Riding the Rally: Navigating Volatility and Smart Pullbacks in a Bull Market [corrected]

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Our View

I don’t know where the Pitbull read the story from, but he said one of the newsletters he gets is talking about an extended period of high volatility. I’m not sure how credible that is—I’ve been saying it for months. The PitBull pays a lot of money for one newsletter; it costs $10k a month. They do make money, but they’re always buying puts on this stock or that stock sector. I’ve seen some good calls, but with the markets constantly going up, I think it’s just a way to waste good money. He sends it to me, but I don’t even read it.

I got it right yesterday about selling the gap up and buying the 30- to 50-point pullbacks. I knew in the first 30 minutes these were going to be larger, but I didn’t think the ES would sell off that much. I also have to admit that I knew the ES was going to bounce, but no way did I think it would rally 155 points. Some people were trying to say the markets sold off because of Trump’s showing during Tuesday night’s debate and that the markets went up because they were cheering for Harris. I think that’s hogwash—the markets were cheering the lowest inflation rate since early 2021.

Our Lean

As a bull guy, I’m sure you’ve noticed how I never start talking about sharply lower prices. Yeah, I know the ES sold off down to 5120, but that took a few weeks to happen, and it only took a week to take back most of the loss. That’s how all these declines end—the bears win for a few days or weeks, and then they eat crow. Our lean is if the ES gaps higher, I want to sell the open and buy the pullbacks, keeping in mind the MrTopStep rule that the ES tends to go sideways to down after a big up day/rally. If the ES gaps down, I’m a buyer, but I need to see a big gap and oversized volume to go charging in. What the bulls need now is a pullback and some back-and-fill, then it’s back up to the old highs at the 5563 to 5569 level. The ES had rallied 140 points in two days; now it has rallied 173.5 points. Like I was trying to express yesterday, if you think you can just buy this blindly, it doesn’t work that way. If you can’t short it, then you have to wait for the morning knockdown.

I posted this chart after the CPI number and said I would post what it looked like later and here you go:

MrTopStep Levels:

MiM and Daily Recap

The ES traded down to 5448.25 and up to 5498.00 just before the CPI release, then to 5498.75 after the CPI print. It sold off down to 5468.75 at 8:35 AM, rallied all the way up to 5507.50, and traded at 5500.50 on the 9:30 AM ET regular session open. After the open, the ES reached 5501.50, then dropped 82.75 points to 5424.75 with a total of 366,000 contracts traded. After a small bounce up to 5437.25, the ES sold off again down to 5412.00 at 10:48 AM.

Following the low, the ES rallied 129 points to 5541.00 by 2:45 PM, pulled back to the 5525.25 area, then rallied up to a new high at 5548.50 at 3:33 PM. It then sold off to 5533.50 at 3:45, traded up to 5546.25 at 3:48 as the 3:50 PM cash imbalance showed $1 billion to buy, which later increased to $1.8 billion. This pushed the ES up to 5557.75 on the 4:00 PM cash close and then up to a new high of 5567.50. After the high, the ES sold off down to 5553.50, flatlined, and settled at 5557.75, up 58.25 points or +1.06%.

The NQ settled at 19,248.00, up 409.25 points or +2.15%. Gold settled at 2,540.20, down 5.90 or -0.29%. The 10-year note settled at 115.110, and Brent crude futures settled at $70.61 a barrel, up $1.42 or 2.05%. U.S. crude futures finished up $1.56 a barrel or 2.37% at $67.31.

In the end, the Consumer Price Index (CPI) did not disappoint. I said yesterday’s trade would be a big two-way street, and that’s an understatement. In terms of the ES’s overall tone, it was a big sell on the open and a big fat buy on the break. Overall, ES trade volume was high at 2.19 million contracts, though part of that was due to the ESU/ESZ spread.

Technical Edge

Guest Post – Dan @ GTC Traders

It’s a Bubble Part Three: Upside Deviations

In the “Opening Print” on June 27, 2024, we said …

“For both predetermined quantitative and qualitative reasons, we believe that we are in the late stages of a longer-term stock market rally; and are in the beginning stages of a stock market bubble. When this happens, our portfolio mandate switches us to play what Poker players would call a very ‘nit’ game. In other words, all of our programs become very … tactically tight. Smaller position sizes.”

For the last two weeks, we have been specifying what we mean by that statement. We began with a discussion of value: how cheap is a stock compared to how the company is actually performing? Is the Rolex Submariner going for $500 or $500,000? What is the value relative to the underlying fundamentals? As we demonstrated a few weeks ago, the market is extremely overvalued.

Credit: currentmarketvaluation

We then discussed the fact that, at the moment, in terms of standard deviation (the square root of the variation of the values and variables surrounding its mean), stocks are at an extreme deviation, last seen at the highs of 2000, 2007, 2019, and the end of 2021.

We concluded by stating that what really drew our interest, is that this standard deviation from it’s mean in Stock Indices is happening …. at the same time the overall VALUE of stocks that we discussed last week is also piquing on a historical basis. It was the combination of those two variables at the same time that leans me towards viewing us as at the end of a longer-term stock market rally, and at the beginning stages of a bubble.

Last week, we also stated that our multi-variate view does not end there. Let’s discuss upside deviations.

Bubble? Upside Deviations.

It would help in this discussion to be familiar with the formulation and theory behind both a Sharpe Ratio, and a Sortino Ratio. I’m not going to go through the specifics here; and it’s not completely necessary to understand them for the purposes of this article. But suffice to say that each measures how volatile an investors returns are. Sharpe Ratio rewards more of a ‘straight linear line higher’ in terms of returns. In other words … let’s not have a lot of deviations to the upside, or the downside. Sharpe Ratio rewards more of a straight line of returns, above the Risk Free Rate (RFR).

But Sortino offers an interesting take. Unlike a Sharpe Ratio? A Sortino teaches that at times it’s important to differentiate between upside deviations (large moves to the positive, which Sharpe does punish and Sortino does not); and downside deviations (which both Sharpe and Sortino punish).

My point is not to talk about performance ratios.

It shows us that there is value is measuring the differences between strong moves to the upside, and strong moves to the downside. Think about the theory behind those studies. It is possible to study the differences between the forms of volatility that you are seeing.

Now, let’s take a look at the Indices.

Again, not to examine their respective ‘performance ratios’. But is there anything we can uncover, when we start measuring upside deviations by themselves? Wouldn’t it make sense that if we were in a bubble, we would see larger and larger upside deviations? Pushes to the upside?

This is a view of the S&P 500 Index, on a simple VAMI graph.

With the above in mind … do you notice anything as to the returns in the last few years?

Notice how from 2018 forward, you begin to see larger and larger deviations to the upside?

But let’s not leave this simply to a ‘view of the eye’. Charts can fool you. What does the quantitative data on upside deviations on returns reveal?

Or to view it more visually …

It should be noted that before 2017? Upside deviations on returns rarely got as high as 8% or 9%.

Again, a Multi-Variate View

So, let’s review, shall we? Review our multi-variate, or three separate variables, that we’ve examined in recent weeks:

And I’m supposed to believe we are not in a stock market bubble?

Until next time, stay safe and trade well…

In The Rooms

On September 11, 2024, PTGDavid led a dynamic trading session, highlighting both bullish and bearish opportunities. Early in the session, he outlined key target zones for both scenarios: bullish targets above 5480 reaching up to the 5505 zone, and bearish targets below 5480, aiming for 5460. These zones were fulfilled, providing ample trading opportunities. PTGDavid noted a strong decline to 5426, which met the Cycle Day 1 average decline target. Buyers responded at the 5407 level, leading to a relief bounce as the market shifted to a more bullish stance.

Throughout the day, David emphasized the importance of following market structure shifts and adjusting strategies accordingly. The rally progressed into the afternoon, fulfilling the Cycle Day 1 penetration target of 5520. Despite some volatility, he maintained that bulls were in control, with buy-on-dip strategies prevailing. By the end of the session, a “dip and rip” play further pushed the market upward, capping off a day where both bulls and bears saw action, but those who overextended were caught off guard.

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Economic Calendar

For a more complete Economic Calendar see: https://mrtopstep.com/economic-calendar/

Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.

Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!