Our View
The stock market has no redeeming qualities right now. I know the dip buyers are back in the market, but I just think it’s too early. Some of the hot stocks that the PitBull looks at were down 60% to 70% and didn’t look good. Then last Thursday he said some of those names are down as much as 70% to 80%. In most cases dip buyers reappear when a stock falls by 10% to 20%, but it doesn’t seem like people are in a big hurry to add more stocks to their portfolios right now.
As Albert W. Thomas said, “Any fool can buy. It’s the ‘wise’ man who knows how to sell.”
Before the pandemic, the Dow was at 29,500 and when Covid started hitting, the index dropped to 18,000. The ES was at 3400 and sold off down to 2175.
The key to this is that the Dow should drop to its prior pre-pandemic high of 29,500 and the ES should drop to 3400.
From Thursday’s high to Friday’s low, the Dow futures fell more than 1,800 points (5.1%) — and lost almost 400 points in the last 30 minutes of Friday’s session. For the S&P, it’s fallen almost 270 points (5.8%) in the same span.
This is not normal.
Our Lean
I learned this from the PitBull and now you are going to learn it from me: The S&P rallies early in the week and early in the day in a bear market. We saw this play out last week, with Monday’s flat session and the rally on Tuesday.
Like the markets or hate them, there is no denying that they are in trouble. After selling off all day on Friday, the MIM delivered a 1-2 punch on Friday’s close with a $5.4 billion sell imbalance that sent the ES tumbling. We see a lot of $1 billion to $2.5 billion dollar sell imbalances, but $5.4 billion is huge and coincides with last week’s non-stop liquidation.
The bulls will hate hearing this, but we have to indoctrinate ourselves into thinking “lower prices.” That also includes not falling in love with any rallies.
The best six months for stocks end this week. Some think there could be some end-of-the-month buying and I can’t disagree, but it doesn’t matter if it rallies for one hour or five days, it’s eventually going to be a sale.
It’s hard to sell the ES after such a big drop. The algorithms and HFT programs live off of “overly” long or overly short positions in the index futures market and the build-up of buy and sell stops — think of a stretching rubber band.
Right now the crowd is short and with the nearby stops being on the upside, I don’t think a pop can be ruled out. Still, this is a sell-the-rallies market. The levels we are focusing on are Friday’s close at 4247, the 4255 to 4260 zone, and the 4265 level. Bears are looking at 4150 to 4165 on the downside.
Daily Recap
Thursday’s gap-up action initially put the ES in weekly-up territory, but it soon began to roll over and fell more than 100 points by the close. Friday’s action was even worse. The ES initially reclaimed Thursday’s close and went less than 3 points into positive territory in the opening minutes before getting crushed.
From 8 am to the 5:00 settlement, the ES fell in eight of the nine 1-hour timeframes. The one “up” run came from noon until 1:00, where the ES posted a net gain of 0.50 points. Yeah, it was that kind of session.
Let’s keep it simple: The ES opened at 4377 and fell right out of the gate, dropping 17 points in the first 10 minutes of the session. Every rally was sold until 3:00, when bulls eventually mustered up a low-to-high rally of 37 points, but as the MIM loomed, the ES came back under pressure.
Going into 3:50, the ES was down 94 points from where it opened, trading 4283.50. When it showed that more than $5 billion was for sale, the ES bled lower into the 4pm close and continued to fall into the 5:00 settlement.
In the end, it was one of the weakest days in a while. In terms of the ES’s overall trade, volume was high at 2.04 million contracts.
- Total Range: 145.75 points
- H: 4393.25
- L: 4247.50
Technical Edge
- NYSE Breadth: 87.3% Downside Volume (!!)
- NASDAQ Breadth: 74% Downside Volume
We were on the verge of a 90% downside day on the NYSE and I’m surprised we didn’t get it. Either way, we’ve had two back-to-back days of 80%-plus downside days.
Does that mean we will bounce today? No.
However, we’ve had two back-to-back 80%-plus downside days in the last 12 months. Once at the beginning of December and another in July. On both occasions, the S&P enjoyed a healthy rebound.
I do wonder if we could be near some sort of washout/capitulation situation. Does that thrust us into the 2022 lows? It should, in my opinion, but maybe it will take some time.
On Friday, we laid out one five-wave (ABCDE) scenario to getting there. The flip side is, we could get there all in one flush, but we’ll see. The Fed speaks next week, and in the back of our head, we’re wondering if the market sets up as it did in March: Sell off into the Fed and rip afterward.
Game Plan
Everyone knows I’m a big fan of taking Mondays slowly. Well, I’m an even bigger fan of it today. We had a really great stretch there of trading individual stocks as the VIX drifted back down to the low $20s.
Now back near $30, the individual trades will likely take a back seat to index setups. Hey, I don’t like it either!! But we can’t fight the market; it’s the one that tells us what to do!
S&P 500
We have been bearish since the February rally. My only regret is not being more bearish, but it’s difficult to be when:
- It doesn’t come naturally (we are bulls at heart and the data supports it) and
- It goes against the trend of the last 12 years.
The question now becomes: Will this be a three-wave move lower (an “ABC” correction) or a five-wave move (an “ABCDE” decline)? That is, assuming we retest the 2022 low.
Bigger picture — We are either looking for a potential rebound back to the 4350 to 4365 area (that gets sold) or a continuation lower into the 4100 to 4150 zone.
The war in Ukraine has not seen a significant improvement, inflation is “maybe” peaking and the Fed is tightening even more aggressively than anticipated. So our rationale behind a retest of the lows is not some perma-bear fodder. It has real rationale.
On the upside, keep an eye on the Globex high and Friday’s close, both at 4267. Above that and perhaps we can see a push back to the 4300 area.
On the downside, the Globex low at 4218.50 is on watch. A break of this level that’s not reclaimed could flush the ES into the 4100s.
Bonds
The TLT is gapping up this morning, currently near Friday’s high. A slightly larger push gets us to last week’s high near $122 and the declining 10-day, the latter of which it hasn’t tested in 12 sessions.
If it gets to this area — the $122 to the 10-day — see if they sell it.
Individual Stock Trades
Holding off on individual stocks for now, with one exception:
TGT
Target may be the one exception here, for those that want to play with a portion of the profit from the previous trade we had here that took us from $229.50 to $250.
Gapping down into the 10-day and 200-day moving averages, let’s see if we get a bounce.
*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).
A huge number of our B/E stops were hit last week, leaving us with virtually no trades left on the books. Some runners may be in play with WMT and TGT.
- VRTX — First trim zone hit → Stopped at B/E
- PANW — Trimmed into weekly-up area near $631. Stopped at B/E
- TGT — $250 trim spot hit → A full exit is okay. Otherwise look for $265-ish on remaining ⅓ of position. Stop-loss either at B/E or raised to $235. Your preference.
- WMT — Trim at $158 → B/E Stop. Inside week. Now looking for inside-and-up rotation over $158.29. If so, it puts $162 in play for small trim, otherwise $165 to $170 is our longer term target.
- ABC — $166 Trim spot hit → stopped at B/E
Relative strength leaders (List is getting longer!) →
- AR — watch for test of 10-day
- MAR — back on the list
- CAT
- DOW, NEM
- DLTR
- COST
- MCK
- BRK.B
- XLB — ADM, NTR, CTVA, NEM, DOW
- ABBV
- FLR
- JNJ
- XLU
- BMY
- Energy — FLNG, XLE, APA, CNQ, CVX, ENB, PXD — etc.
- PANW
- AMGN
- ABC
- UNH
- VRTX
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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