Bonds set to gap lower. So are stocks.
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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
It was an ugly day for the S&P and bonds market. While we all know yields have risen sharply, the bond charts are downright frightening to look at.
I remember how the ES and the bonds went down during the credit crisis and it’s starting to get the same look. Yesterday we noted that stocks were holding up this week, despite the relentless selling in the bonds (despite these two being correlated for most of the year).
In early August, we said that bonds were sending a warning sign and then stocks corrected hard a few weeks later.
I don’t know if that’s the case right now, or if these are just some “Opex games.” However, bonds have been getting decimated. Are stocks next?
Our Lean — Danny’s Take
I want to tell you a quick story. While yesterday’s lean was good, I told Bret to change it early yesterday morning. The original call was one-sided: sell the rallies. We end up saying:
“In general, I am a seller of the rallies, but with the pre-market gains fading, I could see a scenario where the ES pushes higher in the morning.”
That ended up being the correct play and now we can ease into Opex day.
Despite the positive stats going into today’s October options expiration, I think there is reason to be concerned. While there have been several lows made on the day of the October options expiration, that doesn’t mean I think it will be the case this year.
Our Lean: The ES is approaching the 50% retracement of the 3502 low to the high at 3777.25, which comes in at 3639. If that sounds familiar, it’s also the June low. While that area may hold initially, I think 3590 is becoming more and more likely.
On the upside, see if a rally to the 3675 to 3680 area is sold. If not, 3700 is the next big test for bulls today.
Daily Recap
After a volatile overnight session, the ES opened right near 3700, dipped ~10 points and rallied 58 handles to a session high of 3748 just before 10:30. From there, it collapsed almost 70 points as the ES made a new low at 3667 at 2:31.
From there, it rallied up to 3686.50, double topped at 3:09, and then sold off down to 3666.25 at 3:35, a new session low. The ES rallied up to 3681.50 as the 3:50 cash imbalance flipped from $273 million to sell to $1.048 billion to buy and traded 3676 on the 4:00 cash close. The ES settled at 3676.25, down 30 points or -0.81% on the day.
In the end, the YEN and the bonds bombed the ES — if it’s not one thing it’s another! In terms of the ES’s overall tone, I think the PitBull’s rule about the S&P rallying early in the week and early in the day in a bear market says it all. In terms of the ES’s overall trade, volume was steady all day at 2.4 million contracts traded.
Technical Edge
- NYSE Breadth: 48.5% Upside Volume
- Advance/Decline: 30% Advance
- VIX: ~$30.35
We have finally made it to Opex. If I’m being honest, I tend not to do much trading on Opex days, because the moves are too spastic and random.
Bonds are getting clubbed this morning and again I must ask: Has the pre-Opex action propped up stocks amid this bond massacre or are bonds being driven down because of Opex?
As a general rule of thumb, bonds tend to “be right” when it comes down to SPX vs. TLT (or /ES vs. /ZB). By month’s end (or sooner), we’ll know which is true this time around.
S&P 500 — ES
I got some positive feedback on our “no BS ES chart,” so here it is again.
3675 is breaking as support in Globex. That puts our next level in play at 3640, followed by 3590 to 3600.
On the upside, see if a rally into prior support (3675) is sold. The Globex high is just a few points above this mark, FWIW.
Above that puts 3700 back in play.
S&P 500 — SPY
If the SPY ultimately follows the TLT, new lows will eventually be on tap — but that’s a big “if.”
I really like using the 50% to 61.8% retrace zone. For the current rally, that comes into play near $358.50 to $361.75. That so happens to straddle the 200-week moving average.
The Trade: The SPY is set to open in this zone as of 8:30 a.m. ET. Perhaps we can get an opening bounce out of this zone.
Below $358.50 warrants caution. Over $361.75 could put the gap-fill in play at $364.61.
TLT & UUP
If we open notably lower in the SPY, I do think we can get a short-term bounce. However, the above chart is a problem.
TLT is on top and the UUP is down below. The former is in a horrendous downtrend and is set to gap lower by 2% this morning. The latter is set to open above last week’s high, giving it a potential weekly-up rotation.
Both of these are bearish signs for the S&P, so keep a close eye on them today (although, I will admit I don’t know how much correlation they’ll have due to Opex volatility).
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.
Open Positions
- XLE — I want to be down to a half position here given the strength in the XLE, but there’s no shame in a ⅓ position given the choppiness of this market.
- Let’s look for $87 to $87.50 as our next trim spot (either to go from ½ position to ⅓ or ⅓ to ¼ (depending on what you hold now).
- On the downside, use a B/E stop.
Relative strength leaders →
Top:
- LNG — nearing the breakout near $150
- MCK — Stopped earlier but still holding the breakout near $340
- CAH
- LPLA
- CCRN
- FSLR
- REGN
- ALB
- VRTX
- CYTK
Economic Calendar
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