Our View
I think this could be another volatile week for the markets as investors continue to focus on the new Covid-19 variant and the Fed dialing back on its bond-buying program. That’s after Jerome Powell told Congress last week that it was considering speeding up the tapering of its $120 billion a month bond-buying scheme.
There are also some big economic reports this week:
Our Lean
When the ES closes weak like it did Friday, it usually bounces. The problem is that when the ES does short-cover, sellers show up again. Many of the big-name stocks like AAPL, AMZN, GOOGLE, and FB have fallen out of flavor.
The question is, how long will that last?
I know I have not had a great feel for the downside, but when things start rolling over it’s not hard to see. That said, I am sticking with my long YM and ES calls for the end of the year. I started buying small late on Friday and I have left room to add if the markets do sell off hard again.
Our lean is for some type of bounce today, but also not to forget about how all the rallies have failed.
The Opening Print Recap
From 6:00 am to the 9:30 am ET open, the ES rallied 33 points in seven straight 30-minute windows to open at 4595 on Friday. It moved higher by 11.50 points but was then aggressively sold lower down to 4557.50 at 10 am. That’s 49 handles off the high.
The selloff came as Treasury yields fell at the fastest pace since some of the worst days of last year’s pandemic.
The ES traded 4508 as the 3:50 cash imbalance flipped from about $500 million to sell to $650 million to buy. It rallied about 30 handles in the final ten minutes and traded 4537.25 on the 4:00 cash close. It settled at 4533.25 on the 5:00 futures close, down 52 points or 1.1% on the day.
While we mainly look at the ES and NQ, the RTY has taken the biggest beating.
The Russell 2000 is down 7.9% since its high on Black Friday (11/26) and at the low, was down 13.2%.
Clearly, the index has been hit hard by the new Covid-19 Omicron variant. Inflation worries haven’t helped, either. In comparison, the ES is down just 3.5% from its high and at the low, was down just 5.25%.
The small-cap selloff shows how quickly the markets can reverse when Covid-19 rears its ugly head. Just a few weeks ago we were writing about the breakout in the Russell as it hit new all-time highs!
Despite new studies that say Omicron may be milder than other strains, small caps are more vulnerable to new lockdowns and more people staying at home.
In the End
In the end, there is little doubt that the new Covid-19 variant is weighing heavily on the stock market. It doesn’t seem to matter if the S&P rallies 30 or 100 points, because they are all dead-cat bounces so far.
In terms of the ES’s overall tone, it was extremely weak on Friday. In terms of the ES’s overall trade, volume was high at 2.63 million contracts traded.
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Technical Breakdown
- NYSE Breadth: 24% upside volume
- NASDAQ Breadth: 23.5% upside volume
We were looking at our fourth 80%-plus downside day in six sessions until Friday’s late-day rally. While the S&P still finished notably lower on the day, at least the breadth figures improved.
Volume has been robust lately, with the S&P futures hitting its highest volume week since March 2020. The same can be said for the Nasdaq futures.
I had mentioned some seasonality last week, which said that December had the second-highest winning percentage month for the SPY since 1990, positive 75% of the time. A further dive on that analysis says that the second half of December is generally stronger than the first.
However, that does not mean we should put all of our faith in Santa Claus coming to save the market. But the S&P 500 is down just 3.5% from the highs and at worst, was down just over 5% at last week’s intraday low.
The Nasdaq was down more than 7% at its intraday low, but the futures are doing a good job holding the 50-day moving average. The problem here? Tech. Specifically, high-growth tech as ARKK and others get buried.
Can they reverse?
I hate saying that we’re in a “wait-and-see” market, but that is the truth. Going out on a limb can get you crushed if a proper risk plan is not in place. We could be near the end of the decline or still in the middle of it. The index futures will roll this week (with quad-witching next week) too.
I will always be looking for the setups. But until the environment improves, it’s hard to be aggressive right now.
SPY
Friday’s dip went right down to the 21-week moving average and the daily anchored VWAP and bounced hard, back to the 50-day moving average and breakout area.
The $450 area was pretty key last week. Longs want the obvious: for the SPY to stay above last week’s low at $448.92. For the futures, that’s 4492.
On the upside, they’d love to see a move back over $460.30. That’s Friday’s high, but it would also put the stock back above the 10-day moving average, which has been active resistance.
For the futures, that’s a move over 4606.50.
If the S&P can do that, it will have traders potentially looking at the 21-day moving average and last week’s high, at $466.56 in the SPY and 4670 in the futures. It’s hard to imagine a push above this area right now, but it’s something to keep in mind if we clear $460.30/4606.50 and the 10-day moving average.
On the downside, a close below last week’s low could open up some of the downside gaps we have on the chart from the late-October rally.
Like I said earlier, it’s the start of a new week. There’s no need to go in full tilt at 9:33 am ET on Monday. Let’s let the market tell us its intentions.
QQQ
The QQQ is a similar situation. For bulls:
Objective No. 1 is to hold last week’s low.
Objective No. 2 is reclaiming $390 and the 10-day moving average.
Keep in mind, FAANG, Microsoft, Tesla, Nvidia and Adobe are the top holdings here, with these nine stocks making up more than 56% of the fund. As they go, so goes the QQQ.
The NQ has a similar setup:
Individual Stocks
I always hate being “that guy” who’s reminding people of the setups that are working, but it’s the truth. The XHB finished lower on Friday, but down just 35 basis points to the SPY’s 87 basis point decline.
Its relative strength — and many of its components — continues to shine. TOL, HD, TREX, LEN, BLDR, LOW, etc.
Dollar Tree continues to trade really well and has now given us back-to-back inside days.
Home Depot was a newsletter play on Friday that gave us a punch up to our $415 target. There are good trades right now, but traders can’t flinch when it comes to taking their profit and can’t be scared at stopping out.
DLTR
A two-times daily-up rotation over $137.75 could put the gap-fill area in play near $140.50.
DOCU
Knife catchers only: A gap below the $131.51 low could trigger a reversal trade if DOCU opens below this mark and reclaims Friday’s low. Our stop-loss would be just below today’s new low.
I hesitate to even write this because growth has been so painful lately and DOCU in particular. Further, it’s only Day 2 of this stock’s earnings selloff and the selling may not be done yet.
However, down 42.2% on Friday and this one may give us a great R/R if it can find its footing early. Again, disciplined traders only. Reversals are tough.
Arkk
Arkk is similar, with the pivot low sitting down at $91.66.
AMD is setting up in a similar fashion. I don’t necessarily love dipping into growth as a trade, but AMD has been a relative strength leader until the last few days and if they are going to come and buy tech, AMD is a good candidate for a bouncer.
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!
Economic Outlook
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