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Our View
Yesterday’s title, “S&P Sits on Vital Support” proved to be the case, as the index sifted lower, then erupted off the lows. The ES broke its longest losing streak in 2023 yesterday…but not by much or with all that much conviction.
The late-day rebound off the 3975 level definitely caught the bears off-guard, pushing the ES from down 24 points to up 35 points. I try my very best to explain things that keep you informed about the ES’s overall tone — which after four decades I think I can keep a pretty good pulse. For what it’s worth, I 100% believe it is up against a new wave of bots driven by Al.
It’s one thing to follow fair value to help see some of the programs, but these new systems are nothing like the old algos and HFT trading systems that beat them to the punch. While I do not have some of the sophisticated charts that some of you use, I use very unique charts that zero in on volumes. Volume-based trading is something that’s closer to “The Floor” and it’s why I use it.
When I trade all day — probably to my own disadvantage — I have noticed how the new Al programs trade at every price; they are the casino. It’s a constant bombardment of bids and offers that have zero preference of what it buys and sells on up and down ticks.They are way more aggressive now than what we used to see from the “old” algos.
The new AI programs have taken over the CMEs pipe and are front-running the algos and are going to become a very big part of our lives and our trading accounts very soon.
Our Lean
Look, it’s very simple: This isn’t getting easier, it’s getting harder. The PitBull used to say, “the strategies I used to make money on don’t work anymore.”
Well guess what? That goes for every trader that makes their own trading decisions. As for yesterday, we had part of it right — selling the initial rally to 4035 to 4040 — but I didn’t expect the plunge down to the 3975 area. When the ES rallied 50 points off the low, it wasn’t hard to see the programs bidding it higher.
Our Lean: Ideally I would like to buy a lower open, which is looking to be the case after a hotter-than-expected PCE result. There should be solid support at the 3950 area — at least solid enough for a short-term bounce (see the charts below).
While we may bounce, a sustained rally may not be in the cards today. That said, if we do firm up, some lotto calls may be a good approach. If that’s the case, look to sell half on a pop and ride the rest as well, “a lotto.”
Keep an eye on the dollar (DXY), bonds/the 10-year yield (TNX) and the VIX.
MiM and Daily Recap
The ES traded up 4026 on Globex and opened Thursday’s regular session at 4028.50, rallied up to 4030 and dropped 10 points down to 4020 and then rallied 14 points up to 4034.25 at 10:00. From there it sold off down to 3974.25 at 4091.75. The ES pulled back down to 3982 at 1:15.and a ‘rolling buy program’ hit that pushed the ES all the way up to 4028 at 3:32 as the early imbalance showed $303 million to sell.
The ES pulled back down to the 4020.50 area at 3:47 and traded 4021 as the 3:50 cash imbalance showed $450 mil to sell, traded down to 4017 and traded 4018.50 on the 4:00 cash close. After 4:00 the ES pulled back to the 4015 area and settled at 4015.25 at 5:00, up about 20 points or 0.5%.
In the end, despite the drop the ES rebounded to put it back in the black. In terms of the ES’s overall tone, it was firm late but there were tones of two-way buy and sell programs. In terms of the ES’s overall trade, volume was steady at 1.89 million contracts traded.
Technical Edge —
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NYSE Breadth: 56% Upside Volume
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Advance/Decline: 66% Advance
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VIX: ~$22
The S&P took out the prior day’s low, then scorched to the upside. Like a basketball pulled underwater — below Wednesday’s low — they let it go and it ripped higher. We did not get a clean “daily up” rotation, but it was a potent rally off a key support level.
Now another inflation reading is in focus with this morning’s PCE report. The CPI and PPI reports were hot. So was the January jobs report. So I’m not sure why anyone thought this number would be below expectations.
The econ table at the bottom shows the results, but it came in hot across the board. While the Fed Minutes laid out a scenario for a 25 basis point increase in March, I think many investors are getting the hint that “25 and done” is likely off the table and that more hikes will be necessary to tame inflation.
S&P 500 — ES
Yesterday’s action is looking more and more like a “big buy program” off a key support area. Once they undercut the prior day’s low and reclaimed it, it was off to the races.
As Danny said, you could see in the volume that they were ramming through the big buy orders.
In any regard, we’re below yesterday’s low in pre-market trading. If the ES can’t regain this level (~3974) then it opens the door down to 3950, where it should find — at the very least — temporary support.
That level marks the 200-day moving average and the 61.8% retracement.
On the upside, a sustained reclaim of 3974 puts 4000 back in play. Although I have a hard time seeing the ES take out 4025.
SPY
If the PCE results were favorable, I could have envisioned a move to last week’s low and the declining 10-day moving average for a “real test” of who was in control.
Now, short of a big reversal, the SPY is not only ending the week on a sour note but undoing all of yesterday’s reversal.
Below $396.50 puts the 200-day in play at ~$393. Below that and the $390 to $391.50 zone is on the table.
AXP
Post-EPS reset in AXP. After a nice three-day consolidation, we’re looking for a daily-up over $176.60. May not get it, but keep it on your radar.
First target $175.50 (¼ trim) otherwise $178.50 (for ⅓ trim) — one or the other, not both, just your choice on which.
Stop would be ~$172.50.
JNJ
Where are my long-term buyers at? After 7 straight down weeks, LT buyers can likely justify a nibble here in JNJ. Yield is near 3%, valuation is about 15 times earnings and it’s a quality company with quality profits.
It’s not sexy but it’s not supposed to be.
Active investors can cut if it doesn’t hold $153 to $154 on a daily basis, but I like this one as a buy-and-hold.
Open Positions
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Bold are the trades with recent updates.
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Italics show means the trade is closed.
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Any positions that get down to ¼ or less (AKA runners) are removed from the list below and left up to you to manage. My only suggestion would be B/E or better stops.)
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** = previous trade setup we are stalking.
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MRK — Long from ~$110 — Initial stop can be as tight at $108 or as loose as $105, (trader’s preference). Initial target for ⅓ trim is $112.50.
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DD — Long from $72.50 (starter buy at $72.25, added at $72.75 when alert when out) —
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Stop at $71. First target $74 to $75 (ideally $74.50+)
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Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
Relative strength leaders →
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AQUA
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AEHR
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GE
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NVDA, TSLA
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SBUX
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MELI
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NFLX
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WYNN, LVS
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AXP
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BA & Airlines — AAL, DAL, UAL
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TJX, ULTA, NKE
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CAT
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HCCI
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XLE — XOM, CVX, COP, BP, EOG, PXD — (Weekly Charts)
Economic Calendar
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