The S&P 500 futures (ES) trading ranges have widened out and the volume is the highest in over a month. The increased volatility is due to a lot of things: higher inflation, worries of higher interest rates, and a record deficit — to name a few. But now that risk can include more Covid variants.
I am not going to do a big play-by-play of yesterday’s trade. What I will do is a few lines on how I see the ES’s price action. First off, the stock market is in a historical bull ‘super’ cycle. It’s not like anything anyone has ever seen. From the March 2009 Credit Crisis low, the S&P 500 is up more than 600% and it’s up more than 100% from the March 2019 Covid-19 low.
While we all know that the continued support of the Federal Reserve and the federal government has been the main driver of the historic upside push, we also know that the stock market “can’t go up forever.” Somewhere in here, there will be a meaningful correction…but when? I definitely want to be short when the markets actually sell off, but if you have been trying to do that thus far, you know how the declines always end.
Same Recurring Pattern
There has been a very distinct recurring pattern over the last 3 to 4 months. The ES makes a new contract high and then pulls back.
Some traders mistakenly confuse themselves with the difference between a pullback and a correction. It confuses you and costs money, but even worse — it throws you off the actual trend. I agree that lots of money can be made when the stock market does sell off, but until the pattern of making a new high, pulling back and then the back-and-filling is broken, I highly doubt the markets will correct very much.
Take Wednesday, for example, The ES sold off hard on Globex and dropped quickly after the open, but all of a sudden the selling dries up, and in comes the buy programs. It’s all by design and learning not to fight it makes it a lot easier to produce profits.
In The End
During the abbreviated holding session (11/25), the ES traded all the way up to 4717, just a handful of points short of last week’s high at 4723.50. During Thursday night’s Globex session, the ES sold off down to 4597 around 3:00 a.m. ET.
News of a new Covid variant called B.1.1.529 (until a Greek letter is assigned to it by the World Health Organization), carries an unusually large number of mutations and is “clearly very different” from previous incarnations. The U.K. will temporarily ban flights from South Africa and five other African countries over concerns about the new variant.
Stuffed with turkey and done with football, many traders didn’t realize the ES had already flushed lower by almost 70 points by midnight. A few hours later at the low, we were 120 handles off the high.
The news about a new Covid variant wasted no time demolishing the ES. There have been countless reversals and as I said a few days ago, I think the wild swings are going to continue. Looking forward there also could be some very big tax-loss selling, so I hate to rain on the bull parade but that’s the way it goes.
There is still a lot of time in the year to drop and pop several times. That’s when I think buying some January calls may be easier than holding the futures. You know exactly what your risk is and surely a 50- or 80-handle bump will send the calls higher.
Let’s face it, the ES is in a grinding 60- to 80-point trading range. To tell the truth, I think there could be some pain coming the bulls’ way. How many times can the ES test the low end of the trading range and not break down? Below it now, I guess we will see today if longs can reclaim it.
I should have paid more attention to the futures the last few days. I have almost 50 handles of profit on the trade. If I had to sum it up, I would say that the ES can’t “hold the rallies.” The bulls are going to need some of that back-and-fill price action I talked about above. Otherwise 4600-4620 could be where the futures are headed. It all depends on how short people are in the morning.
UPDATE: Well, we have our 4,600 to 4,620 area. It’s been tested and for now, it’s holding. Let’s see if the Globex low holds, but currently down 105 handles from Wednesday’s close and bulls will need to buy-the-dip if they want to contain the damage.
I wasn’t planning on too much today, given how slow of a trading day it tends to be as the markets wrap up early for the weekend. A 120-handle slide in the ES and an 1,100 point dump in the Dow futures has that plan off the table.
This is not a fun situation that the bulls find themselves in. However, the first step (as it usually is for other life applications) is to not panic.
I know that sounds silly, but let’s see how they open the market and how it shakes out over the first 30 to 60 minutes. If we get a pulse and then go flat again, we can stop out and let the market do its thing.
But there’s nothing worse than stopping out in the opening minutes of a gap-down, only to see it surge back to life. I don’t know that that will happen today, but just speaking in general terms, that is a horrible feeling: Not only did we eat the loss, but we also missed the run.
Let’s look at the key indices.
In mid-November, Danny and I were preaching about the upside target in the 4720 area. Danny was looking for 4720 and I was looking for 4275 to 4728. They were both close enough to be in the same ballpark and we got the push we were looking for, even though it took some time to get there.
However, the ES had a hard time holding the rallies — something you just read about above — and now the ES has rotated below our risk level of 4667 and through Wednesday’s low near 4656.
Bouncing off the 4600 area now, we really have to see if the ES can regain some steam. Back above 4656 would be a big win for the bulls, in my opinion. On a rally, the 4650 to 4660 area could be resistance.
I talked about a “worst-case” scenario a few days ago. That being a drop down to the 50-day moving average and the prior breakout level at 4549.50 — call it 4550. That would mark a decline of about 4%, which is far from the end of the world.
I would also keep an eye on the 10-week moving average at ~4575. That could provide some relief.
The Trade: Currently changing hands around 4520 and struggling with 4525 — the low from two weeks ago, if that rings a bell — I want to see if we retest the Globex low at 4597 in the regular-hours session.
A quick selloff to this area could provide an opportunity for longs. Either a dip to this zone that holds as support or a break of the low that’s quickly reclaimed. That reversal could give us a long position with a downside low to measure against, containing our risk.
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!