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Baxter continues to run bullish, looking for new highs. Today’s numbers are way off with the large gap down.
Chart of the Day
Nasdaq 100 strength sets up tech-stock heroes for a fall
“There will be no room for forgiveness” as U.S. technology companies report second-quarter results, according to Michael Shaoul, chief executive officer of Marketfield Asset Management LLC. Renewed strength in the Nasdaq 100 Index relative to the S&P 500 shows as much, Shaoul wrote in a report Thursday. A ratio between the U.S. stock benchmarks rose as much as 6.9% after reaching its low for the year on May 13, according to data compiled by Bloomberg. The advance brought the ratio within 3.3% of a record, set on Feb. 2. Only “stellar earnings and strong guidance” will sustain the recovery, he wrote.
Largest Spike in Puts Since the Election
The S&P 500 withered during the July options expiration and put volume jumped to the highest level since the election. I said early last week that taking out the ES 4400 level would not be as easy as the 4300 level and that the selling would show up at mid-month as the 2Q earnings started. For now, that call is right on target. The US stock market is extremely over-extended.
It was not a good week for the S&P 500 futures (ESU21:CME). The Fed, selling the earnings, negative headline news, and a statistically weak July options expiration seemed to overpower the record bull run.
The ES and NQ initially pulled back on Globex Thursday night, but both opened sharply higher after retail sales showed a 0.6% rise last month. That beat economists’ expectations as shoppers increased their spending, while at the same time inflation is hitting the highest level in 13 years.
However, that rallying took place before the regular-hours trading session. On the 9:30 futures open, the ES traded 4365.25 and made its early high at 4365.75 before immediately getting hit by several sell programs. That pushed the futures down to the 4335 area at 10:45, down 30 points from the regular-hours high and down 32 points from the Globex high.
The ES then short-covered up to the 4346.50 area at 11:22 before selling off all the way down to 4314.25 at 3:30. The ES traded 4319 at 3:50 and traded 4316.50 on the 4:00 cash close.
The selling started on the gap up opened as hundreds of sell programs hit the index futures. The ES traded all the way down to 4314.25 and settled at 4318.60, down 33.50 points or 0.77% on the day. The NQ initially rallied off the open up to 14,869.50, but settled at 14,656, down 117 points or 0.79%.
In the end, it doesn’t matter if you call the direction correctly if you don’t follow your own work and that’s what happened to me last week. I think it’s important to acknowledge that because trading is all about learning from your mistakes. In terms of the ES and NQ’s overall tone it was by far the weakest I have seen in a few months — if not longer. In terms of the overall trade, volume was higher at 1.57 million but low when you consider the size of the move.
When the markets sell-off for a single event, it’s usually a buying opportunity, but when you have so many moving parts, sometimes the market will move down further. I don’t know if this is the beginning of a correction or just another drop that’s supposed to be bought. The big leap in put volume is ominous, but I am not sure that means the markets are going to crash. After all, it means a lot of people are now hedged. This week the earnings season kicks into full gear with big names like J&J, Coca-Cola, Netflix, Snap, Twitter, and AT&T. On the economic front, it’s a quiet week with housing stats and new homes sales.
It’s just after 5:00 am and everything is red. The ES is down 31 at 4287.25 with a 4285 low. The YM is down 311 points at 34,224 and the NQ is down 61 points at 14,608.50. In addition, Chinese tensions have risen and OPEC is raising productivity, sending CL down 2.38%. Cryptocurrencies are down across the board. The CAC, DAX, and FTSE are all down over 1.75%.
Our Lean: If we get a nasty gap-down on the open, perhaps the bulls step in for a bit of a relief bounce. Right now though, it looks like sellers are dominating just about everything. Don’t be a hero today. Let’s see how things shake out near the open. If we get a decent bounce, that may be an opportunity to sell.
We’ve got early selling pressure driving the index futures lower on Monday morning. The ES is coming into the 200-sma on the 4-hour chart, where it may draw a bounce around 4270. However, given the magnitude of the selling pressure right now, the 10-week moving average may be in play near 4250, while the 50-day moving average comes into play at 4235.
With so much activity on the put-option side, there should be solid hedging in place. That said, we’ve been on a hell of a run, so it wouldn’t be abnormal to see some air come out of the market.
Let’s see where the ES finds its footing so we have a reference level to measure against. After such a strong run, we all knew this dip was a “when” not “if” event. The question now is, how low do we go?
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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