Middle East Conflict Remains a Concern
Scratch that…a MAJOR concern
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Our View
Yesterday’s ES reversal was the largest in over two years, which is directly related to the Iran/Israeli conflict. As the US continues to build up its military presence in the Middle East, Russia is supplying Iran with its S400 Triumf mobile surface-to-air missile (SAM) defense system.
If you asked me what else was causing the selloff, believe it or not, the presidential election is also causing a shift. Lastly… stagflation fears are back on the rise.
Today we have the jobless claims report, which is becoming a bigger focus now that there are worries over the labor market. Then this afternoon, we have another big Treasury auction, this time with the 30-year bond. Yesterday’s 10-year note auction did not go so well.
Our Lean
The important part of yesterday’s lean was not the first part, it was the second and third parts: “Our Lean – If the ES gaps sharply higher today, I am selling the open or the first rally above the gap. Then I’ll be looking to buy the initial drop and look for a place to be a buyer which should be done gingerly, pretty cautionary language based on the Middle East conflict.”
As time goes by, the new readers will understand that it’s not always a chart point for me, it’s the tone, a feel or a pattern. I knew at the highs that the rally was over, but people get sucked into thinking the markets are just going to keep going up…in reality, they already rallied.
The main pattern we see is one of failed rallies or big dead-cat bounces that end up tanking late in the day accompanied with a big MOC sell order and another after-4pm drop, which was an additional 35 to 40 points into the futures close. I do NOT — and I want to emphasize — that I am not taking the Iranian/Israeli conflict lightly and it’s not going to be the 300 missiles they fired last time. How about 3,000 and then another 3,000 and another 3,000…and what about a land war?
Very unstable times.
Our Lean: First of all, this is time to buckle down the hatch, don’t take on oversized risk and protect when you can. As for the ES levels, if the ES takes out yesterday’s 5196.75 low and starts breaking 5165, I think it’s right back down through the 5120 level and all stops under there.
PitBull asked me where I thought the larger support came in and I said 5048. Let’s face it, there is an abundance of negatives. I think there will be big movement in both directions with a downside bias. (Below are some levels I am looking at). I think there will be big movement in both directions with a downside bias. The 50% retracement of yesterday’s range is 5278.50. Sell any 75 to 125 point rips.
Levels: 5120, 5090, 5078, 5065, 5048, 5024, 4968, 4917
MrTopStep Levels:
MiM and Daily Recap
ES recap
After a 106-point drop on Tuesday’s close, the ES rallied 112.75 points to 5334.00 on Globex and opened Wednesday’s regular session at 5327.75. After the open, the ES traded down to 5323.25, then rallied 36 points to 5359.35 at 10:02, with a total of 204k contracts traded. It then sold off to 5325.25, 34 points off the high, at 10:30, rallied to a lower high of 5353.50 at 10:48, and then sold off to 5343.75. It rallied to another lower high at 5351.50, sold off to 5342.00, and then rallied to a third lower high at 5354.50 at 11:07. The ES then dropped 21.75 points to 5332.75, rallied to 5343.00 at 11:37, and dropped to a new low of 5313.00 at 11:49. It then rallied back to 5325.75 before dropping to another new low at 5300.50, down 59.75 points from the high of the day.
The ES rallied again to a lower high of 5323.75 before selling off to another new low at 5265.00 at 1:20. It bounced 27.5 points to 5292.25 at 1:39 and then sold off to the low of the day at 5230.50 at 2:49. It rallied to 5263.00 at 3:09, then pulled back to 5245.50 at 3:44. It traded 5252.00 as the 3:50 cash imbalance showed $2.1 billion to sell, bringing the total to $15.50 billion sold over the last three sessions. The ES then sold off to 5222.75 and traded at 5229.75 at the 4:00 cash close.
After 4:00, the ES fell to 5196.75 and settled at 5202.25, down 162.5 points from its high, a decrease of 46.75 points or -0.86%. The NQ, which made a high at 18,558.50, sold off 722.25 points to 17,836.25 and settled at 18,854.50, down 242 points or -1.34%. The yield on the 10-year note rose to 3.968%, up from 3.887% on Tuesday, marking two days of increases after eight days of declines. Brent crude closed up 2.4% to $78.33 per barrel. Gold settled at 2423.50, down 8.10 or -0.33%, and Bitcoin settled at 55,240, down 1,905 or -3.33%.
In the end, all I have to say is don’t fall in love with the dead-cat bounces. In terms of the ES and NQ’s overall tone, they were putrid. In terms of the ES’s overall trade, volume was high, with a total of 2.14 million contracts traded.
Technical Edge
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NYSE Breadth: 41% Upside Volume
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Nasdaq Breadth: 31% Upside Volume
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Advance/Decline: 42% Advance
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VIX: ~27.5
Guest Post — Dan at GTC Traders
Some Advice for Volatility …
A lot has changed in the last 7 days.
The last entry we had here, we were discussing that we did not feel rate cuts are necessary. Within 168 hours, we have gone from “Rate cuts would not be a good idea” … to “Rate Cuts by the Fed would be an epic disaster.”
Naturally, the reason for this being the Carry Trade unwind out of the Yen …
USD/JPY
Any cut in the Interest Rate by the Fed now would only seek to further destabilize that Carry; as all Carry Trades are attractive and maintained due to the differential in Interest Rates.
As far as the markets themselves? We track various relationship metrics and pairs to measure risk. The draw-down in terms of price of risk assets and relationships we have seen to this point is statistically normal. A little more than what we experienced from July to October of 2023. Far less drawdown than we saw in 2022. What is not normal?
Is the rate of the change of volatility. We are seeing statistics in the rate of change of volatility that has never been seen before.
And with that? I offer one word of advice.
If volatility increases? Decrease your position size.
It is the easiest and most effective way to control your risk in these environments.
The other day? I received a phone call. It was one of “those” phone calls.
A guy I’ve known out of New York City. Beautiful family. Beautiful home. I’ve watched his kids grow up over the years? He’s about my age; almost to the day. And I’ve watched him do quite well in markets.
Got stuck … and he was specifically stuck on the wrong side of volatility on Monday. His position size was too big, and he was over-leveraged. And then came the margin call. It wiped out almost a decade of his previous work. Gone. In a few hours time.
There is nothing ‘funny’ about that. There is no ‘if they were as smart as me’. No.
Listen.
Every … single … professional of note that I have known in my nearly 30 years in markets? Has had an event like that. Every … single … one of them. One guy I know, lost a house in literally 30 seconds. It was over that fast.
My own experiences, as well as watching others has taught me one thing?
When volatility even hints at increasing? You begin to decrease your position size.
It is one of the easiest and simple ways to avoid having such moments.
Stay safe (and in this environment, we truly mean that) … and trade well …
Economic Calendar
For a more complete Economic Calendar see: https://mrtopstep.com/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!
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