Marty “PitBull” Schwartz has many rules, and one that we don’t often mention is one written about him in Market Wizards, which is the three day rule. This rule suggests that after a market has climbed for three consecutive days to never go long after the third day. The thesis is that the smart money is buying on day one, then the semi smart money comes in on day two, finally on day three is when the “dumb” money comes in. Typically after such a moves the market will take a breather, if not reverse.
After Wednesday’s third consecutive higher day, in which the S&P 500 futures climbed to close more than 30 handles higher, I began to warm our IMPRO room as well at our Twitter and StockTwits followers of this rule. There are many things that we use to follow on the trading floor that have become secondary. While other rules may have fallen by the wayside, some rules are timeless, and that’s why the old school floor mentality, combined with a little experience and old fashioned gut feel still have a place in today’s trading world.
The ESH16 could never hold a strong bid during Thursday’s session as the morning and afternoon highs were sold. The index dropped as much as 11.50 handles on the day before closing at 1916.50 on a $100 million market-on-close order which broke a several day streak of buy imbalances. At the end of the day, the price action was two way and limited on both sides as volume continues to settle lower and the markets shake off the most volatile January in history.
Something else the PitBull always said was that strong markets tend to be weak early in the trading week and then show strength later in the week. Meanwhile lower trending markets tend to rally early in the week and then sell late in the week This is precisely what we are seeing this week as Friday’s globe trade has taken the S&P futures down as low as 1906.50 as buyers controlled this week’s open, sellers are at this point controlling the close.
We noted that the PitBull’s expiration rule had worked 12 of the last 13 Februarys, and this week made 13 of 14. Heading into today’s trade is an economic calendar that is virtually non-existent, and given the final trading day of the week, we are expecting even lower volume and perhaps an even choppier trade. We will begin to look to next week. The statistics look less favorable for bulls as the equity indexes have run against resistance from late Jan/early Feb.
In Asia 7 out of 11 markets closed lower (Nikkei -1.42%), and In Europe 11 out of 12 markets are trading lower this morning (DAX -0.87%). Today’s economic calendar includes Loretta Mester Speaking, Consumer Price Index, and the Baker-Hughes Rig Count.
Our View: After a nearly 130 handle rally in a week it was time for the S&P to give up some fuel. However, even after Thursday’s weakness and Friday’s overnight selling, the ESH16 was only about 25 handles off of this week’s high. Friday’s have been weak this year but after last Friday’s pop higher, it showed that no one is afraid of the end of the week as volatility continues to slow down. We see any downside move today as being limited and still hold out for the possibility of a “thin-to-win” type trade today that could lead to a late Friday RIP.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 7 out of 11 markets closed lower: Shanghai Comp -0.10%, Hang Seng -0.40%, Nikkei -1.42%
- In Europe 11 of 12 markets are trading lower: CAC -0.67%, DAX -0.87%, FTSE -0.33% at 6:00am CT
- Fair Value: S&P -3.22, NASDAQ -1.59, Dow -31.19
- Total Volume: 1.6mil ESH and 6.3k SPH
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