I would like to point something out — I’m a bull market guy and always have been. From taking Paul Tudor Jones’, the PitBull’s, and Moore Capital’s orders, to doing the UBS S&P index arbitrage business, to taking a $10 million hit in the FLASH CRASH, I get it.
Personally, I would be very happy if the current rally is the bottom of the bear market. I think the public deserves a break, but everything seems so unsustainable. If the bond low is in, stocks stand a much better chance — and bonds have been trading much better — but when the Fed raises rates in June and begins to unwind its asset purchases, the markets will go sailing back down. Beyond that, crude oil and natural gas are skyrocketing, CL is closing in on $115 and natty gas has doubled in price this year. Lastly, Inflation is still impacting businesses and consumers.
In one of its newsletters earlier this year, Goldman Sachs warned of food shortages and civil unrest. Personally, I am not one of those guys to get all crazy and buy dried rations, stock up on ammo and silver, and prepare for the worst. However, tensions remain high around the world and it’s hard to deny that. Whether it’s the U.S. and Russia, grain exports out of Ukraine, China, and Taiwan — the list goes on and on.
Can the ES keep going up? Sure. Is the low in? Nope!
Our View
After 7 straight weekly lower closes, the S&P looks like it’s about to break the streak. If today reverses and the ES can’t break its losing streak — it would need to fall 4% today — it will match the longest period of losses in nearly 100 years.
Yesterday marked the 100th trading day of the year. And unfortunately, it was the worst in history for both the Nasdaq Composite and the Russell 2000 and the second-worst start for the S&P 500. Will the markets close higher this week? Yes, but I just don’t think the markets can shake something like this off while inflation is raging and the Fed is raising interest rates.
Our Lean
Selling the early rallies and buying the pullbacks has a bullish basis just as buying the pullbacks and selling the rallies has a bearish basis. Obviously, if you are a scalper you are looking for trade opportunities in both directions, but if you are a trend follower you would be buying weakness or selling rallies based on the trend/direction.
Our lean is to sell the early rallies if the ES gaps higher and buy the pullbacks — a bullish basis.
Trade should be slower today in the lead-up to the long holiday weekend. Our lean from yesterday was, “Volume is going to drop and when that happens it should favor the upside.” That took care of us yesterday and we don’t want to do anything stupid ahead of the long weekend.
Daily Recap
The ES traded opened Thursday’s regular session at 3989.75 and rallied ~40 points up to 4030.00 at 9:57. The bulls were in control right out of the gate.
After a few pullbacks and new highs, the ES traded up to 4052 at 11:22. The ES pulled back to 4039.75 at 11:49, then made a new high at 4073.25 at 1:10. That ended up being the contract high of the day.
It then pulled back and sold off down to 4057 going into 1:30. After some back and fill the ES rallied up to a lower high at 4069.25 and then slowly made its way back down to the 4048 level at 3:24.The ES traded back up to 4061.75 at 3:41 as the early MIM showed $1.75 billion to buy and traded back up to 4069.75 at 3:49.
The ES traded 4072.00 as the 3:50 cash imbalance showed $3.8 billion to buy, traded up to 4073, sold off 10 points down to 4061.25, and traded 4056.50 on the 4:00 cash close. It settled at 4050.75 on the 5:00 futures close, up 79 points or up 2% on the day.
In the end, ‘thin to win prevailed’ until the MIM came out big to buy and the futures dropped. In terms of the ES’s overall tone, it was an all-day buy program until just before the 3:50 imbalance. In terms of the ES’s overall trade, volume was holiday-like at 1.42 million contracts traded.
- Daily Range: 113 points
- H: 4073.50
- L: 3960.50
Technical Edge
- NYSE Breadth: 87.4% Upside Volume (!)
- NASDAQ Breadth: 82% Upside Volume (!)
- VIX: ~$27
The bulls generated back-to-back days of 80%+ upside (we post this throughout the day in our new Twitter group, by the way!), showing the potential of renewed demand. Combined with the rally in bonds, there is at least some rationale that we have a short-term low to measure against.
Is it the bottom?
My gut says “no,” but there are at least some factors that support it.
A stretch of seven straight declines has always led to an intermediate or long-term low, but it’s also only happened three other times in the past ~90 years. The renewed breadth helps too, but I wouldn’t rule out retesting the low. How it reacts will be quite telling.
Game Plan — S&P (ES and SPY), Nasdaq (NQ and QQQ), Oil
https://mrtopstep.substack.com/p/these-stocks-have-relative-strength
S&P 500 — ES
The ES did exactly what we needed it to do yesterday: It cleared 4000 and Wednesday highs, vaulting it to the 4056 level and the 21-day moving average. Kudos bulls, you have been paid handsomely for your preparation and for taking on some risk!
Now look at where the ES is biding its time: 4056.
If it uses this level as a launch pad, Thursday’s high and the Globex high are in play at 4073.50 and ~4077, respectively. Above that opens the door to last week’s high at 4095. Now I would be quite content with 20+ points on the ES for a day’s work. But if we go weekly-up and don’t look back, a push into the 4120 to 4150 area is possible.
On the downside, I would love to hold the Globex low at 4041 and the 21-day. However, the must-hold level is actually 4000. Not only a psychologically relevant level, it’s also the 61.8% retracement of yesterday’s range and the 10-day moving average.
SPY
One-hour chart above and the daily chart below.
I would love to see the SPY hold the H1 10-ema and keep the trend alive as it tries to hold up over the key $405 level.
You’ll see on the daily chart that if we can take out Thursday’s high of ~$407, the weekly-up level near $408.50 is in play.
On the downside, if the 10-ema doesn’t hold on the H1 chart, let’s see if the SPY can stay above $400 and the 10-day moving average (just like ES and the 4000 level).
Nasdaq — NQ
Fairly straightforward with the NQ futures, as it sits right at the 21-day and yesterday’s high.
Either clear this area and push up to last week’s high near 12,595, or take a breather. If it’s the latter, the bulls will want to hold the 10-day. Below 12K and this could lose a lot of momentum.
Nasdaq — QQQ
We got the $300 level we were looking for, but now the QQQ is in a tricky spot. A push higher gets us our second target of $305 and the 21-day. Last week’s high sits up at $306.56.
On the downside, I want to hold the 10-day. The line in the sand is $295.
CL — Oil
Oil needs to clear $115.50 to $116.25. It continues to put in higher lows and the trend remains bullish. However, I don’t have an actionable setup on this at this time.
Over this zone does open up the $122.50 area, but the risk is quite wide in that scenario.
Wheat — ZW
Still consolidating. Maybe we get an inside day, which gives us inside-and-up potential next week. Otherwise, a slightly deeper dip could be in the cards and that’s ok.
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.
We have been spanking the very select individual trades we have taken. For that, I’m super grateful! It shows that discipline wins out in a tough tape.
- XOM — All out of XOM and this one has been a banger. Back on the Go-To List it goes.
- XLE —All out of this one too. Energy remains robust and is a staple on the 2022 Go-To List.
- DXY / UUP — 103.50 to 104 would be the ideal first trim area. For UUP, that’s $27.50 to $28. For UP, conservative bulls may be waiting for a gap-fill at $27.09 and a tag of the 50-day before getting long.
- ZB (bonds) — Weekly-up in play → Looking to trim 143+ on 50% of the position or more. Can also look for that trim on a test of the 50-day, currently at 142’29.
- MRK — Broke the 10-day with some force yesterday. Let’s see if it can regain this level and push into the $93 to $93.50 area for a ⅓ trim. Conservative longs without a position can wait for a potential undercut of Thursday’s low and a tag of the 21-day to get long if they prefer.
Relative strength leaders (List is cleaned up and shorter!) →
- XLE — Above $79.75 and bulls can stay long this name.
- AR
- DLTR
- CTVA
- VRTX
- AMGN
- MRK
- MCK
- JNJ
- BMY
Economic Calendar
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