In the world of big ups and big downs, 2016 has started out with a bang. After a test of the 1820 level, the S&P 500 futures (ESH16) rallied all the way up to 1855 during Monday’s trade and then fell apart overnight when crude oil and the European markets fell. At its overnight low, the ESH16 was down to 1826.75, down 24.75 handles, and rallied 30 handles just after the 8:30 CT futures open to an early day session high of 1856.85; it then reversed lower as the weakness in crude oil futures continued. If there is one thing that can be said about the futures markets right now, it’s that the headline news, global stock market weakness and energy markets are continuing to run the show.
After January opened the year with strong liquidation, the equity indexes saw buying into the month’s rebalance, leaving the question of whether the buying was new money or was it short covering into the end of the month. As February opened, the answer seemed clearer – that large funds liquidated some shorts into the end of month and then reopened bearish positions into the beginning of the new month. The answer to the question seemed to be confirmed by the CME’s Commitment of Traders report which showed small speculators at a near record short position going into last week’s close.
Furthermore, as the Nasdaq made a new low last week, fewer than 10% of its stocks were making new lows, which has historically been a bullish divergence. Meanwhile, the S&P has held its January low despite a wave of selling that entered the market in early February. Combined with the COT report showing extreme sentiment levels, we believe that there is a possibility that as long as the S&P can hold its low, that the mid-month rebalance could lead to a short covering rally back near 1900 during next week’s options expiration.
PitBull’s Rule
For years MrTopStep has been beating the drum of the PitBull’s Expiration rule. This rule, developed by Marty “PitBull” Schwartz some years ago, suggests that the S&P 500 will make a low the Thursday or Friday before option expiration week and will tend to hold that low while trading higher the following week into expiration Friday. With the advent of weekly options, the standard expiration does not carry quite the same relevance as years past. Its performance in recent years has been noticeable, as observed by the below chart, showing how in the last year the S&P futures have traded higher into the option expiration (OPEX), typically finding the high of the month and then trading low into month’s end.
While last month we noted in the Opening Print that the rule tended to work contrary in the month of January, as we head into February’s OPEX week, the expiration rule looks quite strong, having been successful during this month in 12 of the last 13 years, including the last 6 years in a row. With next week being expiration week, this rule suggests we look for a low later this week.
You can read more about the PitBull’s expiration rule here.
Download all of the MrTopStep Trading Rules here.
In Asia 6 out of 6 open markets closed lower (Nikkei -2.32%), and In Europe 11 out of 12 markets are trading higher this morning (DAX +2.39%). Today’s economic calendar includes the MBA Mortgage Applications, Yellen Text To Be Released At 8:30 a.m. ET, Janet Yellen Speaks, EIA Petroleum Status Report, 10-Yr Note Auction, John Williams Speaks, Treasury Budget, and earnings from Carlyle Group LP (CG), Centurylink Inc (CTL), Cisco Systems Inc (CSCO), Equifax Inc (EFX), Expedia Inc (EXPE), Humana Inc (HUM), Lifelock Inc (LOCK), O’Reilly Automotive Inc(ORLY), Prudential Financial Inc (PRU), Skechers Usa Incorporated (SKX), Sun Life Financial Inc (SLF), Tesla Motors Inc (TSLA), Time Warner Inc (TWX), and Twitter Inc (TWTR).
PitBull ESH 1880
Our View: Overnight, after trading down to 1838.50 early as the New Hampshire Primary results were coming in, the ESH16 rallied after the European markets opened trading up to 1872.00, that’s up 24 handles on the session and about 34 from the globex low. While at the moment we believe the risk is to the upside, we believe that buyers must be cautious with the futures up 50+ handles from Monday’s low. We lean to selling the early rallies and buying weakness.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 6 out of 6 open markets closed lower: Shanghai Comp %, Hang Seng %, Nikkei -2.31%
- In Europe 11 of 12 markets are trading higher: CAC +2.36%, DAX +2.38%, FTSE +1.13%
% at 6:30am CT - Fair Value: S&P -4.92, NASDAQ -5.69, Dow -50.52
- Total Volume: 2.8mil ESH and 7.9k SPH
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