Extreme Trading
Volatility went to an extreme during yesterday’s S&P 500 futures trading session. After waves of margin selling during Tuesday’s trade the S&P futures gapped higher and sold off sharply as global equities were hit by a wave of selling. It all started in Asia with the Hang Seng Composite down -3.82% and then rolled into Europe with all the major European bourses down over 3%. The German DAX closed down -2.82%, the FTSE fell -3.46%, and the French CAC fell -3.45%.
The S&P started falling as soon as Globex opened and continued to fall all night making and early low of 1804.25, down 69 points. The Dow futures(YMH16:CBT) was down over 500 points and the NASDAQ futures (NQH16:CME) fell over 100 points. The futures rallied off the early Globex low, and after the 8:30 CT open, the futures rallied initially but were met by waves of sell programs. While this was going on crude oil futures (CLH16:NYM ) sold off again all the way down to $26.19. As the European market continued to weaken, and with oil falling, the S&P futures were hit by wave after wave of selling. Several of the sell programs were some of the largest we have seen since the Monday August 24th panic selling. The decline had all the makings of an even larger sell off.
Expect the Unexpected
We are not going to be talking about how the Nasdaq futures rallied from -157 points lower to +27 points higher on the day, or that the S&P futures rallied 65 handles in less than three hours, what we are going to talk about was the overwhelming weakness and how hard it was to find anyone saying anything bullish. With the S&P futures down 8 out of the first 12 sessions for a total loss of 230 handles, plus yesterday’s 69 handle drop from Tuesdays close to Wednesdays low, and the overwhelming negative sentiment on TV and Twitter, we thought it was possible that the S&P could ‘bounce’. I came out in the MrTopStep forum and on the @MrTopStep Twitter feed asking a simple question; where did everyone think the next 50 handles (points) would be, up or down? The S&P had just made its low at 1804.25, down 69 handles on the day, and was ‘literally’ crashing when I asked the question. The ESH16 already had a small pop up and was starting to pull back again near the lows. I told traders that the ESH had gone too far too fast, that everyone was short and that the next 50 handles were going to be up. It was not a chart point that made me think that, but while no one was saying it, the ESH was holding above 1800 and loaded with buy stops above. With the increase in volume the level of algorithmic and HFT trading programs has exploded.
The ESH started to short cover a little then the CLH started to move back up. As that happened the premium levels between the S&P 500 cash (^GSPC:SNP) and the S&P 500 futures (ESH16:CME) expanded and in came the buy programs. With so many traders forced to sell at lower prices due to margin calls, and an abundance of buy stops above the market, the S&P did what it does best; it started running the upside stops. Once the futures start moving up it was one buy program after another, the exact opposite of the price action that helped the futures crash earlier in the day. I know there was some positive stock news and some false headlines about Twitter, but with everyone positioned so short, the ESH producing such high volume and oil moving back up, both markets felt like they were capitulating. With so much volume traded in the overnight session, it was like two separate day sessions, the early drop and the late rip higher.
Robots Take Over
I know I have said this many times but I can honestly say I have never seen a worse start to a new year for the S&P 500 futures. Fear has run rampant and the VIX has reacted in kind trading up as much as 80% in 2016. Can the ESH16 keep going up? Part of that depends on what happens around the globe, another part is what happens to oil, and the final part is what the S&P wants to do. My call yesterday was what I call a ‘gut’ call, meaning it was not based on any chart points. After a 230 handle drop on the first 13 trading days, and based on the overall price action of the ESH and how the ES closed, I believe there is more room on the upside, but that does not mean the futures will not drop first. They squeezed out all the longs and now it’s time to squeeze out some of the shorts.
In Asia, 10 out of 11 markets closed lower (Hang Seng -1.82%), and in Europe 11 out of 12 markets are trading higher (DAX +0.57%). Today’s economic calendar includes the Weekly Bill Settlement Jobless Claims, Philadelphia Fed Business Outlook Survey, Bloomberg Consumer Comfort Index, EIA Natural Gas Report, EIA Petroleum Status Report, 3-Month Bill Announcement, 6-Month Bill Announcement, 2-Yr Note Announcement, 5-Yr Note Announcement, 7-Yr Note Announcement, 10-Yr TIPS Auction, Fed Balance Sheet and Money Supply.
Our View: When I told the PitBull that the next 50 handles were going to be up yesterday he said, “I don’t know about that”, well neither did anyone else. Part of the new world trading order is that if you don’t step in front of steamrollers you just can’t make any money. Sure you can make 5 – 10- 15 handles in the S&P, maybe 20 or even 30, but you have to be willing to take on the risk and make the trade. With the markets moving the way they have it can be hard to pull the trigger, but if you nail one like yesterday, it makes it all worth it. Our view, we have a lot of economic and earnings reports to get past, and considering the global market rally, I think the ESH could trade up to 1885-1890. Sell the early rallies and buy weakness. The ES is starting to push back.
As always, please use protective buy and sell stops when trading futures and options.
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- in Asia 10 out of 11 markets closed lower: Shanghai Comp -3.23%, Hang Seng -1.82%, Nikkei -2.43%
- In Europe 11 of 12 markets are trading higher: CAC +0.59%, DAX +0.57%, FTSE +0.37% at 5:15am CT
- Fair Value: S&P -7.32, NASDAQ -9.39, Dow -85.67
- Total Volume: 3.9mil ESH and 3.5k SPH
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