Yesterday, the S&P 500 futures (ESZ15:CME) did what we have been waiting for it to do for nearly a week, it paid the sellers. After the futures sold off in globex, they continued to sell off after the 8:30ct open, and from there proceeded to sell off even further throughout the morning. Even after it found its bottom, near mid-session, it still could not maintain a strong bid and closed in the lower half of the day’s range. Yesterday was the strongest down day since late September, and narrowly avoided a negative 1% close.
I had been calling for some strong selling going into the middle of last week, and Friday’s non-farm payroll seemed to be the best opportunity. However, on Friday after selling early on the NFP release, and again after the cash open, the S&P’s losses were kept orderly as bids came in the afternoon to take it higher. We began to alert traders in the room and on the ICE chat, that over the last year, the week following NFP and pre-option expiration tends to be the weakest part of the month, and also coincides with the PitBull’s Thursday/Friday low.
When the futures failed at the 2100 area overnight that was the first sign of trouble. When the cash session opened 10 handles off the globex high, that was another sign, and when the indexes refused to find a low in the first 30 minutes and kept slamming bids, then we knew there were going to be some further sell stops to run. They did run those stops, taking the S&P 500 below last weeks low before finally letting off midday, but the damage was done.
40 Handles – Now What?
Last week when I wrote about CNBC commentators calling for higher year end targets, I myself had already ‘declared’ that a high was made, and was looking for a sell off. I said that ultimately the equity indexes would rally into year end, but I didn’t believe in getting people in the markets on the high tick, especially after missing a historic monthly run in October. We maintained that a pullback in November would be a “gift” and a buying opportunity. The 40 handle call has now been met, as yesterday the futures turned in the area of last weeks low, suggesting that price is maintaining order and not breaking down rapidly. After the futures rallied off yesterday’s 2062 low, it made an overnight high at the 2077 area, and maintained some strength after the Chinese CPI & PPI numbers were released. It slipped some on the Euro open, but seems to be firming up some at 5:30 am CT.
We are looking at yesterday’s low, which coincides with last week’s low, as a pivotal area. At the same time, we see the potential for the Pitbull’s Thursday/Friday low to be in play. After closing higher 6 weeks in a row, the futures could brace for a slightly down week, the last time the benchmark traded similar to this was during Oct-Nov 2014 when the S&P closed higher 7 consecutive weeks. November’s stats are bullish at the beginning and end of the month, but mid month is modestly weak, however, we believe that any downside will be limited, and will be bought. Remember “it takes days and weeks to knock the S&P down, but only one day to bring it back”.
See all of the November expiration stats here…
In Asia 9 out of 11 markets closed lower (Shanghai Comp. .18%), and in Europe 11 out of 11 markets are trading lower (DAX -.31%). Today’s economic calendar includes the NFIB Small Business Optimism Index, Import and Export Prices, Redbook, Wholesale Trade, Chicago Federal Reserve Bank President Charles Evans on panel discussing government debt, in Chicago, 4-Week Bill Auction, 52-Week Bill Auction, and a 10-Yr Note Auction.
Our View: The S&P has finally reacted to the downside. While yesterday’s call was to sell the early rallies and buy weakness, the real trade was just selling rallies. Sure the ESZ popped late in the day when the 2:45 CT imbalance showed $1.5bil to buy, but the ES sold off a little going into the 3:35 futures close, and went lower overnight. I didn’t think when the ES started selling off that it was going to be a one day sell off, and now the ESZ has been down 4 days in a row. We have some economic and earnings reports to get past this morning, but our view remains the same; sell the early rallies and buy weakness. Start looking for some type of low later in the week to set up the November expiration.
As always; please use protective buy and sell stops when trading futures and options.
MrTopStep Mid-Day Update with Top Notch Trading
- In Asia 9 out of 11 markets closed lower : Shanghai Comp. .18%, Hang Seng -1.43%, Nikkei +.15%.
- In Europe 11 out of 11 markets are trading lower : CAC -.40%, DAX -.31%, -.44 FTSE % at 6:00am CT
- Fair Value: S&P -4.42, NASDAQ -6.00 , Dow -53.59
- Total Volume: 1.85mil ESZ and 12k SPZ
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