Our View
There is no crystal ball when it comes to trading. Nothing comes easy and sometimes things take a little longer to move in our favored direction than we would like.
Yes, a lot of yesterday’s buying was short covering and buy stops, but this goes back to the PitBull’s old saying, “take out the sell stops, take out the buy stops.” My gut says the low is in, but I still want to keep next week’s two-day Fed meeting and the December quad-witch expiration front and center.
Our Lean
I believe yesterday’s rally was a setup to new all-time contract highs and beyond.
Today Jeff Hirsch from the Stock Trader’s Almanac is going to go over the end-of-the-year seasonalities in the Mr Top Step chatroom. It’s going to be interesting to hear what he has to say about the recent selloff and the ensuing rip.
Our lean is to sell the early rallies and buy the pullbacks.
I have told the PitBull 10 times over the last two weeks that I was going to buy the January calls. Today he took profit on some short puts he had on. I told him to hold some and he said he was going to look for a low this Thursday or Friday (the week before the expiration week) to get long again.
Over the last year, the MTS chat looks for late Thursday weakness to get long. That said, there is another rule we use and it says that the S&P tends to go sideways to down after a big up day. I can’t rule out another pop, but that would be Day 3 of a major move. I think the ES needs to do some back-and-fill before going higher.
The Opening Print Recap
The ES traded all the way up to 4657 on Globex — up 61.5 handles from Monday’s close — and traded 4647.25 on the open. After the open, the ES dipped one point and went on a rip.
The “dip” really took place ahead of the open, when it faded 14 handles from the Globex high to the low at 9:20. From the low, the ES ripped off eight straight gains on the five-minute chart and climbed in 18 of the next 22 five-minute windows from the low.
It was a huge burst right off the open and the sellers were run over.
After hitting a high of 4692.50 at 11 am, the ES chopped in a 10-point range until 3:15 when it began to dip toward the close.
At 3:37, the ES traded 4671.50, 21 points off the high of the day as the MIM started showing $84 million to sell. The ES rallied a few handles, then traded down to 4666.25 as the 3:50 cash imbalance showed $3.6 billion to sell. Before the close though, it rebounded hard, going out at 4686.25 on the 4pm cash close, up 20 handles in less than 10 minutes.
The ES settled at 4695, up about 100 points or 2.2% on the day.
In The End
In the end, the ES did what it does best: It staged a major short squeeze.
In terms of the ES’s overall tone, it acted extremely firm until late in the day when some small profit-taking took place. In terms of the ES’s overall trade, volume was almost 50% lower from the last few down days, at 1.7 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: 84.6% upside volume
- NASDAQ Breadth: 81% upside volume
It’s been a while since we’ve had this many significant volume breadth days. Yesterday was significant because it was a back-to-back 80%-plus breadth day on the NYSE. It was also an 81% breadth day on the Nasdaq.
I think the strength took most traders off-guard yesterday.
The way we closed on Monday technically left the markets vulnerable to more downside — in other words, bulls weren’t out of the woods. The S&P 500 tried but failed to close above Friday’s high and active resistance from the declining 10-day moving average.
On Tuesday, we had a gap-up into the 21-day moving average and the prior week’s high.
For most traders, the odds in this scenario favor booking some or all profits and looking for a pullback. It was the prudent thing to do, even though holding through to the close would have paid the best in yesterday’s action.
This is a game of probability and odds — it does not guarantee anything. But you simply place your bets in setups where the odds are in your favor. Yesterday’s action favored taking some exposure off in the opening 15 to 30 minutes. From yesterday’s game plan:
“You don’t have to be net short after the open — or sell at all for that matter — but I personally find it worth the opportunity to take some gains off the table when given a gift like this.”
We talked about the building buy-stops up above and clearly that was the case, as shorts have been forced to cover.
S&P 500, Nasdaq
From a charting perspective, I don’t have much to add to the other posts this week. The bulls want to see the S&P hold last week’s high. If it can do that, upside resistance and the all-time high are in play.
Those levels look like this:
SPY
- Hold last week’s high at $466.56
- Resistance is $470.50
- The all-time high is $473.54
S&P Futures
- Last week’s high 4670
- Resistance is 4712 (that’s also today’s Globex high, FYI)
- The all-time high is 4740.50
Some may critique this look as “lazy,” but I don’t think so. I really just like to keep it simple and this is the simplest approach.
Above last week’s high and the upside levels are on watch. Below last week’s high and we have to do some navigating.
Specifically, I want to see the flat 21-day and rising 10-day moving averages hold as support. A break of these measures will force bulls to shift into a more cautious stance going into the end of the week.
For the QQQ and Nasdaq, it’s a little different.
The Nasdaq futures have struggled with the 16,450 area — and did so again in the Globex session. A move over this level not only gives the NQ a weekly-up rotation but also puts the 16,750 highs in play.
On the downside, we want to see it hold the 10-day and 21-day moving averages. That would be a mild pullback from Tuesday’s high, but still leave bulls in control.
Thus far, the NQ is contained with an inside week, although there is plenty of time to go.
The approach to the QQQ is straightforward too.
- Don’t give up Tuesday’s low
- Close above $401 resistance.
The more time over the 10-day and 21-day moving averages, the better. Below Tuesday’s low and the gap becomes vulnerable, all the way down to $387.60.
Individual Stocks
I am still watching Macy’s as it carves out a nice low down here. This week’s low at $26.84 is the risk point I have written down. More aggressive traders can use last week’s low at $26.10.
$28.15 is the key rotation level — but I don’t like how long it is taking to rotate, particularly with the strength in the broader market, hence the risk point that’s on watch.
Semiconductors
Here’s an interesting look at the one-day performance of the SMH following a 4% or higher gain in the prior session. The SMH was up almost 5% on Tuesday, so a down day or rest day here is most probable.
That doesn’t mean down 2% to 3%. It could be down 0.01% and this statistic would ring true. But I thought I’d point it out.
This is interesting because we are also looking at Nvidia — the top holding in the SMH.
Nvidia
Up big off Monday’s low (where it tagged the 10-week moving average) and a day of rest would be good here.
But I’d be lying if I said I didn’t have an alert in NVDA at $324.50 for a daily-up rotation. Just be leery of a daily-up attempt and fail. In reality, an inside day would be most constructive here.
Tesla
Like Nvidia, Tesla started off the week under pressure, but quickly reclaimed the Nov. low and the 50-day moving average, then pushed higher yesterday.
Now into last week’s low near $1,057 and where potential resistance sits near $1,060 and bulls should take note of where it is on the chart. Above this zone puts the 10-day and 21-day moving averages in play and above these measures really opens Tesla up to some upside.
But this is a big hurdle area.
Also, Tesla’s the largest holding in ARKK, something we have traded quite well lately. Keep that in mind as well.
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
