Our View
Goldman Sachs has downgraded its forecast for US economic growth in 2022. It now sees little to no growth during the first three months of the year. Goldman’s economists, led by Jan Hatzius, said the chance of a recession in the United States over the next year has risen as high to as 35%.
“Rising commodity prices will likely result in a drag on consumer spending, as households — and lower-income households in particular — are forced to spend a larger share of income on food and gas.”
I think there is reason to be concerned.
For me it’s plain and simple: The stock market will have a difficult time going up with inflation and rates going up, and a 25 bps rate hike will do absolutely nothing.
Our Lean
On Friday, I did what I say I never do — I changed the “Our Lean” when I saw the Putin story hit and the futures were up. It’s another example of how the headlines make this market difficult to trade.
That said, we generally rally after a big dump…then fall. This week is the long-awaited Fed meeting and the first rate hike in several years. I don’t know if it starts this week or next, but I think we are going a lot lower. If the futures start falling this week, it’s possible we see ES 4100 — a retest of the February lows. If they really fall, 3900 could be in play over the next few weeks.
As for today, you can buy the early weakness and sell the rallies or just be patient and sell the rallies keying in on the Globex highs. Also the NQ is trading below Friday’s low.
In a longer view (next 2 to 3 weeks) I think the YM is going back to its 32,150 from two weeks ago and my downside targets are 30,000, 29,000 to 28,500. I also think there is a high level of uncertainty surrounding the Fed’s rate hikes due to the war in Ukraine. We should get a better idea of what it looks like after Wednesday’s rate hike.
Daily Recap
At 6:20, the ES rocketed higher on reports of positive comments from Putin in regards to the ongoing conflict. The market rose 66 points in 10 minutes, trading up to 4326.75 on Globex. However, when the market opened, the ES was trading just 4275 — there’s that level again — roughly 52 points off the high.
It was a pathetic day for the bulls and just one among many lately.
In the minutes following the open, the ES traded up to 4281.25 and hit its regular-session high. From there, it fell ~33 points down to 4242 and carved out a low near this area over the next 30 minutes, then bounced to a lower high of 4265. From there, the ES fell more than 40 points, breaking the morning low around 4242 and bottomed at 4223 around 12:30.
Another mild bounce gave us another lower high before the market flushed down toward 4200 going into 3:50. As the 3:50 cash imbalance showed $1.77 billion to sell, the ES traded down to 4189 — the session low — before trading 4195 on the 4:00 cash close. The ES settled at 4196.75 on the 5:00 futures close, down 60.50 points or 1.5% on the day.
In the end, a combination of headline news and short-covering pushed the ES above 4320 and once the fake buying power was used up, the ES fell 3% from the high to the low. In terms of the ES’s overall tone, it was very weak. In terms of the ES’s overall trade, volume was steady but relatively low all day at 1.68 million contracts traded.
Technical Edge
- NYSE Breadth: 82.5% Downside Volume (!)
- NASDAQ Breadth: 70% Downside Volume
This week really centers on just one thing: How will the market handle the Fed?
We already know it’s likely that the Fed will raise rates. The odds have favored a 25 basis point hike for the better part of two months, but it has wavered between 25 and 50 bps at times.
There is a ~98% chance the Fed hikes by 25 bps and 2.2% odds they stay flat. Given last month’s inflation report — which showed 7.9% YoY growth — it’s hard to imagine the Fed doesn’t go through with it.
Plus, Powell all but said the Fed would raise rates this month.
Game Plan
Over the last month, we have been discussing the possibility that the market sells off into the Fed meeting, then potentially rallies after the news of a rate hike. At this point, the market has already priced in this month’s hike and has been busy pricing in more.
We won’t get into the all what-ifs just yet. All I will say is, a hawkish Fed is going to make it hard for a sustainable rally to occur. If the Fed blinks — and is a bit more dovish — then we may see a rally.
As of now though, the action hasn’t been great and this morning’s meager bounce after Friday’s decline doesn’t help.
S&P 500 — ES
- Feel free to extrapolate this layout to the SPY.
*Just go level-to-level. “If 4210 fails as support on the downside, it puts 4189 in play.” “If ES clears 4223, then 4245 is in play.”
The upside levels are:
- 4223
- 4245
- 10-day ema
- 4275 to 4280 (key level and VWAP from Feb low)
Downside levels of interest:
- 4210
- 4189 — Friday’s low
- 4139 to 4152 — support last week
- 4223 (remains a key pivot and the O/N low)
Bonds — TLT
The TLT is gapping lower by about 1.3% this morning. Note the $133.50 level on the weekly chart, which has been support since 2019. Let’s see if that remains the case or if the TLT suffers a larger break to the downside.
My lean would be for a potential bullish reversal back through last week’s low of $138.72. How’s the trade work? A gap below a key level and then a reclaim of that mark can give us the “reversal.” They don’t always work, but the R/R is often too tempting to ignore.
Let’s see how TLT sets up today.
Crude & Gold — *Covered in Video*
*Volatility remains incredibly high in the commodities space. If trading the futures, keep that in mind. Consider smaller position sizes and honor your targets and stops.*
Last week’s video remains in play for these two.
Crude
Continue watching the 21-day and the $100 level. It was close to tagging this morning, but no cigar.
Gold
$1961 and the 10-day continue to “bend but not break.” For now the short-term trend is lower but let’s watch for any sort of rotation to the upside (such as on the 2H or 4H chart), as the long-term trend remains higher.
VRTX
We talked about VRTX on Friday, with a possible breakout over $243. I hesitated to even write that word — breakout — because breakouts don’t work in this tape. However, it was too hard to ignore.
And I think the above chart does a great job highlighting what breakouts look like in these types of market environments. While it worked well initially, it did not hold up by the close.
TSLA
Notice how: The trend has been lower, TSLA isn’t reclaiming key levels (like $950) and is being squeezed lower by active resistance (in this case, the 21-day sma).
TSLA is gapping lower on the day, down into last week’s low near $782. That either creates the potential for a reversal if the market firms up post-open or the potential for a weekly-down rotation if it weakens.
That is not the most direct trade setup, admittedly. However, it’s also the truth. This one can go one of two ways as TSLA sits on the key level — last week’s low. Keep an eye on it.
BTU
We were really fortunate with this one last week, then BTU gave us an inside day on Friday. Gapping below/near Friday’s low of $21.82, keep this level in sight today.
If BTU undercuts it and holds the 10-day, look for a possible bounce spot of this area. It will likely only act as a cash flow day trade, but there’s nothing wrong with that.
A break of Friday’s low and failure to find its footing could put $20 back in play — on an inside-and-down rotation.
Go-To Watch List
*Feel free to build your own trades off these relative strength leaders*
Numbered are the ones I’m watching most closely.
- TU
- TECK — beauty thus far. Trim ½ & look for $44.25 on the rest.
- Energy —XLE, APA, CNQ, CVX, ENB | b/e stop on these.
- Boring but Good: BRK.B, KHC, MKC
- ABBV, BMY
- Gold, GDX
- FCX
- ADM — looking to buy near $80
- b
- CHKP — $140+ Daily-up rotation
- UPST
- COOP
- AR
- COST, DLTR, BBY
- BTU — Huge winner off that Daily-up move. Definitely trim. I am down to ⅓ already. (on chart)
Economic Outlook
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