside, $74 is our first upside target. 

Relative strength leaders (List is cleaned up and shorter!) → 

  • O
  • CNC
  • HRB
  • ENPH — kickstarted the rally in Solar
  • TAN
  • FSLR
  • MSTR
  • LNG 
  • PWR
  • CHNG
  • COST — trade is live
  • PEP — trade is live 
  • BA  
  • UNH
  • XLE
  • MCK — trade is live

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.

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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