Today’s econ data isn’t helping the bull
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Our View
There are very large congestions of buy stops building up above 3900 and sell stops below 3800. On both sides there are two possible scenarios.
The first is just a quick stop run and then back to the trading range — a “look above” or “look below.” Second, we could have a breakout (or breakdown). I know the new year has brought out some optimism about a beginning of the year rally, but until something really changes, I think any rally will be short-lived.
At some point, the ES will make a high print and everyone will still be rooting for higher prices and then the ES will tumble. On the other side, the ES does appear to be back-and-filling at the 3830 level, but it has not led to a larger sustained push up.
As for seasonality, our friend Jeff of the Stock Traders’ Almanac has given us some nice insights. First, the S&P 500 ended the Santa Claus Rally — defined as the last five trading days of December and the first two trading days of January — with a gain of 0.8%.
Stat-wise, there are three periods on watch right now: The Santa Claus Rally, the first five days of January and the January Barometer. One of three is now positive. When all three are positive, the S&P 500 has ended the year higher about 90% of the time.
We’ll find out next week how the first five days of January ends, as we only have two days in the book so far.
Our Lean — Danny’s Take
Short weeks can be difficult, especially when it’s the first trading week of the new year. Plus, a lot gets crammed into the short week. For example, we had the Fed yesterday, then today we will get a look at the ADP employment report, initial jobless claims, trade deficit, S&P U.S. services PMI, and then the Fed’s James Bullard speaks. Tomorrow is the jobs report.
I think the ES has been stuck in this trading range for the last 13 or 14 sessions. I have to be honest, I don’t know where the next 100 points in the ES will be and I don’t know whether we will break out or break down. Too many traders have a problem saying, “I don’t know,” and the truth is, none of us do. We are simply trading the action that’s in front of us.
Our Lean: I expect more of the same to continue. Selling the gap-up opens has worked over the last few weeks, as has playing the range. I.E. selling the rallies to 3900 and buying the dips into the 3800s. If the ES is too big of an instrument for you to do that, then consider the micros — the /MES — or even the SPY. There’s nothing wrong with “sizing right” based on your account.
I know at some point the stops will get run and it will most likely be the upside, but the same reappearing question comes flying back in: Can the ES hold the rally?
Right now the answer to that question is “no,” but even if the ES keeps going up, it will still end up a dead cat at the end of the day.
Key levels on watch: 3836, 3800-05. On the upside, 3900, 3920. We’re buying the dips and selling the rips into the ranges until it fails.
MiM and Daily Recap
The ES traded up to 3870 on Globex and opened Wednesday’s regular session at 3869. After the open, the ES dropped down to 3855.75 at 9:34, ripped up to 3875.25 at 9:37 and then fell back down to 3858.50 at 9:46 — that’s a lot of ‘sloshing’ for 16 minutes. The ES back-and-filled up to the 3870.50 level and then dropped down to 3852.75 at 10:00, before shooting up to 3880 at 10:02 and then dropping down to 3836.50 at 10:11. Ultimately, the ES rallied up to 3896.25 at 11:58.
Just the sheer number of points the ES traded in the first 2.5 hours is astonishing. The ES pulled back down to the 3874 level at 2:00 as the FOMC minutes started hitting and quickly rallied up to a new high 3893.25 at 2:01 and then sold off down to 3859.50 at 2:03, traded up to 3883.25 at 2:06 and traded down to 3862.50 at 2:10. It then sold off down to 3848 at 2:30 and then popped up to 3869 at 2:57.
The ES traded 3858 as the 3:50 cash imbalance showed $1 billion to buy, rallied up to 3876.50 and traded 3874 on the 4:00 cash close. The ES settled at 3871.25 on the 5:00 futures close, up 28 points or +0.73% on the day.
You can call it chop, sloshing around, range-bound or whatever you like, but the PitBull has called this type of price action “water in the bathtub” for the last 40 years. Why? Because the algos push the water one way and then push it the other way. We all know the 3800-3920 range will not last forever, but it’s causing what I call a lot of “false starts.” You can’t sell the low 3800s and you can’t buy the 3900’s+.
In the end, the ES could not hold the rallies in the early going and firmed up, but that didn’t preclude the ES from several 30 and 50-point drops. In terms of the ES’s overall trade, volume was decent at 1.86 million contracts traded.
Technical Edge —
- NYSE Breadth: 87% Upside Volume
- Advance/Decline: 80% Advance
- VIX: ~$22.50
Does the market know what it wants or not? Bad econ data gives the impression that a real recession is on the way. Good econ data says the Fed may not play so nice when it comes to the hawkish stance it’s been reiterating.
Tomorrow is the monthly jobs data, but this morning’s labor data was all better-than-expected. That has the S&P moving lower.
S&P 500 — ES
Above is a 4-hour look, just to give a slightly different perspective. We can see a series of higher lows and lower highs, as the price action continues to condense between last week’s week range.
On the daily chart below, you’ll notice how clustered the ES’s range has been between 3800 to 3900 — an observation that seemingly everyone is finally catching on to this week.
The ES has declined in four straight weeks (as has the SPX and SPY). Notice though, how it continues to build below the 21-day and 50-day moving averages, as well as the critical 3920 level.
That level is a line drawn straight across the chart and there’s been notable action above and below this mark. Last week’s high of 3900.50 also keeps acting as a “sell.”
This is my line in the sand.
If the ES can push above last week’s high and not reverse lower, then 3920 is in play. Above that and we can have some fireworks as they run the buy-stops, potentially up to the 3985 to 4000 area.
Until then though, we must be a bit cautious below the 10-day moving average. A sustained break of 3836 opens the door down to 3800. Below that puts 3760 in play.
QQQ
The SPY doesn’t have much of an actionable setup at the moment. Like the ES, it hinges on a range break.
As for the QQQ, it’s now running into active resistance, while struggling with last week’s high.
Keep a close eye on the $262 to $262.50. That’s been key support. If it breaks, last week’s low is vulnerable.
Open Positions —
- Numbered are the trades that are open.
- Bold are the trades with recent updates.
- Italics show means the trade is closed.
- UUP — Ideally we were/are looking for a push back up to $28.40+ but the going has been quite slow. That said, our stop never hit and we got our first price target yesterday: $28.15+
- Let’s go with a B/E stop.
- TLT — Should be down to ½ or ⅓ position as TLT pushed into the 103.25 to 103.50 range. I would surely go with a B/E stop and look for a potential push to $105 and/or the 21-day.
Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
Relative strength leaders →
- SBUX — nicely weekly-up setup after 10-week ema reset.
- DE — gap-fill & 10-week would be attractive for potential longs
- SMCI — weekly up over $85.85
- HON — weekly
- CAH
- LNG
- LMT, RTX, NOC
- MET — weekly
- GIS
- CI
- MCD — weekly
- FSLR — $140 is the 21-week sma and retest of prior resistance
- VRTX, UNH, MRK
- XLE — XOM, CVX, COP, BP, EOG, PXD (Weekly Charts)
Economic Calendar
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