Last Week of Q2. Questions Remain on Fed’s Plan

S&P sits at a key juncture for bulls and bears

Follow @MrTopStep and @BretKenwell on Twitter and please share if you find our work valuable.

Our View

This week marks the end of the second quarter and has several economic and inflation-related updates.

We’ll get a glimpse at the housing market with new home sales (from May) on Tuesday and pending home sales on Thursday. The GDP report is due out on Thursday, while the PCE Price Index is due up on Friday — which is the Fed’s preferred inflation measure.

Speaking of the Fed, Chair Powell is on tap twice this week, on Wednesday and Thursday. The bank stress tests results are also due up on Wednesday.

While all of these data points are not exactly like what we saw a few weeks ago (with the Fed’s rate decision, CPI and PPI data and quad-witch), it is a lot of potential headline-moving events ahead of the Q2 rebalance.

Despite the big YTD and Q2 rally, there are still lingering questions surrounding the markets. First, is the Fed saying that they are not done raising rates?

The Bank of England raised rates 50 basis points last week. Further, “The world’s central bank umbrella body, the Bank for International Settlements (BIS), called on Sunday for more interest rate hikes, warning the world economy was now at a crucial point as countries struggle to rein in inflation.”

Lastly, bond markets are now starting to price in that the Fed won’t cut rates this year.

The second question is, one has to wonder if the recent selloff is a prelude of things to come…

Our Lean

There should be increased two-way flow going into the final five sessions of the second quarter.

Our Lean: Mondays tend to be the lowest volume day of the week and could help a thin-to-win type trade. You can buy the early weakness and sell the rallies or just be patient and sell the 20 to 30 point rips.

Remember, the ES is short term oversold.

As for levels, watch 4400. A sustained move above this level is bullish and puts 4425 in play. If 4400 is resistance, 4375 remains in play, followed by 4350.

MiM and Daily Recap

The ES sold off down to 4385.50 on Globex and opened Friday’s regular session at 4386. After the open, the ES sold off down to the level I talked about earlier last week — 4384 — then slowly rallied its way up to the VWAP at 4397 at 10:12, back-and-filled between 4391 and 4397 until 10:00 and made an ealy high at 4399.75 at 10:40. After the high, the ES sold off down to 4385.50 — just a few ticks off the 4384 level — and then rallied up to 4397 at 11:46 and then rallied 19.5 points up to a new high at 4406 at 12:34.

From there, it pulled back to 4399 at 2:07, rallied up to 4408 and then dropped down to 4381.50 at 3:05 — the session low — and slowly rallied back up to 4394.25 at 3:40. The ES traded 4393.75 as the 3:50 cash imbalance showed $2 billion to sell, jumped to 4397.75 and then traded 4390.25 on the 4:00 cash close. After 4:00, the ES fell down to 4383.25 and traded 4388.50 on the 5:00 futures close, down 35.50 points or down 0.80% on the day.

In the end, the Dow (YM) snapped a three-week winning streak, the NQ ended an eight-week win streak and the ES snapped a five-week win streak. All three are still up for the year, though. In terms of the ES’s overall tone, it was weak. In terms of the ES’s overall trade, volume was on the high side for the week at 1.46 million contracts traded, but low given the recent trading volume over the past month.

Technical Edge

The dip is exactly what we were looking for. Now the question is, will they turn the screws to the dip-buyers or will the bulls rescue the S&P after declining in four of the last five days?

The ES is under modest selling pressure this morning, giving room for both sides of the tape to have their way. If we see further weakness this week, there’s an opportunity at 4350 for the ES and 4300 for the SPX.

S&P 500 — ES

The ES is twirling on the 61.8% via the Globex low. My thought process is pretty simple.

Either we hold the 4390s and regain 4400 to put 4425+ in play or we push down to 4350, where we find the prior breakout level, the 21-day moving average and the 78.6% retracement of the recent rally.

SPX

On the SPX, it’s a similar layout, but with 4300 being the downside objective

SPY

NQ

Open Positions

4 longs, 2 shorts.

Note: No trigger on GM, setup is done.

Go-To Watchlist

Feel free to build your own trades off these relative strength leaders

Relative strength leaders → (List is growing long!)

Relative weakness leaders →

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!