Our View
If there was one word to describe the markets, it would be ugly. I don’t think many people talk about this, but it took years to rebuild my S&P desk business after the turmoil throughout the years: The 1987, 2000, and 2008 crashes, the credit crisis, PGF and MF Global…the list goes on.
So even when the market does recover, it’s going to take years to rebuild.
Paul Tudor Jones, who used my desk leading up to the 1987 stock market crash, said, “You can’t think of a worse environment than where we are right now for financial assets, clearly you don’t want to own bonds and stocks.” He went on to say, “If there was a strategy that I would want to employ right now, if someone put a gun to my head, I’d say simple trend-following strategies.” He also said, instead of aiming for high returns, protecting your money should be the priority!
Paul is a very smart guy and made a name for himself in the industry when he sold thousands of S&P in the weeks leading up to the 1987 crash. Of all the things he said, I think the most important one is to protect your money.
The second thing I agree with and have been adamant about is staying with the trend. I know it’s a difficult time for a lot of people and what worries me the most is I do not think all the uncertainties are just going to go away. It may take years…
Our Lean
I think we will see lower prices this week. As always, I can’t rule out some pops, but I think you sell the 50 to 70-point rallies. What’s weighing on the stock market is the unwinding of leveraged trades or the possible liquidation of funds following big wrong-way bets that have accelerated over the last few weeks at a pace not seen since the onset of the Covid-19 pandemic.
Over the last few years, when traders saw a hot stock they would rush into the options market. According to Deutsche Bank, call option volumes on single stocks recently hit the lowest level since April 2020. This is all part of the great unwind.
Daily Recap
The ES opened Friday’s regular session at 4117.25, traded 4123.25, and then sold off 61 points down to 4062 at 9:57, and rallied 77 up to 4139.50 at 10:59. That’s an entire day’s range in the opening 90 minutes.
After the rally, the ES dipped slightly but ultimately ran to 4153, up 91 points off the morning low. Shortly after noon, the ES dipped more than 50 points off the high, found its footing at 4100, and popped 48 points to 4148.75 just after 1:00 — a lower high.
From there, the ES pulled back 70 points down to 4078 at 3:15, then rallied 46 points into the 3:50 MIM reading. The cash imbalance showed small to buy and the ES traded 4119.25 on the 4:00 cash close and 4110.75 on the 5:00 futures close, down 32.5 points or 0.79% on the day.
In the end, it was a very long week of battling the markets. In terms of the ES’s overall tone, there was some two-way price action, but the Sellers won out. In terms of the ES’s overall trade volume, was steady at 2.33 million contracts traded.
- Total Range: 91.25 points
- H: 4153.25
- L: 4062
Technical Edge
- NYSE Breadth: 69% Downside Volume
- NASDAQ Breadth: 75% Downside Volume
- VIX: ~$34
For investors, this environment has been destructive. While the indices are down a reasonable amount, many stocks have been obliterated. 35% to 50% drops are not out of the question, even for high-quality stocks: Retailers like NKE and HD, entertainment stocks like DIS and even FAANG holdings like FB and NFLX.
Investors are depressed and understandably so. Many of my investments haven’t done well either.
However, for traders this pain is avoidable.
We get to go home flat at the end of the day, impervious to what type of gap the market has for us at the next open. We can follow the trends, shorting rallies into resistance or buying dips into support — depending on the asset and prevailing trend.
We don’t treat our investment accounts like that, but our trading accounts give us the ultimate flexibility. If we can check our bias at the door and trade the action in front of us, we can navigate this mess with a little grace.
Game Plan — S&P, Nasdaq, Bonds, Individual Stocks
With a $34 VIX and a gap down today, one has to wonder if a capitulation is near. Remember, the market has trouble sustaining a $37.50+ VIX and at some point, we will be due for a dead-cat bounce.
Surprisingly, our MCK trade got us all three upside price targets. Walmart was a stop-out with minimal damage and DLTR gave us a nice move on Friday for anyone that took it and was able to ride a decent boost into the close. Traders can even use a B/E stop-loss at this point.
With all that in mind, let’s approach today with an open mind and see what the market has in store.
S&P 500
I spoke with a few trader friends lately, just bullshitting about the market. They want to trade individual stocks — and so do I. But we agreed that right now, the environment is just too choppy. With the VIX above $30 and the markets as volatile as can be, the whippy action in the individual names is 2x or 3x that of the indices…or more.
As it pertains to the ES, watch the 52-week low from last week at 4056. A reclaim of that area opens the door back to 4100.
If the ES can power above 4100, then 4165 could be on tap, followed by 4195 to 4200.
On the downside, sustaining below 4056 will have 4000 acting as a magnet. Keep in mind, there is a gap down at 4015 from early April 2021. That may need to be filled.
SPY
For the SPY, that gap sits down at $400.67. Not that it had to be filled, but I have had my eye on this level since January, wondering if it would come into play.
The SPY traded as low at $202.75 in the pre-market but is catching some reprieve after 8:00.
On the upside, watch $405 — last week’s low. If it’s resistance, I think the gap needs to be filled near $400. Above $405 and the $410 to $412 area is in play, followed by $417 and $420 to $421.
On the downside, $390 would be my max short-term downside target if $400 fails to act as support.
Nasdaq
Above is a weekly look at the NQ, which has been a dog in this decline. I don’t know where or when it will find some support, but this 12,250 to 12,450 area has been notable in the past.
It was resistance in 2020 and support in 2021. Just keep that in mind as we push lower this morning.
As for specifics, keep an eye on Friday’s low at 12,519. A reclaim of that could open the door back to 12,700. That could have 13,000 in play if the snap-back rally gains steam.
QQQ
The QQQ is similar to the rest. Trading $302-ish in the pre-market, keep an eye on last week’s low at $305.11.
Above it opens the door back to the $310 area. Some real steam puts $318 on the table.
If $305 is resistance (or QQQ melts lower on the open), keep an eye on $297.45. An undercut of that level and a reversal could make things interesting.
Go-To Watchlist
*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.
- WMT — Stopped → trade closed.
- MCK — Targets 2 and 3 were hit on Friday. Stunning. → down to just runners or all out of position and trade closed.
- DLTR — B/E stop just to protect profits after a nice move on Friday.
Relative strength leaders (List is cleaned up and shorter!) →
- AR — booming to new highs.
- WMT
- PEP
- KO
- MCK
- BMY — inside week thus far.
- JNJ
- DLTR
- DOW
- VRTX
- MAR
Economic Calendar
As we all know, there’s no crystal ball when it comes to trading stocks, options, or futures. But the Market Imbalance Meter may be as close as it comes. Knowing how the “Big Money” is placing its bets can give our trading room a big wave to ride — or a warning sign to stay out of the water. Come check it out now, risk-free for 30 days.
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