Market Review
On Tuesday, the ES that closed at 4343.25 traded down to 4321.25 during Globex and opened the regular session at 4366.50. It coughed up 10 points in the 10 minutes, bottoming at 4356.50 at 9:40, and then it started to jump higher. Breadth was robust in the first few hours of the day, with more than 90% upside volume in the NYSE.
The ES powered all the way up to 4402 before noon, up 35 handles from the open. In that stretch, it gave us nine straight higher 15-minute bars, as bulls were firmly in control ahead of the Fed.
That’s where things got a bit volatile, as you would expect. The initial reaction to the Fed was lower. The ES entered 2:00 at 4386 and quickly fell down to 4375 before the buyers stepped in. They jammed it all the way up to new session highs, at 4406.50 before it flushed lower once again. The ES took its afternoon low of 4375.50, bottoming at 4371.75.
In other words, they did exactly what we talked about in Wednesday’s Opening Print and in the Mr. Top Step chat room: They ran the stops on both sides, barely breaking the high, then barely breaking the low.
Like the entire day, the ES rallied all the way up to 4394.50 at 3:10 and then rocketed up to a lower high at 4403.25. At 3:34 the ES traded 4387.75 as the early MIM showed $437 million to sell. Just before the 3:50 cash imbalance, the MIM showed $2.1 billion to sell and traded down to 4382.75. On the 4:00 cash close, the ES traded 4382.50 and went on to settle at 4386.25 on the 5:00 futures close, up more than 40 handles or almost 1% on the day.
In the end, the day was filled with 25 and 30 point rips and dips. In terms of the ES’s overall tone, it traded firm all day until the Powell headlines hit. In terms of the day’s overall trade, volume was ‘steady’ but not overly high at 1.71 million contracts traded.
Economic Calendar
Closing Prices
In the TradeChat Room
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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: ~14:15
09:30 – 10:00 55% ( wrong)
10:00 – 12:00 25% (wrong)
Low: ~09:44
12:00 – 15:30 ~70% (wrong)
Baxter missed both time slots yesterday.
High:
09:30 – 10:00 55%
Low:
10:00 – 12:00 63%
12:00 15:30 25%
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
Worry gap is seen between U.S. stocks and high-yield debt
U.S. stock investors show “a degree of worry” that’s largely absent in bonds, according to Andrew Garthwaite, a global strategist at Credit Suisse Group AG. He compared the Cboe Volatility Index, or the VIX, with the yield gap between U.S. high-yield bonds and Treasuries in a report Tuesday. While the VIX set a four-month high Monday, lower-rated debt didn’t keep up. The yield spread for the Bloomberg U.S. Corporate High Yield Index closed at 2.9 percentage points, within 0.3 point of a 14-year low reached in July, according to data compiled by Bloomberg. High-yield bonds look riskier than stocks, Garthwaite wrote.
Our View
Most times when making a directional change on your chart, it’s because you are seeing something that tells you the price action has changed. In September, the S&P 500 futures (ESZ21:CME) made an all-time high at 4549.25, up over 21% in 2021. As in most cases, the ES ‘pulls back a bit’ after making new all-time contract highs — especially after making more than 50 new all-time closing highs during the year.
Traders always like making comparisons, such as the current rally reminds me of 1987 or the 2000 tech bubble. Well, you know what? This rally doesn’t look like a bubble to me.
The pandemic has not only changed our lives but it’s also changed where we want to live and how we invest. Everything is being reassessed. I am just one guy, I do not pretend to know for sure where the markets are headed, but I feel strongly that the trend is still intact.
After being down 10 of the last 12 sessions before Wednesday’s gain, the ES rallied hard up to 4406.50. That’s up over 112 points from Friday’s 4293.75 low and up 85 points from the 4321 Globex low.
I know how bad the S&P looked, it’s made to look that way to ‘spook’ people out and bring back the short sellers and hedgers. The MrTopStep Opening Print has been written every day since 1994-95. We don’t pretend to be a name-brand ‘market timers’ newsletter like Bert Dolhman or Bob Prechter. We’re not written about in Market Wizards.
Instead, the Opening Print provides two things:
- A practical look at the markets from a guy that ran the largest S&P 500 futures desk on the CME floor and handled some of the largest Wall Street trading desks and understands price action and program trading. Oh yeah, and he hung around for almost 40 years on the floor.
- You do not have to pay the ultimate price. That is, paying a lot of money for poor market-timer advice and losing money at the same time. It’s simple: Sometimes people need to be reminded about the old but most important rule in trading — the trend is your friend.
$50 Million Dollar Options Bet
Yesterday there was a very bullish bet that the S&P would rally at the end of the year. The traders were in the SPDR S&P 500 ETF Trust (SPY) and were executed between 10:34 a.m. and 10:41 a.m. New York time which involved call spreads maturing in each of the next three months with a total close of $50 million. The transactions occurred before the Federal Reserve’s policy decision. According to an estimate from Chris Murphy, co-head of derivatives strategy at Susquehanna, should all the contracts be in the money by their respective expiration dates, they would be worth $136 million, for a profit of roughly 70%. Below are the actual trades:
- 25,000 Dec. 448/470 call spreads for $7.91
- 32,000 Nov. 448/460 call spreads for $4.35
- 43,000 Oct. 442/452 call spreads for $3.89
Our View
Like I said above, the bears still have the September end-of-quarter rebalance and ‘spooky’ October to push the markets lower, but either before or after, the ES is going back up to new contract highs. Today’s economic calendar includes initial jobless claims and some PMI data. The trade above is a big bull bet, but why just not buy some Dec 4750 calls? Figure out what you want to risk and let it fly!
Our Lean
If you are looking at the ESZ, it failed to close above 4400. I am not sure that’s significant or not but that doesn’t mean it won’t today. More than ever, there are three parts to the ES’s trading session: What happens on Globex, what happens after the 9:30 ET futures open and what happens in the last hour. Clearly, all three have provided a high level of volatility.
Our lean is to sell the early rallies — especially if the ES gaps higher — and buy the pullbacks, which tend to be around 30 points. If that all works I’ll step back, buy around 11:00 and come back for the last hour.
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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