The ES opened Thursday night’s Globex session at 4707, traded up to 4708.50, and sold off sharply after news of the new South African Covid19 variant B.1.1.529 — dubbed “Omicron.”
Since then, the UK and other countries have begun shutting down flights between South Africa and other African countries. The news was an immediate hit to global equities, as the DAX fell 530 points and is down 1,000 points in the last 4.5 sessions.
Just after 10:00 am, the ES traded down to 4606, down 102.50 from the Globex high. It was a huge wake-up call for traders that were expecting easy money on a short trading day.
After a rally up to 4618, the ES sold off down to 4585 at 11:24 and then rallied 16 points up to 4601. It’s impossible to recap all the dips and rips from the day — nor do you want me to.
At 11:53, total volume in the ES was ‘oversized’ at 1.38 million contracts traded, with 571,000 coming from Globex. That’s a normal day of volume — even heavy for some days — and we were only a few hours into the regular-hours session.
After some sideways price action, the ES dropped down to 4587 and at 12:39 the ES traded all the way up to 4618.75, 34 handles off the low. It didn’t matter though, as the ES made new lows toward the 1 pm early cash close.
The moves were extreme. The ES settled at 4579 on the 1:15 holiday close, down 126.50 points or -2.36% on the day.
As I said, extreme moves all day.
In The End
In the end, the new Covid-19 variant not only attacks people, but it attacks the markets.
Bonds were up 3 points, The ES dropped over 125 handles and crude was down over $10/barrel or 3% on the day. Even the safe-haven gold — which was up 1.75% at one point — couldn’t hold its gains, finishing just above flat on the day.
Everything was moving.
In terms of the ES’s overall tone, all the failed rallies we have been talking about finally succumbed to the Covid headlines. In terms of the day’s overall trade, volume was extremely high for a shortened holiday session, with a total of 1.863 million contracts traded. You just can’t make this kind of stuff up!
Am I surprised by the size of Friday’s selloff? No. I think we all know that the markets can’t keep going up like they have been without pullbacks and selloffs. We also know that the rallies had not been holding up, raising a caution flag for us. The technicals had also raised the alarm a few times (more on that below).
I know that it took the news to trigger the decline, and so one could reasonably argue that if not for the headlines, none of our “observations” would have come to fruition. That’s true in a sense, but there was weakness brewing below the surface that made the market vulnerable to such a reaction. It just took the right headline.
But let’s be clear: We weren’t bearish, we were cautious.
I had a great position and ended up losing money Friday. Once the S&P and Nasdaq snowball started rolling, there was no stopping it. Yes, there were some times when you could have bought it and made good money, but the number of sell programs was overwhelming.
The DAX fell 1,000 points over the last 4 to 5 days and was hammered on Friday — and rightfully so. Europe has been facing increased restrictions and lockdowns, worsening its economic situation. Another variant only adds to its risks.
Let’s face it, the markets got spooked by the new Covid variant and talk of more cities laying down new restrictions. Australia, Austria, and Netherlands joined a group of countries that include the U.K, Germany, Belgium, Israel, and Italy that have detected the new strain. New York’s governor recently declared a state of emergency to prepare for a possible surge from the Omicron variant.
There are only two sessions left in November and both are bullish days, historically speaking. My guess is we will start to bounce, but the PitBull — who has been ‘bearish’ lately — said that most of the stocks he charts are 30% to 40% below their highs. All I can say is, don’t mess with his stock research.
It’s insane: The S&P is up 22.3% and the Shanghai Composite is up 2.62% on the year. The DAX closed down 4.15% on Friday and has fallen 5.59% over the last 5 sessions. What I do not want to do is lose focus of the task at hand, which is to continue to buy the pullbacks going into the end of the year.
Can 1.1.529 cause more harm? Sure it can. As the holidays approach, who’s to say more air travel isn’t shut down? Despite all the noise, panic, and rhetoric out there right now, we have to keep the trend in mind.
The ES went out at a $15 discount to the S&P cash. Most people think the ES will be down on Globex, but after a 126 point selloff, the odds of a short-covering rally are high. I am going to continue to look at the January Dow futures (YM) 39500 and 40,000 calls and the ES 4900 and 5000 calls.
I think when the markets do start going up, they are going to rally just as hard as Friday’s selloff. I don’t know that we are at the buy point now, but I think it’s worth taking a stab at it on the dips — but go slow!
I am going to risk $10,000 on the long. It’s 6:33 pm and the ES just traded up to 4629.25, up 50 points from the close. I can’t say “don’t sell the rallies” or that “the decline is over,” but I’m not going to confuse myself with doing that when I want to be long. Patience is everything in this game.
The faster and harder the ES gets hit, the better — but I’m not sure that’s going to happen. Everything is subject to the headlines.
In Danny’s recap, he mentioned that the technicals raised a few alarm bells and that’s exactly right. I had pointed out the divergence in both the Nasdaq and the S&P 500 futures, even as the indices were hitting new all-time highs.
Further, we laid out the deteriorating breadth beneath the surface. Neither one of these observations (even together) necessarily warranted a short position — particularly given the market’s trend.
However, it did have us a bit cautious as we inched higher in the market. Monday’s sell-the-news reaction to Powell’s renomination didn’t make things easy, but for those that were prepared, they were able to react quickly.
Now we have to assess some of the damage.
Friday’s action was tricky. Not only did we have a short, holiday-altered session, but we had the Omicron news. Who wanted to go home long with that type of headline risk?
The NYSE registered a 90% downside day, while the Nasdaq registered just a 71% downside day as at-home stocks caught a bid.
Let’s zoom out, then zoom in. Starting with the weekly, then going to the daily, then H4 chart.
As you can see, the S&P futures are finding support at the 8/10-week moving average combo.
Last week’s low comes into play at ~4577, while this week’s current early low is at ~4589.
Currently trading above 4630 as of 8:00 a.m., these lows are important levels to watch. A break of 4589 — which is really just the Globex low and essentially where the ES opened for trading on Sunday night — puts last week’s/Friday’s low in play.
It’s a break of this low that we’re watching.
Does it break and create a flush down to the 4735 to 4750 area — the prior breakout level from late October — or does the ES hold this area and work its way back higher?
We’re seeing some bids come off the daily VWAP level, which is anchored back to that big breakout day on Oct. 14.
If we lose last week’s low, this chart does a good job illustrating the prior breakout level. It also shows the 50-day moving average is close by, near 4525. If we retest the 4535 level, it will be a 4.3% correction off the highs.
Remember how hard it was to get a 5% correction off the highs earlier this year?
The H4 chart does a good job highlighting current resistance at 4640.
If we get a multi-H4 rotation higher, it puts the 4650 to 4660 area in play, which was support for several days last week. The latter end of that range is also where the ES will find its 10-day and 21-day moving averages.
If we clear those levels, 4700 resistance is back on the table.
On the downside, a sustained move below 4620 could put 4600 or lower back on the table, and thus opening up some of those downside levels we mentioned earlier.
The Trade: Feel free to flip through these charts a few times and jot down the key levels. Save the charts if you’d like.
At the end of the day, we’re already seeing a nice bounce as Omicron didn’t end the world over the weekend. So far, the Omicron variant seems to be resulting in “very mild” symptoms, although that can change at any time as more cases present themselves.
The setup in the ES is straightforward:
Over 4640 and there is a potential 10 to 20 point move into the next resistance area. Above that (4660 and the 21-day moving average) and bulls can regain momentum.
A dip below 4620 that isn’t quickly reclaimed could put 4600 or lower on deck.
The divergence on the QQQ was something to note, but it wasn’t an issue until it reversed so hard, losing the prior day’s range and the prior all-time highs near $401.
The QQQ ended up going weekly-down to finish the week but is now gapping up by about 1% to $395 on Monday morning. That puts it right near the 10-day and 21-day moving averages.
Not to be dramatic, but this is a perfect (and tricky) spot for the market. Reclaiming these moving averages almost instantly shifts bulls back into offense.
However, a gap-and-fade from this area could turn these moving averages into resistance and put last week’s low in play near $389.75.
A sustained move lower puts the $382.75 level and the 50-day moving average in play. Above $379 (and thus its key moving averages) and the QQQ could hit $400 again.
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!