PITBULL: Trend Change After Long Weekend and “Turnem Down” Tuesday

on May 27, 2015

The S&P went for a ride yesterday—a ride down that is. After a few weeks of grinding higher the S&P futures finally started running some of the sell stops that have been building up on the downside. You see, when the VIX dropped under 12, and the volumes are so low, it makes it easy to push the S&P around, but when you have a mix of data, Greek uncertainty and headlines saying the “FBI investigates chemical weapon threats to 10 international flights”, things tend to get a little unstable. The ESM15 was already overbought, but the low volumes kept it afloat. Once the news algos locked on the weaker than expected economic reports, and the FBI headline hit, the downside sell stops came right into play.

Friday’s Sell was the “Tell”

Ever since the ESM made its 2134 contract high, I called for the next 30 handles from 2130 to be down. Despite over a week and a half of low volume chop, the algorithmic trading programs reversed course and started going back down yesterday. After forcing the short option players to roll higher and cover margin calls, down the ESM15 went. Volume in the ES was the best in many days with nearly 900,000 contracts traded. Going into 10:40 CT crude oil was not having a great day either. At the same time, the CLN was also hitting sell stops from $58.00 down to $57.71 before it finally bounced back up to the $58.20 level late. Neither market could hold the rallies, but the ESM “double bottomed” at the 2096.00 level and rallied up to the 2104.00 area going into the 3:15 futures close. We think the over $1.35bil for sale on Friday’s close was the key to Tuesday’s early weakness but the news headline algos did the rest of the heavy lifting on the downside. The $890mil to sell MOC, and the late bounce back up on the close, caught most traders off base and scrambling to cover.

BROAD DECLINE

Remember last week the S&P was on track for one of its best monthly gains all year, but yesterday all 30 of the Dow 30 closed lower, and some market leading sectors, like technology stocks in the S&P 500 falling over -1.4%, and the Russell 2000 down 1.1%, ended the day with one of the largest declines in nearly a month, just after both the Dow and S&P made new record highs last week. The Dow Jones Industrial Average fell 190 points, or down 1%, for its largest loss since the end of April. The S&P also fell 1% down to 2104.20, and the Nasdaq Composite fell 1.1% with both indexes sustaining their largest loss since the first week of May. Yesterday’s selloff has the Dow up a modest 1.2%, and the S&P up 2.2% in 2015.

No one has ever promised us a rose garden when it comes to trading futures and options, but over the last few years it seems like trading is getting harder, not easier. As the volumes thin out over the summer, we suspect it may get even trickier.

In Asia 7 out of 11 markets closed lower, and in Europe 11 out of 12 markets quoted are trading higher this morning. Today’s economic calendar is light; MBA Mortgage Applications, Redbook and a 5 Yr-Note Auction.

Our View: What looked good on Friday got ugly on Tuesday. That’s how the game is played, keep it going up on no volume and bam! In come a few negative headlines and the bears come running back. Yesterday I got the 30-handle pull back I was calling for. Like I said on the @MrTopStep Twitter: “I’m old school and I have to get the 30 handles I called for before I start calling out 50 and 60 handle pull backs.” Furthermore who knows when the ES volume will drop again, and the spoos will start going back up again, but it’s my guess this is not an extended selloff. It may last days, but not weeks. But I must say that the overall price action was one of failed short covering rallies met by large selling, and it seemed to catch people off guard.

So where from here? There should at least be a few more days of this downward price action, but that pop up on the close was not at all what the bears wanted to see. I keep saying we are not going to crash, and we are also not going to take off to the upside…at least not yet. Our view is to sell the early rallies and buy weakness. The decline may not be over yet but I don’t think the ES will go down without a fight.