Our View
If you are feeling beat up by all the large moves I have news for you: It’s not going to stop.
Over the years I have had the opportunity to work with some of the largest investment firms in the world. From the Abu Dhabi Investment Authority (ADIA) that managed over $700 billion dollars to AIG, Bank of America, and a long list of banks and big hedge funds during the credit crisis.
No one had even mentioned the word “subprime” when the PitBull told me in late-2007 that there was “rotten wood floating around the market-leading stocks, the banks and brokerage firms.”
As things unwound, I knew bad things were coming. Several clearing firms were in trouble and the fall of Bear Stears and Lehman Brothers went down. Yesterday I heard a handful of clearing firms in Chicago were under the microscope. I told the PitBull and he said “Boy, I didn’t even think about that.”
It’s clear to see that this is not just a one-and-done event. There are inflation problems, interest-rate problems, and geopolitical problems. Then there are the Covid-19 pandemic and worsening supply chain problems.
If you asked the PitBull about my abilities, he would tell you I gave him some of the best advice anyone has ever given him. When he turned $30 million into over $100 million, I told him to take $50 million out and put it in the bank.
He didn’t.
Then August of 2010 hit and he lost most of his profits. The days before he kept asking me what I thought, and I said get out and he did, but he only cut back part of his positions. I’m not your banker and I’m not a stock market analyst, but the writing is on the wall…the big firms are selling the earnings. They have also pulverized high-growth stocks like Zoom, DraftKings, Roku, Netflix, Shopify, and others.
Stocks were overvalued and instead of taking profits, traders became complacent. I don’t trade stocks very often, but when many of the hot names were under their 50-day moving average and the S&P and Nasdaq were making new highs on negative breath, warning lights were flashing.
I am sure some will chuckle about it, but it’s really true that these are not our father’s markets or charts, and nor will they ever be. Does that mean lower? I think the wild swings will continue, but I also can’t rule out a larger bounce after such a fast decline.
Our Lean — Upside Potential
I questioned whether the Fed would still raise rates two weeks ago. I even did a Twitter poll where 68% of the votes said the will Fed hikes rate in the March meeting. In the last week, a handful of investment banks like Goldman Sachs and Bank of America said they expected the Fed could be more hawkish, which could mean a tightening of monetary policy.
It’s 10:00 PM and the ES is trading 4305. I think it’s too hard to call the 150-handles moves, but with so many shorts and buy stops above, it seems the path of least resistance may be higher. After yesterday’s low, the ES popped up to the 4280 area and I told the MrTopStep forum that I thought the next 50 points were up That worked out well and after 1:00, I called the late rally above 4400 but I didn’t expect the ES to fall back down to the 4296.25.
With this in mind, I think there has been a lot of over hedging on the selloffs. I know the ES rallied over 200 points from the low on Monday, but it also fell 150 points yesterday. Yesterday, Goldman said “We believe we are in a correction within a bull market cycle. In our view we remain in the early part of the Growth phase – returns will likely be low from here, but the bull market should continue (so long as economies grow).”
Our lean is for higher prices going into the second day of the Fed meeting. As I said above, I think there has been a lot of over-hedging and there is a high level of buy-stops above 4402 up to 4420 and again above 4427 up to 4450-4460 and then the 4500 level comes into play. My guess is the Fed will continue on its hike schedule, but I’m not sure that will be good news for the markets if they rally hard before the headlines.
While I am looking for higher prices, remember that this is a two-way market. If we see the 4495 to 4510 zone in the ES, my lean is to be a seller. For the YM, that’s 34,900 and for the NQ, it’s 14,790.
Daily Recap
There has been a lot of talk about futures and options account ‘blow ups’ over the last few sessions and I think that’s very understandable. With the daily swings in the ES and NQ ranging from 2% to 4% a day the blow-up story is totally within reality.
Guys and gals, we have to protect our accounts before we engage with the markets. Think of it like the ocean. You wouldn’t go out paddling in a tsunami — wait until the waves are ones you feel comfortable riding.
After trading up to 4411.50 on Monday’s close, the ES futures sold off all the way down to 4319 at 8:15 am on Globex yesterday and opened Tuesday’s regular session at 4337.50.
After the open, the ES traded up to 4352 at 9:39 and then dropped 85 points down to 4276.50 at 10:06. After the low, I called for the next 50 points to be up in the MTS chat room and the ES rallied all the way up to the 4330 level, pulled back, then traded 4336.50 and pulled back again. We tacked on a few more points up to 4344.75 at 10:51, up 68.5 points off the low.
When the buy programs started hitting, it pushed the ES all the way back up to 4402.75 at 2:56, up 126.25 points off the low of the day. After the high, the ES sold off down to 4373 at 3:08, ripped back to 4389.75 at 3:21 and traded back off down to 4348 at 3:37.
The ES traded 4355 as the 3:50 cash imbalance showed $1.2 billion to sell and sold off down to 4340 at 3:54. The ES then bounced back up to the 4356.50 level on the 4:00 cash close, dropped initially when Microsoft reported earnings, and then settled at 4306.25 on the 5:00 futures close, down 101 points or 2.3% on the day.
In the End
In the end, it was another rocky day of big dips and rips that finished poorly. In terms of the ES’s overall tone, the last failed rally above 4400 was another great example of how the sellers have been in control, not the bulls. In terms of the ES’s overall trade, volume was steady all day at 2.4 million contracts traded.
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.
Technical Breakdown
- NYSE Breadth: 47.6% Upside Volume
- NASDAQ Breadth: 35.5% Upside Volume
On Monday, the markets fell precipitously and then recovered all of their losses and then some by the close. On Tuesday, it looked like it was going to try the same thing, but they sold the close, and the S&P and Nasdaq couldn’t recover.
Now we come into Wednesday’s Fed day with a gap-up rally, with both the ES and NQ futures near yesterday’s highs.
For what it’s worth, it’s not likely that the Fed will raise rates but the expectation is that they will do so in March. However, investors will be paying careful attention to the language in today’s statement, looking for a potentially less-hawkish Fed after the Nasdaq’s peak-to-trough decline of 18.5%.
In Q4 2018, the Fed capitulation with its plans for a rate-hiking spree after equity markets fell about 20%. We’re in a different setting than a few years ago though and one has to wonder (at least currently) whether the Fed really cares about the market’s temper tantrum.
That said, how much of a decline do we need to see before the correction accounts for four rate hikes in what would still leave us in a low-rate environment, historically speaking?
Game Plan
When I started writing this newsletter, I made a promise to myself that I would not deviate from my personal trading plan and that I would not add setups for the sake of filling up a page with words and charts.
With the VIX near $30 and the market all over the place, I’m not looking to make any bold moves ahead of the Fed announcement just a few hours from now.
We are pretty fortunate to have navigated these first few days without getting hurt. Monday was tough — well, from the perspective of a pre-market newsletter anyway — with the gap-and-puke but Tuesday was a great situation with XOM.
It was one of the only setups we were watching ahead of the open and it paid off tremendously well as the stock hit new highs on the year.
Almost always but especially now, simpler has been better. If you don’t already, consider following me on Twitter. I usually stick to the Game Plan, but when I write it at 7 a.m., things can change throughout the day and if they do, that’s where I’ll post about it.
S&P 500 Futures and SPY
Above is a daily look at the ES and you can see how big these ranges are. Right now, 50 handles is the new 10 handles and the futures will gladly steamroll anyone who can’t mind their risk.
It’s back above last week’s low but continues to struggle with the 4405 to 4425 area, as attempts to reclaim the 200-day moving average.
I can’t help but feel like how we close today will be important.
Below last week’s low keeps 4300 in play, as well as Tuesday’s low. A break of the latter makes this week’s low vulnerable. Above 4430 and we could see a push up to the 4480 to 4500 area.
As for SPY, it’s a similar look. Bulls need to clear $440 and the 200-day to open the door up to $450.
Below $437.95 keeps the $427 to $430 area and Tuesday’s low in business. Below the Q4 low of $426.36 and this week’s low is vulnerable.
This is your roadmap. Keep it handy when the Fed starts flapping its lips and it may remain in play the rest of this week.
Nasdaq
The other day, we talked about how the NQ could get back to 15,000. To do it now the NQ will need to clear and stay above this week’s current high at 14,582.
If it does, a move to the declining 10-day and flat 200-day moving averages is possible.
On the downside, keep an eye on the Q4 low at ~14,368. A break and failure to recover could put 13,900 to 14,000 in play.
Individual Stocks — MSFT, JNJ, Energy, Go-To List
MSFT
This is my chart from Tuesday morning (10:33 a.m. ET), so while the closing price isn’t accurate, it doesn’t matter. I only cared about two levels and now with the gap-up, I only care about one area: $300 to $305.
While admittedly a wide range, I want to be careful about the gap-up, as MSFT is gapping into a potential resistance area and active resistance via the 10-day.
If this stock fades from this area, keep that in the back of your mind as it pertains to the QQQ and NQ futures. Remember, MSFT is a $2.2 trillion company.
JNJ
I like JNJ and believe in its value when holding it for the long term. However, yesterday’s post-earnings rally sent it right to a resistance zone around $168.
A push through this area is good, but failure to do so could make it vulnerable and it’s not really gapping up with the rest of the market. Below $166 is a bad look.
Energy/XOM
If you still have any XOM from yesterday, consider a trim on today’s pop, otherwise, you may consider gunning for the $77 area, which is the 161.8% extension of the recent pullback.
This was a huge winner — save the chart, learn the patterns to watch.
Until proven otherwise, we will keep going back to energy until it fails us.
Go-To List: Keeping It Short
- NVDA — inside day on the 200-day moving average. One to watch for stabilization
- BRK.B — a big winner from Tuesday too (and recent Go-To list holding), but trim if you are long from yesterday’s bullish reversal
- PEP — look for a possible undercut of Monday or Tuesday’s low & tag of the 50-day.
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.
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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