Market Review
On Friday, the S&P futures closed down 42.5 handles and that was just the beginning. The ES opened lower on Monday and at the low, was down 128 points from Friday’s close.
The ES opened the regular-hours session at 4354.25. After a rally up to 4371.25 at 9:51, the S&P fell precipitously down to 4293.75 at 3:18 ET. After the low, the ES popped toward 4350, up 56 handles in less than 40 minutes — more than 1 full point per minute.
In the end, the ES finished lower by 73.50 points or 1.66%.
In terms of the ES’s overall tone, it was extremely weak and filled with sell programs, but the late rally seemed to deflect some of the day’s weakness. In terms of the day’s overall trade, 534,000 contracts traded on Globex and 2.092 million futures traded on the day session for a grand total of 2.62 million contracts traded.
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Baxter
Baxter is our new AI trading helper. This data is early, new, and not very well tested but we want to share some of our findings. We are concentrating on the SP500 which should benefit ES futures and SPY traders.
Last Trading Day:
High: ~09:46
10:00 – 12:00 78% (wrong)
Low: ~15:19
10:00 – 12:00 >80% (wrong)
Today:
High:
12:00 – 15:30 >80%
Low:
09:30 – 10:00 >80%
What do the percentages mean? Baxter is a classification model trained to identify a coarse shape of price action. When the high or low is likely to occur. He can guess for four time frames correctly more than 66% of the time. The way classification programs work is a weighted value for each time frame is generated from our input data. When Baxter is sure he will produce a clear signal > 80%. If he cannot determine from the current input and past inputs, those weights get spread around. The guess is always the largest value no matter how close, but knowing that there is confusion might have some trading value.
Chart of the Day
Strength turns to weakness for S&P 500 industrial stocks
Industrial companies were leaders among U.S. stocks as recently as four months ago. Now they are laggards — and the shares “remain vulnerable,” Jonathan Krinsky, chief market technician at Bay Crest Partners, wrote in a report Friday. The ratio between the S&P 500 Industrials Index and the S&P 500 shows the reversal. After setting an almost 20-year low in May 2020, the ratio climbed as much as 21% in the next 12 months. The indicator then gave back 58% of the gain through Friday and finished the week at its lowest level in more than a year.
Our View
When things unravel they unravel fast. It’s not new news that the Federal Reserve is trying to cut back its support for the economy and that Chinese real estate developer Evergrande was going to have problems paying its $300 billion in debt. Nor is it news that several Fed governors sold their stocks because it was a conflict of interest, right? It’s really just one big coincidence, or is it?
At the end of last year, MrTopStep called for S&P 4400 then raised our prediction to 4600 and the S&P futures traded all the way up to 4549.25. The real deal here is the S&P was up 33% YTD and has not had a decent pullback in more than a year.
The other clue to this decline is that Goldman Sachs, CitiBank, B of A, Morgan Stanley, and Deutsche Bank have all lowered expectations. Well, guess what? MrTopStep hasn’t! I am not saying the S&P can’t fall more, but the idea that the “dip buyers are finished” is ludicrous. It’s as silly as comparing Evergrande to the fall of Lehman Brothers.
Let’s get this straight: At its high, the S&P had rallied 107.5% since the March 2020 Covid-19 lows and just a handful of trading days ago, it was up a whopping 33% on the year. I have always said the S&P can balance one negative, it can even balance two negatives, but when the stock market is up so much, it’s only natural that some type of correction occurs. It’s also occurring at a critically historical period for stocks — AKA September.
Who’s to say this wasn’t coming at some point anyway, the news just helped it along. It was a great excuse to flush the market lower.
I will finish by saying that no one knows for sure what the stock market is going to do next. However, I can also say that despite the taper talk, the US government fully expects to win the vote to spend $6 trillion dollars and the Fed is not just going to walk away and they may be much more guarded this week when they meet. If indeed the S&P does continue to sell off, I think it will only add more fire to the year-end rally and…ES 4600!
Things got a little out of control yesterday. As the saying goes, “these are not our fathers’ markets or charts” and they never will be! Yesterday the news algos overran the index markets. Today’s data point is the US Housing Starts number and it’s day one of the Fed’s two-day meeting. They say that Fed Chairman Powell has worked hard not to blow things up when talking about cutting back on the Fed’s bond-buying program, but after yesterday it may be even harder to thread the needle.
Our lean: 4381 is a big level. The ES should see initial resistance at that level. If it gets above there, I have 4412 on the radar, but I don’t think it will come very fast. If I was right about anything it was last week when I said the ES was not in a hurry to go back to 4450 and I still feel that way.
However, we all know that it takes days and weeks to knock the S&P down and one to bring it back. Obviously, it is unlikely we will hear much from the Fed today but tomorrow could be another head-banger! Our lean is to sell the early rallies and buy the pullbacks. The average 3-day range of the ES is 43 handles, meaning we should see a decent range even if it is quiet.
As we all know, there’s no crystal ball when it comes to trading stocks, options, or futures. But the Market Imbalance Meter may be as close as it comes. Knowing how the “Big Money” is placing its bets can give our trading room a big wave to ride — or a warning sign to stay out of the water. Come check it out now, risk-free for 30 days.
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
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