Our View
This has been a head-banger of a week and there are still two sessions left. Just think, it took 3 days for the ES to sell off from the 4017.75 high last Friday and in just 2 hours yesterday, it rallied 75 points. I guess that answered our question from yesterday: “Is There a Rate-Hike Rally In Store?”
The market rallied into and through the event on Wednesday. In its statement, the FOMC acknowledges that “spending and production have softened,” yet also affirms that “job gains have been robust in recent months.” Russia’s war in Ukraine is adding “upward pressure” on inflation as well as weighing on economic activity, the Fed says. The FOMC repeats that it’s “highly attentive to inflation risks.” The Fed’s balance-sheet reduction process is proceeding as planned with caps on Treasury roll-off doubling to $60 billion a month in September and to $35 billion for MBS
My takeaway is that the ‘public’ got short into an event, the Fed meeting. This is another example of one of MrTopStep’s oldest trading rules; the ES never does what most people want it to do when they want it. With everyone off base, some end-of-the-month rebalancing, and a boat load of buy stops made for an all-day buy program. it was a perfect storm to the upside.
Our Lean
Another tech company missed expectations… META. As I have always said, as traders we are not here to fight city hall.
If the ES is going up I want to go for the ride. Am I bullish yet? Kinda, but not overly. I’m hesitant because after the two last rallies I got bullish into the rally and it totally threw me off. In one case I turned a 70-point winner into a 30-point winner and tried to buy it again but it sold off another 140 points. That’s the problem, we never know how far it’s going to rally or fall.
I do think there is more upside but I’m not sure about today; in fact, if the ES got up near yesterday’s 4042 high, I may sell into it.
Our lean: We have to go with the MTS rule that says after a big rally the ES tends to go sideways to down. If the ES gaps higher tomorrow, I may sell the open. I do not rule out another upside push, but the ES needs a little downside repair. My guess is we see a two-way trade.
These are my own levels I’m pulling off my charts:
Upside Resistance :4025.00, 4039.50 4042.75, 4053, 4075*, 4106, 4130**
Downside Support: 4006.50 to 4004.00, 3996, 3993-3986, 3983.50, 3974, 3972, 3968**, 3963**
Daily Recap
The ES opened Wednesday’s regular session at 3958.25, then traded 3962.25 and dropped down to 3954.50 at 9:33, and then slowly fell into an upward ‘back and fill’ that pushed the futures up 3972.25 at 10:06, pulled back to a higher low at 3963.50 at 10:10 then traded up to 3982.00 at 11:04. After a quick pullback, the ES slowly crept up to the 3984.50 level at 12:30 and then quickly dropped 13.5 points down to 3971.00 at 1:11. After the low the ES started doing the same price action as mentioned above…a gradual uptick. At 1:57 ET, the ES traded 3979.50, three minutes before the second Fed 0.75% rate hike in 2022. The markets had been “bid” pretty much all day. when the headline hit, the ES traded 3973 and then ripped up to 3989.25 and then dropped down to the 3968.50 level at 2:08.
The ES rallied back up to 3982.75 at 2:30, traded down to 3968.50 at 2:33, and then rallied ~30 points up to 3997.75 at 2:36. After the high, the ES pulled back down to 3986.25 at 2:38 and rallied almost 40 points up to 4023.50 at 2:52, dropped back down to 4007.25 going into 3:00, did a little sideways trade and did another rip up to 4026.75 at 3:07.
From there, it did a small round of “back and fill” and traded 4019.75 at 3:15 and then rallied 23 points up to 4042.75 at 3:30 as the early MIM showed $359 million to buy. The ES down-ticked to the 4032.50 level at 3:40 and traded 4034 as the 3:50 cash imbalance showed $1.27 billion to buy and traded 4024 on the 4:00 cash close. After 4:00, the ES traded down to 4014 and settled at 4020.50 on the 5:00 futures close, up 101 points or 2.6% on the day.
In the end, yesterday’s move up was signaled by two things:
- How the ES kept trying to go ‘bid’ while the NQ was going ‘offered’ during Tuesday’s trade, and
- The ES rally at 4:00 on Tuesday’s close despite top and bottom line misses from GOOGL and MSFT.
In terms of the ES’s overall tone, it was an algorithmic buy program as buy stops fueled T+2 end-of-the-month buy programs. In terms of the ES’s overall trade, volume was really low but picked up around 1:30 into the 4:00 cash close. Total ES volume was 1.67 million contracts traded – solid.
- Daily Range: 104 points
- H: 4042.75
- L: 3938.75
Technical Edge
- NYSE Breadth: 85% Upside Volume (!)
- NASDAQ Breadth: 81% Upside Volume (!)
- VIX: ~$23
Game Plan: S&P 500, SPY
Readers: I’m terribly sorry for today’s short piece. I feel awful right now physically but managed to take a look at the S&P.
S&P 500 — ES
I would love to see the ES stay above last week’s high of 4016.25. However, if it can just stay above 4000, that’s constructive for the bulls.
On the upside, yesterday’s 4042.75 high is a level to watch. A move above it this week could put ~4100 in play.
S&P 500 — SPY
We got our gap-fill on the SPY, but the close leaves some questions as to “where to from here?”
Above Wednesday’s high could put $407 in play. On the downside, I’d like to see $397.50 to $398.50 hold as support. That’s the 50% to 61.8% retrace of yesterday’s range. Bulls don’t want to give up too much of yesterday’s gains.
Go-To Watchlist — Individual Stocks
*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.
Trade Sheets: Down to 1 individual holdings against a profitable stop-loss.
- MCK — We have hit two trim zones so far on MCK. Feel free to cash the last ⅓ of the position as you see fit. $335 to $340 is a potential upside target (and has since been hit).
- Moving stop-loss up to $315 and given the consolidation, I am thinking of holding my last ⅓ for a push to $348 to $350.
- PEP — I want to trim a little at $173 to $173.50, just to put some money in my pocket. From there, I’m really looking for $176 to $177. On the downside, I’m using $168 as my initial stop-loss.
- COST — I ended up taking a ½ size position at the gap-fill ($513.25). I am going to use a stop-loss of $505. I may consider making it a full-sized position if we go daily-up over $519.68.
- I did add a little at $519, but then once we hit the $525 to $526 upside target, I trimmed a bunch and ultimately moved back down to a ½ position. Stop-losses to B/E at this point. Will probably trim move near $530.
Relative strength leaders (List is cleaned up and shorter!) →
- O
- CNC
- HRB
- CHNG
- COST
- PEP — 2x daily up now sitting at $172
- BA — beauty
- ABBV
- UNH
- XLE
- VRTX — really nice action lately.
- MCK — trying to break out.
Economic Calendar
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