Tuesday’s Session was Cycle Day 1 (CD1): Price recovered its prior session losses as trend day down (CD3), was replaced with trend day up (CD1). The market does not appear to have a consensus of value, given a multi-modal profile pattern. Range was 76.25 handles on 1.812M contracts exchanged.
…Transition from Cycle Day 1 to Cycle Day 2
This leads us into Cycle Day 2 (CD2): Price has recovered back up to 3 Day Central Pivot Zone (4313-4321) during the prior session. Normal for CD2 is for some balancing recent down and up back-to-back trend days, in search of accepted value consensus. We anticipate this process may take several sessions to be worked out. As such, estimated scenarios to consider for today’s trading.
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No Baxter today. New model later this week.
Chart of the Day
Gains for quality U.S. stocks are seen going beyond tech
Gains among higher-quality stocks are poised to broaden out to companies displaying “earnings stability rather than growth,” according to Mike Wilson, chief U.S. equity strategist at Morgan Stanley. Wilson drew his conclusion in a report Monday that compared the MSCI USA Quality and Russell 2000 indexes. The ratio between them climbed 24% from a March 12 low through yesterday, according to data compiled by Bloomberg. The rally followed a 35% retreat from a record in March 2020. Health-care, consumer-staples, real-estate and phone stocks are poised to join technology shares as leaders, Wilson wrote.
S&P 500 Records Its Best Day In Four Months
After a rough couple of days, the S&P 500 futures (ES) snapped back yesterday, having its best day in four months. There is a constant theme in the indices: don’t fight the Fed and buy the pullbacks, and that’s exactly what investors did yesterday.
Despite the spread of the Delta variant coronavirus and the possible damage it can do to the economy, many traders continue to see the stock market as the best bet for their investments.
On Tuesday, the S&P rallied sharply and closed higher by 1.51%, its largest one-day gain since March 26th as it wiped out all but 0.1% of Monday’s loss. The Dow Jones futures (YM) gained 550 points or 1.6% and the Nasdaq 100 futures (NQ) climbed 235 points for a gain of 1.6%.
The ES rallied on Globex and traded 4261.25 on the 9:30 futures open, made an early low at 4252.75, and then started screaming high. At 11:24 the ES rallied 56.5 points up to 4310.50, pulled back down to 4302.25, and just after 1:00 ET traded all the way up to 4325.75, up 76.75 points off the low of the day. After a pullback down to the 4312.00 area just before 2:00, the ES ‘stutter stepped’ up to the high of the day of 4329.00 at 3:15 and a few minutes later someone sold over 10,000 ES pushing the futures back down to the 4316 level after the imbalance showed over $2 billion to buy. On the 5:00 futures close the ES traded 4315.50, up 64.25 points or + 1.5%.
Breadth was robust on the NYSE, logging a near-90% upside volume day. That comes after a near-90% downside day on Monday. So we’ve had quite a bit of turbulence in that regard lately.
In the end, the indices did exactly what they do on almost every big decline — they rallied sharply. As I have always said, the trend is your friend and as long as the Fed is supporting the markets it will continue to be a buy-the-dips environment.
In terms of the ES’s overall tone, the big buy program kept the market extremely firm. After running the sell stops on Monday, the buyers returned in force. In terms of the day’s overall trade, volume was high as 388,000 ES traded on Globex and 2 million futures traded on the day session for a total of 2.388 million futures traded.
I want to explain something that I think is critical. When the markets sell-off like they did from last Friday to Monday, the put buying and hedging get to an extreme, and when the selling dries up, the shorts put buy stops in.
When the cash buyers show up, the ES starts to short cover, and with the help of the algorithmic and HFT trading programs, the buy stops become a target helping facilitate the programs. In other words, the shorts get used to help push the market higher and that’s exactly what happened yesterday. This type of price action is impossible to fight, you either go with it or stand aside.
It seems to me that the ES has been up a day, down a day for the last 7 sessions. Regardless, the buyers took back the tape yesterday. I know I said in the MrTopStep YouTube video that I thought we could see some further weakness this week, but I also said that we could see higher prices and a “Turnaround Tuesday” in yesterday’s Opening Print. I ended up making back a big chunk of the money I lost last week, but I still have a ways to go to get back to even.
Sometimes you just have to go back to the basics and trade less and smaller and that’s what I did. I would like to say every day is a winner but I can’t say that. I am just like everyone else, I have to roll with the punches. On the close, all three indices were within 2% of their respective July 12th all-time contract highs.
Our lean: Big downs lead to big ups. I believe that as long as the trend is intact, buying the pullbacks are more profitable and an easier way to go. Does that mean the ES is now going to go straight up to ES 4400? I don’t know about straight up, but I think it will get there eventually even though we can’t rule out some dips along the way.
Wednesdays and Thursdays tend to be countertrend days. You can sell the early rallies and buy the pullbacks or just be patient and buy the pullbacks. One of the MrTopStep trading rules is that the ES tends to go sideways to down after a big up day…we shall see.
Danny Riley is a 39-year veteran of the CME trading floor. He ran one of the largest S&P desks on the floor of the CME Group since 1985.
As always, please use protective buy and sell stops when trading futures and options.
Disclaimer: Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. Decisions to purchase or sell as a result of the opinions expressed in the forum will be the full responsibility of the person(s) authorizing such transaction(s). BE ADVISED TO ALWAYS USE PROTECTIVE STOP LOSSES AND ALLOW FOR SLIPPAGE TO MANAGE YOUR TRADE(S) AS AN INVESTOR COULD LOSE ALL OR MORE THAN THEIR INITIAL INVESTMENT. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS