Our View
We live in an ever-changing world where nothing stays the same. Call it frayed, unraveled, disjointed, discombobulated — whatever you want. But I think we are in it for the long hull.
I have forgotten some of the great stories over the years, but I think one of the best ones was when the PitBull told me at the end of 2007 that there was “rotten wood floating around in the market-leading stocks — the brokerage and bank stocks.”
We saw the desk volume start to increase and then all the news about the subprime blow-up started wreaking havoc, while Bear Stearns and Lehman were going under. It was a scary time watching the markets fall and volume in the ES going from 2 or 3 million a day to over 5 million a day for almost two weeks straight, then over 6 million a day before going to its all-time volume high at 6.69 million contracts.
On Oct. 15, 2007, the S&P was trading 1575 and fell to 666 in March 2009. As the S&P started to rally, the damage became more clear. AIG was gone and the Fed pushed my largest desk account. BofA overtook Merrill Lynch, which I still insist was the wrong thing to do. That all said, the markets didn’t recover overnight. It took years.
I’m not saying we are in the midst of a credit crisis — at all — but we are in a very dark time for the stock market. Russia is helping to destabilize an already very unstable economic period, pushing crude oil up to $130.40 last night. To me, it looks like Russia is trying to push the US into a recession while trying to raise interest rates.
I know people do not like to talk about gas going to $10 but it could if oil keeps up. No one thought oil would hit $120 a few months ago, but I thought it was very possible.
By nature, we don’t want to think about the bad stuff, like increasing inflation or food shortages. It upsets us and causes worry and stress. Right now that seems totally unavoidable. The PitBull said U.S. Aerospace & Defense stocks are on the “launch pad.” (They are also on our Go-To Watchlist!)
I don’t pretend to be smart enough to put all this together and pretend to know how this is going to end up. Next week the Federal Reserve is going to raise interest rates. It’s a step in the right direction, but it’s going to be a long and hard process.
Our Lean
All I am going to say is, “there are always rallies.” These rallies are designed to throw you off from the true direction of the S&P. They are ‘counter trend’ or ‘dead cat’ bounces. I was right about selling the rallies Friday, but the “buy the lower open” didn’t work real well.
The problem is, instead of getting short into the pop you’re getting out of a weak long. That’s the basis of the tape right now. That said, I suspect we will rally at some point this morning but I think you sell it when it does go up. The ES has fallen ~138 points in the last two days and half way back is 4350. That should be a good spot to get short. 4315 to 4320 should also be good resistance.
I also think you sell the rallies in the euro currency.
Daily Recap
The ES opened Friday’s regular session at 4320.25, traded up to 4328, dropped down to 4316, and rallied back up to 4337 at 10:01. After the rally, the ES got hit by several sell programs that pushed it down to 4289.50 at 10:20 and then rallied almost 20 points up to 4308.25 at 10:37. It then broke down to a new low at 4280 at 10:46.
After some sideways-to-down price action, the ES caught a bid and rallied all the way up to 4322 at 12:18 and dropped down to 4308 at 12:47, and then ‘popped’ up to 4337 at 1:10. From there, it dropped back down to 4300, which was support for the afternoon, while struggling on the rallies up toward 4325 to 4330.
On the 3:50 cash imbalance, the ES traded 4305 and then traded 4325.50 on the 4:00 cash close. It settled at 4320.25 at the 5:00 futures close, down 45 points or about 1% on the day.
In the end, it was another difficult day for the stock market and another good example of what failed rallies look like. In terms of the ES’s overall tone, it was weak. In terms of the ES’s overall trade, volume was steady with a total of 1.84 million contracts traded.
- Total Range: 93.25 points
- H: 4374.50
- L: 4281.25
Technical Edge
- NYSE Breadth: 35% Upside Volume
- NASDAQ Breadth: 29.5% Upside Volume
The markets are off the overnight lows, which is a positive development for the bulls, but it was a busy Globex. Stocks fell, oil ripped and gold cleared $2,000 an ounce.
That said, the S&P still looks like it could be set for a retest of the lows, if not a larger move to the downside. This week will be an important development. We have a clear upside hurdle at 4400. On the downside, 4275 has been key lately.
Game Plan
We’re going to see what holds and what folds this week. My main question is, do we get a decline into the Fed next week and a “sell the rumor, buy the news” reaction? AKA selling into the Fed announcement and buying after the rate hike?
S&P 500 — ES
- Feel free to extrapolate this layout to the SPY.
There’s no need to jump out of the gate on Monday morning at 9:33 ET. It’ll be a long week. Pick and choose your spots carefully and let’s make smart trades!
We can see the overnight action penetrated last week’s low at 4251.50 before bouncing. The ES needs to regain the VWAP measure from the Feb. 24 low, currently at ~4315.
We went over the pattern for the S&P on Sunday. The question is, does the 61.8% rejection result in another test of the lows or do we have another leg to the downside (making it a five-wave correction?)
***(For the levels below, simply move from one zone to the next & feel free to write them down. If we rally to 4,400, that’s the first upside level we’re watching. If the ES gets above and stays above it, the next “upside level” becomes our focus. In today’s case, that would be 4419)***
The upside levels are:
- 4315
- ~4327.50 & 10-day ema
- 4390 to 4400
- ~4419 — Last week’s high
Downside levels of interest:
- 4251.50 — last week’s low
- 4238 — O/N low
- 4223 — 61.8% retracement of the “D leg”
- 4210 to 4212
Gold
From Friday:
“If it holds $1944.50 and pushes ahead, $1961 resistance is in play, followed by $1975. Above $1980 and the talk will quickly shift to $2,000.”
The Gold trade has been working out really well and we continue to see that action now.
It held $1944 and overnight we saw all three of these upside targets hit — $1961, $1975 and $2000.
Now fading a bit, it would be most constructive to see these upside targets become support.
Crude — Blow-Off Top?
Surely that move from Friday’s close at ~$115 to the overnight high just north of $130 blew some traders up.
Now fading hard, is crude enduring a temporary top? It looks that way, as it roared through our top extension mark near $122.50 and is now fading hard.
Watch the $115 to $116 area. If it loses that, $110 or lower could be in play and specifically, I’d be watching the 10-day ema.
Go-To Watch List: Boring Is Working + Energy & Defense
AAPL
When was the last time you saw a weekly chart like this? All that range and by the end of the week, flat price action.
Seriously. Each of the last three weeks of action for Apple moved less than 10 basis points. That’s incredible!
As for the action now, ~$162 is last week’s low. A break of that level and a recovery could give us a reversal if the Nasdaq cooperates. However, my bigger concern would be a weekly-down rotation.
I don’t really like shorting Apple, but notice the weekly closes. They have progressively gotten worse over each week. The most recent close was below the 10-week and 21-week moving averages.
A weekly-down rotation could open the door down to the $155 area and the 10-month moving average.
*Feel free to build your own trades off these relative strength leaders*
Take a few minutes and study this list. These are the leaders right now, those with relative strength. I wish it was loaded with tech and some of the fast-movers. It’s not, but all we can do is trade the hand we’re dealt or fold and wait for better cards.
- CHKP, UPST
- Boring but Good: BRK.B, KO, KHC
- ABBV, BMY
- ADM
- Defense — RTX, GD, LMT, NOC — great bounce so far
- Energy — FCX, CNQ, CVX, ENB
- SYY — see if $86 holds
- TU
- COOP — weekly up at $51.20.
- MAT
- Gold
- CCK
- TECK — Went for $41 on Friday and got it for another trim. Now look for $44.50 on the last chunk. (chart:)
Economic Outlook
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