There are two key levels to keep focused on.
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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
I want like hell for this to be the low, but when I look at the poor action in the bonds — a new 52-week low on Wednesday — and the strong action in the dollar, it’s hard to think that equities have a long-lasting bullish runway ahead of them.
Further, we never got a robust upside breadth reading combined with a robust advanced/decline reading off last week’s low.
As much as I want this to be the low — and it could be — the weight of evidence just isn’t there yet.
Yes, last week’s rally/reversal was impressive, and it came off of a key area that we have highlighted several times in the last four months (for the ES, SPY, and SPX).
Earnings have had a good reaction so far, and if the dollar fades and the bonds gain, then I’d be willing to think more upside exists. Until then though, we must remain prudently defensive.
What I can’t decide is, is Opex keeping stocks up amid a backdrop of falling bonds, or are stocks right and the bonds are being held down due to Opex? Generally, the assumption lies with bonds being right, but we’ll know soon enough.
Our Lean — Danny’s Take
While I did say in yesterday’s Lean that the rally is likely a dead-cat, I did not sell into Wednesday’s action. That’s as these counter-trend moves (the bear-market rallies) have been tradeable from the long side until the momentum fades (and they can be hard to fade).
I fully admit that when the market breaks trend and starts going up and everyone gets bullish, I lose my feel — and that’s exactly when I should just go with my gut and the trend. Bear markets always make things tricky from a mental standpoint.
That said, it didn’t take long to figure out that the NQ and ES were struggling. I know there are still a lot of folks talking about higher prices — ES 3800 or ES 4000 — but when they sell off 100 points, not even the bulls can hold on for that.
Our lean: The ES back-and-filling under and around 3700. The first support comes in between 3668 and 3676. This is a key level of support. If you are bullish, use caution if the /ES loses and can’t regain this zone.
Below that and I am watching 3650 to 3655, 3643, 3623, and 3616. Those are the levels I have up on my screen.
On the upside, they read 3721 to 3725, 3740, 3752, 3761 to 3765, and lastly, 3775. The latter is key resistance, thus far.
Opex is likely going to make this action sloppy. 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. For what it’s worth, the October expiration stats are bullish. According to the Ned Davis cash study, the ES has closed higher on October’s expiration day 22 of the past 38 occasions (up 58% of the time). The Thursday before and the Monday after were up 23 of the past 38 (60.5% of the time).
Technical Edge
- NYSE Breadth: 25% Upside Volume
- Advance/Decline: 23% Advance
- VIX: ~$30.75
Guys & Gals — I know some of you are chomping at the bit for more setups. They will come in good time! Right now, I must remind you that cash has been the best-performing asset this year (with the dollar index up almost 20%).
Let’s not get complacent and force trades when nothing is there. Years ago, I vowed I would not publish trade ideas for the sake of generating trade ideas; I would publish my actual game plan each morning, whether it was boring or not. We must adapt to the landscape in front of us and right now, we have a tough landscape.
Continue to focus on the bonds and the dollar as your guide to the S&P. With that, let’s look at the latter.
Note: XLE update is below, under “Go-To Watchlist.” I am just going to outline the /ES and SPY this morning and look for better setups after the open.
S&P 500 — ES
The ES continues to hold the 10-day and 21-day moving averages, but still below last week’s high.
If bulls can grab control into Opex, we could make a push into 3800, then potentially set the stage for 3900.
On the downside, draw a line on your chart — or better yet, use the one below — at 3675. Below that opens the door to 3639, then 3600.
No B.S. Look at the /ES
The “No BS” look at the S&P shows it simply: We’re range-bound between 3675 and 3775.
A sustained break of either of those levels and we can have a continuation in that respective direction.
Below 3675 without a recovery puts 3600 in play. Above 3775 without a reversal lower puts 3800 to 3820 on tap.
S&P 500 — SPY
$367-ish has been a point of interest this week. If we lose this level, use a bit of caution, as yesterday’s low may be in play near $365.50.
If we lose yesterday’s low, $360 could be back in play.
On the upside, over $372 puts $375.50 in play, followed by $378 and the declining 10-week moving average.
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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