Tuesday’s Session was Cycle Day 2 (CD2): Selling continued into this session, driving price down to mid-April Lows. Typical of CD2, price did find balance between 4152 – 4129 Value Area. Range was 82 handles on 2.848M contracts exchanged.
…Transition from Cycle Day 2 to Cycle Day 3
This leads us into Cycle Day 3 (CD3): Price is still below CD1 Low (4172), with historical odds favoring recovery. As such, estimated scenarios to consider for today’s trading.
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Chart of the Day
Dow Jones Industrial; Worst Down Day Since February
The ES initially rallied on Monday night’s Globex session but opened 31 points lower on yesterday’s 9:30 ET futures open. After the open, the ES rallied up to 4156.25 at 10:03 and then dropped down to 4103.75, a 52.50 point drop in 45 minutes. After the low, the ES ‘ground higher’ — trading 4148.00 at 12:18.
The ES sold off down to a higher low of 4123.75 at 12:57. After a few 10 and 15 point drops and pops, the ES pulled back again down to the 4134.50 level then snapped back up to a lower high of 4149.50 at 3:20.
We mainly talk about the S&P futures (ESM21:CME) and the Nasdaq futures (NQM21:CME) and if you are wondering why, it’s because the Dow was left behind during the Covid-19 lockdowns when the ‘at home stocks’ became the investment darlings.
But that has changed over the last few months as the Dow Jones futures (YMM21:CBOT) not only surged higher but at times outperformed the S&P and Nasdaq. The markets have continued higher even as rising inflation has cast a level of doubt and the U.S. economy continues to heat up.
After being over 300 points higher at new all-time highs and reversing Monday, the Dow tumbled 475 points on Tuesday, its steepest decline since February when bond yields were rising.
At the end of the day, the Nasdaq futures closed roughly flat, however, it climbed 280 from the session low. The S&P closed down 37.25 points or -0.89%, while the Dow fell 485 points or -1.4% on the day.
In terms of the market’s overall tone, it was not hard to see: The NQ was ticking up while the ES was going down. That said, the ES did close 36.25 points off its low.
In terms of the day’s overall tone, all the big ups and downs helped push the ES volume to the highest level we have seen in a few months, with 2.49 million contracts traded.
Are we about to see another rotation? While high-tech growth stocks have been engulfed in a painful bear market, the so-called boring stocks have led the way higher. You know the types: Energy, financials, utilities, industrials, dividends stocks, and the like.
There’s a reason the Dow Jones has been hitting all-time high after all-time high while the ARK funds have been hitting new low after new low.
However, we saw a strong reversal in growth stocks on Tuesday and a move lower in the Dow. That doesn’t mean the trends are about to reverse or that growth stocks are out of the woods just yet. But it’s something to pay attention to as rotation has been the name of the game and has frustrated many traders.
Let us also not forget the CPI report due out at 8:30 ET on Wednesday, which should give us some more inflation-related headlines. Let’s also not forget the PPI report at 8:30 ET on Thursday.
Our view: as I have said many times, the ES can close down one day, it can close down two days in a row…but when it comes to three- and four-day declines, they tend to be few and far between. And yes, on a rare occasion we do see eight- and nine-day selloffs, but those are extremely rare.
Our lean: you can sell the rip and buy the dips, but we prefer the latter. If the ES closes firm today I will be looking to buy the ES if it’s down Thursday afternoon for a Friday RIP. That’s all I got to say about that. Don’t forget what happened last week.
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.
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