It has been a bear market, but once yesterday got going, I expected more upside. That said, I didn’t expect the ES to explode almost 2.5% and climb more than 100 handles off the overnight low.
Am I surprised by the rally? Not at all. We did say that we “cannot rule out a bounce,” but man, that was a hell of a bounce yesterday.
The ES has fallen more than 730 points and fallen in six of the past seven weeks. In that sense, it was/is overdue for a rally. Last night the PitBull called just after the ES made its 3686 Globex low and asked me if I still thought the ES could trade up to 3750 and I told him yes. It’s 6:00 am and guess what? It just traded 3750, up ~60 points.
Has the October ‘bear killer’ rally started? It looks that way, but it’s got a lot of levels to get through.
Our Lean — Danny’s Take
If you measure from the new contract low up to the summer high in mid-August, you get a 50% retracement at 3949.75 — call it 3950.
If indeed the bear-killing rally is underway, I think this could be a reasonable bear market bounce target.
Our Lean: While I cannot rule out selling some rips, ideally we want to buy any 40 to 60-point pullbacks unless the tide changes.
The one other thing I want to say is, too many traders view someone changing their position or mind as a bad thing. Well, guess what? On the floor, that was called being flexible and open-minded. Not doing so is being called stubborn and ego-driven.
Traders need to be able to change gears when the market tells them so. Even if they end up being wrong, it’s better than being stubborn and wrong.
The ES treaded down to 3571.50 and rallied up to 3645.50 at 9:15 on Globex and opened Monday’s regular session at 3635.75. After the open ES traded up to 3639.50 and dropped down to an early low at 3617, that low set off an all-day buy program.
The ES traded 3680 at 11:12 and the largest pullback was 15 points. Then the ES pulled back 19 points down to 3659.50 at 12:33 and with the exception of the ES having a few 5 to 9-point pullbacks, it rallied all the way up to 3711.75 going into 3:00. After the high, the ES sold off down to 3698.25 at 3:20, traded 3696 as the 3:50 cash imbalance showed $219 million to buy, sold off down to 3686 and traded 3691.25 on the 4:00 cash close. After 4:00, the ES steadied and went out at 3694.50 at the 5:00 futures close, up 89 points or +2.45% on the day.
In the end, it was Mutual Fund Monday, and too many people were thinking the same thing (short). In terms of the ES’s overall tone, it was firm. In terms of the ES’s overall trade, volume was in line with what we have been seeing for the last two weeks, although the 2.25 million contracts traded was below the 20-day average and the lowest reading since Sept. 19.
Daily Range: 140 points
NYSE Breadth:89% Upside Volume (!)
NASDAQ Breadth: 80% Upside Volume (!)
Game Plan: S&P, Nasdaq
For those of you that took the time to watch our video on Sept. 15, it should be no surprise to see the major indices trading down into the 200-week moving averages. But it brings up this question: Would it be so obvious to trade down to this level and bounce?
Just like it was so obvious to rally up to the 200-day moving average in mid-August and reverse down?
To see the market doing such “obvious things” frustrates the masses, I think because no one seems to expect “the obvious” in a tape like this.
After an 89% upside day yesterday, we were just short of seeing a 90/90 upside day — which would have been enough to call a possible bottom and get long. Another 80/80 day today could let us make a similar takeaway (although the risk is higher because we would really need another strong rally today before getting long).
S&P 500 — ES
Yesterday’s move was impressive and today, traders wake up to more green across the board.
The ES is pushing higher, with last week’s high in play at 3751. This level was already taken out in Globex, but staying above it in the regular session is the bulls’ goal.
Not only does that create a weekly-up rotation (and a bullish engulfing candle on the weekly), but it leaves a lot of space between current levels and the next resistance spot.
If we open above 3751 and trade back below this level, some traders will consider it a cash flow reversal trade to the downside, with a stop just above the regular-session high (assuming it’s a reasonably small amount).
That setup is not for everyone, but seeing a 5%+ rally from Monday’s Globex low and a big gap-up open into a very key area could give us a reason to make an early sale if the setup is right.
Otherwise, if the ES reclaims 3751 and stays above it, it could put another hundred handles in play up to 3850 and the 21-day. Know your timeframe! Are you trading the 15-minute chart or the daily/weekly?
We have the same setup in the SPY with last week’s high at $372.30. Currently trading $372.75-ish in the pre-market, an open near this level and a dip back through last week’s high could get us short with a stop-loss parked just above the session high.
As good as the rally feels for the bulls and as much as I want to see a bear-killer month unfold, let’s keep in mind yesterday was just one day and the SPY has a lot of key levels in this $372-ish area.
It includes prior support (from July) turned resistance (in September), last week’s high at $372.30, and a gap-fill at $373.44.
If the short-reversal trade sets up, please remember it is just a cash-flow trade. It might give us 40 cents a share. Maybe $4 a share. It could be a loss. I don’t know. But it’s just a trade, NOT a lifestyle change. You don’t bet the farm — ever.
Nasdaq — NQ
Great job holding the June low and the NQ got us the 11,250 level.
Now powering higher again, it feels great for bulls. But keep an eye on the 11,550 to 11,600 area. If that can’t be reclaimed, it could act as resistance.
Above this zone opens the door to the 11,775 to 11,800 area, where we find a prior support level and the declining 21-day moving average.
The Dollar — DXY
Maybe we get the longer-term setup we discussed yesterday. Sustained weakness in the dollar will be a bullish driver for equities.
Please consider keeping bonds — either TLT or /ZB — and the Dollar — either UUP or DXY — up on your screens. You don’t need to trade them but it helps to know what they are doing and how it’s impacting the S&P right now.
*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.
Relative strength leaders →
ENPH — holding the breakout near $269 — Great Setup
LNG — nearing the breakout near $150 — Monster Reaction
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!