Let’s ease into the week and look for high-probability trades
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Don’t Forget: The Long-term performance of the S&P 500, some longer term setups and 5 red flags that showed up before the 2022 bear market.
Our View
As many of you know, I’m a big fan of retracements and below are some big ones. As I always say, no one knows for sure what the market is going to do next, but if indeed they do keep going down, these are “levels of interest.”
From the all-time high (36,832) down to the Covid low (18,086), the Dow futures (YM) have the 50% retracement at 27,459. To get there, the YM has to decline more than 1,850 points or about 6.3% from last week’s close.
While the S&P 500 did get our test of the 200-week moving average, it has not yet tested its 50% retracement from the all-time high of 4808 down to the Covid low of 2174, which comes into play at 3491.
That’s down almost 160 points or about 4.5% from last week’s close.
Our Lean — Danny’s Take
There are dark clouds hanging over the markets after the NQ closed down 450 points on Friday. Tech was murdered, as Nvidia fell 8% and AMD tumbled ~14%. Apple fell 3.7%, AMZN fell 4.7%, MSFT fell 5% and TSLA fell 6.3%.
It was not a good session for the bulls.
Then there is all the geopolitical risk — like North Korea raising problems and the ongoing issues with Russia and Putin. This week we are going to see earnings season kick into gear on Friday, and after AMD’s disappointing preliminary results, it could be the tip of the iceberg for a bad quarter. There’s also the CPI report on Thursday.
We want to pick our spots carefully and focus on high risk/reward setups.
Our Lean: Based on Friday’s close, I think there is a good possibility that the ES and NQ accelerate to the downside. That said, we could see a bounce this morning first as the ES rallies off the overnight lows and amid a “thin to win” trade due to Columbus Day.
I do think the rally is one to sell, but not blindly.
I don’t know that we’ll see 3694, which is the “halfway back” or 50% retracement from the overnight low to Friday’s high. Ideally we could sell a rally back to Friday’s high, but that would require a big move from the ES to the tune of ~4% in the coming days.
Ultimately, ES 3430 is ON TAP, but how we get there may not be as clear.
Daily Recap
The ES traded down to 3700.25 on Globex after the jobs report and opened Friday’s regular session at 3713.75. The ES traded up to 3717.50, which was the session high, then dropped 46 points down to 3670.75 at 10:06. That’s when I put this in the room
IMPRO: Dboy :(10:07:37 AM) : I think we bounce
Sometimes trading decisions are not based on your charts, an indicator, or a trendline, but I believe some decisions come from your gut. It’s a feeling you get or a pattern you have seen before and your brain steps away from all your tools and goes to your instincts.
Not long after, the ES rallied up to 3694.75 at 10:47, up 24 points off the morning low. After the bounce, the ES fell another 40 points down to 3654 at 1:00, bounced 12 points, then faded another 34 handles down to a low of 3632.50 at 3:30.
The ES traded 3644.50 as the 3:50 cash imbalance ‘flipped’ to $2.3 billion to buy, traded up to ~3656 and closed at 3651.25 on the 4:00 cash close. It ended half a point lower at the 5 pm futures close, down 103 points or 2.75% on the day.
In the end, it was a Fryday’s downside jobs disaster. In terms of the ES’s overall tone, it was all sell programs. In terms of the ES’s overall trade, volume came in at 2.23 million contracts
Technical Edge
- NYSE Breadth: 91% Downside Volume (!!)
- Advance/Decline: 86% Decline
- VIX: ~$32.80
Game Plan: S&P, Bonds
A stronger-than-expected jobs report had lower wage pressure, but a stubbornly high unemployment rate. To the Fed, that means they have more runway for their hawkish stance and the market behaved like that is the case on Friday.
Long-time readers know I’m never in much of a hurry to do something on Monday’s open. I like to see how the market is going to set up.
In any regard, we’re coming into the day with more bond weakness and dollar strength — a recipe that has, for the most part, kept us relatively cautious.
Even if that’s “boring” by most standards, it’s kept us pretty safe & I am grateful for that.
Let’s have a great week.
S&P 500 — ES
The ES did not have a good close last Friday, but nor did it have a good close on the prior Friday either and it promptly rallied 250 points.
I’m not saying that’s on tap, but the S&P is at a notable area.
I was trying to find the positives last Friday in our recent video, but a lot of it will hinge on how the ES handles the June lows near 3639. If it can hold this area and stay above Friday’s low of 3632.50, perhaps it can drift higher toward 3700 and the declining 10-day ema.
Below 3640 and I think we need to be a bit more cautious. Below the overnight low (and failure to reclaim it) at 3618 keeps last week’s low in play at 3571.
SPY
Notice how the SPY caught a late-day bid off the June low, helping it to close off the session low.
Below Friday’s low of $360.94 and failure to reclaim it leaves last week’s low with $2 a share, along with a retest of the 200-week moving average.
Ultimately, a larger breakdown could send the SPY down to that $350 area noted above.
On a rally, $367 to $368.50 would have me looking for a sale in the SPY, which is the 50% to 61.8% retrace zone of Friday’s range.
Nasdaq — NQ
One setup I’m watching is the NQ. If we go “bid” off the open, keep an eye on the overnight high, which is now at ~11,100. If we clear that, who’s to say the NQ doesn’t bounce to 11,200 or higher?
On the downside, below the June low of 11,068 has me cautious of a retest of the overnight low at 10,986.
XLE
Keep an eye on the $77.50 area in the coming days, as energy/oil has momentum.
FSLR
Thankfully we didn’t get caught up in the ENPH tumble last week, which does have me shying away from FSLR a bit here. However, a tag of the breakout level near $123 and the 50-day moving average would have me looking at a potential long here.
Again, with VIX $30+, there is zero shame in sticking to the indices (or nothing at all) until the environment becomes more conducive.
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.
- Italics show means the trade is closed.
Notes:
MCK — weekly-up triggered from our buy list. $360 to $362 is our first upside target. $346 is a reasonable stop-loss for those long from the weekly-up level of $351. — stopped
Relative strength leaders →
Top:
- LNG — nearing the breakout near $150
- MCK — holding the breakout near $340
- CAH — holding the breakout near $64
Here’s a quick look at the stocks above (in the Opening Print Twitter Community).
- LPLA
- CCRN
- FLSR
- ALB
- VRTX
- CYTK
Economic Calendar
Nothing notable.
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