In recent sessions we began to highlight the significance of the 2000 level in the S&P 500 futures. After the ESH16 passed through the 1950 level with seeming ease on the first touch in late February, our call was that the 2000 level would offer greater significance. Sentiment, as well as most price and volume oscillators, are suggesting an overbought market after a 200-handle rally in less than a month’s time, since February 11th. Since reaching and surpassing 2000 on Friday’s session, the benchmark S&P 500 index has started to see a slowdown of buying, as well as some outflow seen in yesterday’s $1.8 billion market-on-close sell imbalance. Friday, the futures failed to hold and close above the 2000 area, and Monday the S&P placed a lower high while settling at 1999.00. Then, on Tuesday’s trade, the futures placed a consecutive lower high as sellers controlled both the open and the close session, and as the major equity indexes traded to new lows on the close.
We thought that there could be some weakness this week. For the last two years, including the last four months, the trend has been for the ESH16 to close lower in the week following non-farm payroll. This month, the post-NFP weakness timing coincides with the PitBull’s Thursday/Friday low rule, suggesting the index may trade lower into the Thursday or Friday the week prior to monthly options expiration. However, given the resistance thus far at 2000, the bears have not exactly taken over. I said early in the day’s session that we could see a 1975.00 print, and the index did trade to 1976. Now it appears that the 1950 level may be in play as a first test of intermediate support in this market. For bulls, the good news is that sellers have not seemed especially anxious at the 2000 level; and with a modest pullback, bulls could be reloading for a push up to the 2050 area, and then moving forward to test some major resistance levels at and above 2100.00.
However, the larger picture from the daily, weekly and monthly charts appears to show a market that is top-heavy and rolling over. With this in mind, one would expect the index to make a lower high on the monthly time frame, quite possibly at the 2050 area, before attempting to leg lower. Given this, we still do not foresee a retest of this year’s low until the summer at the earliest; and in the meantime, we expect to see a trading range mostly between 1900 and 2100.
For the next few days, it’s likely to be tug of war as the futures rolling over from the March expiration to the June expiration begins to take significant effect today, lasting through the end of the week. Next week, the mid-month rebalance could be modest, as the first part of March has seen lower volume and tighter range. We will be watching the 1950 and 1900 levels on the downside, and the 2000 and 2050 levels on the upside. Of course, with the ECB’s decision tomorrow, the currency effect on equities cannot be ignored; but given Draghi’s words earlier this year, much of the anticipation over the March meeting of the European Central Banks has already resolved into the expectation of some new stimulus. In the U.S., the Fed Funds Rate futures do not see any likelihood of a rate increase until later this year; and what we believe is certain is that next week’s FOMC meeting will not produce a rate hike.
Overnight, the futures have rallied back to the 1994 level, paring off most of yesterday’s losses, and is currently trading at 1991.25, up 10.25 handles after finding some initial resistance at Tuesday’s high. Levels we will be watching for today’s trade will be the 1994-95 area, then the 2000-2004 area, and Friday’s high of 2007.50. On the downside the 1980-84 area, the 1975-76 level, 1966.25 and 1950.00.
In Asia, 6 out of 11 markets closed lower (Shanghai Comp -1.34%), and In Europe 8 out of 12 markets are trading higher this morning (DAX +1.37% ). Today’s economic calendar starts with the MBA Mortgage Applications, Wholesale Trade, EIA Petroleum Status Report, and a 10-Yr Note Auction.
Our View: It’s just about 7:00 am CT and globex volume is sitting at 175K. With the low globex volume combined with the extreme light economic calendar, we expect for the day to be pretty uneventful. Then throw in the futures roll that will account for a good portion of the day’s volume and it will leave the day very thin. With bears losing another opportunity overnight, it’s clear that the S&P is in dip buying mode, and in what could be a “thin-to-win” type environment today; we don’t want to fight the trend. We want to buy the early weakness today, and continue to buy above today’s cash open with the idea that the 2000 area is a magnet that is stronger than 1975 right now.
As always, please use protective buy and sell stops when trading futures and options.
‘FANG, Crude and the S&P 3 Week Rally Comes To An End’
- In Asia 6 out of 11 markets closed lower: Shanghai Comp -1.34%, Hang Seng -0.08%, Nikkei -0.84%
- In Europe 8 out of 12 markets are trading higher: CAC +1.15%, DAX +1.37%, FTSE +0.70% at 5:30am CT
- Fair Value: S&P -0.97, NASDAQ -1.15, Dow -4.91
- Total Volume: 1.9mil ESH and 6.4k SPH
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