Fearing a Chain Reaction in the Middle East

And yet, the S&P is rallying

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Our View

I wrote a full paragraph about Hamas Sunday night, but I didn’t use it because almost 3 months ago I said the first war the US enters will be in the Middle East with Iran, which will set off a chain of other wars the US will be expected to play a role in. I am sure the Chinese and Russian state planners know this will push the US to a breaking point.

I also want to point out something — and as good as Israel’s iron dome is — it’s not made for knocking down 200 to 300 missiles or for that matter 60 to 80 all coming at once. I am also sure what we saw would be exactly what China would do if we tried to defend Taiwan when the US ships even entered the China Sea. The US says it has the capabilities to defend against an attack, but what if China fired 100 missiles at our aircraft carriers? They would get sunk and we would lose thousands of soldiers in the process.

As we have learned in Ukraine, it’s all artillery, drones and missiles. Yesterday Hamas said they were ready for a truce, but we all know the Israelis are just beginning to move into Gaza. Personally, I think this war is just beginning and the real fear is Iran and the US slugging it out with Russia and China in the background.

According to GS, in the US, CTAs are short $47 billion of equities after selling $88 billion over the 15 sessions. It’s the “Largest US short position for this cohort on record.” Per GS model, the CTAs are now buyers of SPX in every scenario over the next month.

Our Lean

There were some good rallies to sell, but the lower volume and stuck shorts created a ‘thin to win’ trading environment. After a few good drops, it was like someone flipped on the buy switch and never turned it off. I was concerned about the possible lower volumes, but didn’t fully think it through.

Our Lean: Sell the early rallies and buy the 30 to 50-point pullbacks/drops. I don’t think the downside is over, but right now the ES wants to go higher. As for levels, @handelstats says:

Upside: Hourly close above 4382 targets 1 sd at 4405.48. An hourly close above there targets 4412.48, then the DAILY close above there may be the trigger to start a much larger move back up. Above that target 4423.62, then 4435.50, then 2 sd at 4440.46.

Downside: Below 4367.50 targets 4339 and -1 sd at 4335.52. Hourly close below there targets 4314.25, then 4304.75, then -2 sd at 4300.54.

MiM and Daily Recap

The ES sold off down to 4399.50 on Globex and opened Monday’s regular session at 4321.75. After the open, the ES made six separate new highs all the way up to 4338.00 at 10:01, dropped down to the 4323.00 level at 1:06, rallied up to a lower high at 4335.00 at 10:27, and then sold off down to a new daily low at 4216.00. After a little back-and-fill at the VWAP from 10:47 to 11:11, the ES popped up to 4336.00 at 11:36 and made three more highs at 4337.50 and 4341.00 and 4346.25 at 12:23. After the high, the ES pulled back to 4331.75, rallied up to 4336.00 at 1:44, climbed to another new high at 4365.75 at 1:49, then another new high at 4368.75 at 2:00 and traded 4372.50 at 2:31.

As you see by the price action, the buyers are not letting the ES pull back more than 3 to 4 points. After the high, the ES pulled back to the 4363.50 level and then rallied up to a new high at 4375.75 and slowly sold off down to 4362.25 at 3:46 as the early imbalance showed $196 million to sell. The ES traded 4366 as the 3:50 cash imbalance showed $1.86 billion to sell and traded 4370 on the 4:00 cash close. After 4:00, the ES traded up to 4372.00 at 4:07 and settled at 4368.75 on the 5:00 futures close, up 27.25 points or 0.63% on the day.

In the end, Hamas’ weakness was met with a 76.25-point rally from the Globex low. In terms of the ES’s overall tone, it seems like most of the selling was done on Globex. In terms of the ES’s overall trade, volume was way lower: 309k traded on Globex and 1.116 million traded on the day session for a total of 1.425 million contracts traded, almost 600k contracts lower than last Thursday and Friday’s volume.

Technical Edge

ES

ES cleared last week’s high and the prior week’s high as it looks for to build momentum on the upside.

NQ

Economic Calendar

Disclaimer: Charts and analysis 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!