S&P 500 & The Big Bad Correction

Heading into Friday’s trade, MrTopStep highlighted that when Thursdays have seen large buying, typically the following day is sideways to lower. When the S&P futures (ESU15:CME) opened globex for Friday’s trade, price began to travel higher, making a high early in the Asian session at the 1992.75 before traveling lower 25 handles to 1967.50 during the early part of the European session. From there, it double bottomed, then started higher to open the regular trading hours at 1977.50; went even higher, testing the overnight high as the Euro session closed; and finally, failing to break that high, dipped 20 handles during the lunch hour before buy programs took it higher into the close, back to the intraday top as the futures settled at 1986.25.

Last week was unique – total volume for the week was the highest since the 2011 correction, and it was one of the top weeks since the 2008 sell off. The price range for the week was the widest since the 2008 sell off in terms of handles; however, we do realize that the S&P 500 was considerably lower in 2011 – thus, the swings were over a greater percentage range. However, the historicity of last week’s move can’t be denied as the DJIA futures followed its worst intraday point loss by its largest two-day percentage rally in history. There was significant volume; but considering how much price the volume covered, it was not as impressive as it seems to the naked eye; and anyone watching the depth-of-market (DOM) on the futures could see that the books were far thinner than usual. I commented that I had never seen algorithmic activity like I did last week, and I stand behind that statement. On last Monday morning’s mini-crash, the algos were able to push down the lighter futures markets, making a low more than 30 handles lower than the cash index (SPX) while fair value was around -2.50. The futures market was being beat up by these algos; and once everyone was short, the algos tried to push it back to even on the day before again running the sell stops.

S&P 500 FUTURES TAKE A BEATING BUT ON KEEP TICKING

The S&P has taken a beating since last week. You can see that as the volume picked up, so did the level of MOC selling. One of the things we have constantly written about is how the MOC buying switched to selling on the last trading days of the March or the last trading day of the first quarter.

The S&P 500 finally got its correction just days after the index death crosses on the DJIA; and once it was in correction territory, it did not want to remain there, but sprang higher. All in all, the major index futures actually closed the week higher last week, and to me that’s not a particularly good sign. Corrections typically take more than one or two weeks to materialize, and history shows that when a correction is made so quickly, it typically will retest those lows or even make new lows before making a complete rebound.

Heading into this week all eyes will be on non-farm payroll (NFP), on what is popularly considered the last week of the summer travel season. The potential exists for desks to be lighter this week. A thinner market will find either a tight range chop, or on less volume, more algo activity that can drive it back & forth in wider ranges. Last week’s volume was impressive. On Monday, over five million mini’s traded; however, every day following had lower volume back up to the 2000 price level. Of course, volume wasn’t going to sustain Monday’s levels; but it’s not particularly encouraging that on the largest moves higher, volume was shrinking steadily. One desk in New York suggested that fund managers really have yet to return to their desks. If this is so, what direction do we expect the equity indexes to head once volume pours back in? Last week, we highlighted the similarities of this year’s price action and the action in 2011 when the last correction was seen. Back then, the markets did not go substantially higher until the August lows were retested in October; and during the last two years, even when the post Labor Day volume came back into the market, it was sell volume, as highs were found on September 16th both years before selling into October.

NFP weeks have tended to trade higher; however, the month-end trade has tended to be lower. Meanwhile, early September doesn’t have the best month-beginning stats. The market is always able to bounce, but we don’t expect for the overall selling to be over; and frankly, with the S&P travelling back 160+ handles last week, how much higher can it go this week?

Last night, I told one of our traders via IM that the futures were not done going down yet, and the funds would likely be selling into month close. Last night, when the futures opened on globex it went straight down, dropping 27 handles in just over half an hour of trade. It chopped around on the Asian and Euro sessions and is currently trading 1972.25 at 7:30 CST.

In Asia, 6 out of of 11 markets closed lower (Shanghai Comp. -0.82%), and in Europe 7 out 12 of markets are trading lower (DAX -0.76%). Today’s economic calendar includes: 7-Yr Note Settlement 2-Yr Note Settlement,5-Yr Note Settlement,5-Yr TIPS Settlement, Chicago PMI 9:45 AM ET Dallas Fed Mfg Survey 10:30 AM ET, 4-Week Bill Announcement 11:00 AM ET, 3-Month Bill Auction 11:30 AM ET, 6-Month Bill Auction 11:30 AM ET, Farm Prices 3:00 PM ET

Our View: It’s Monday, and we still believe there are two magnets with control in the S&P futures market, that being the big round numbers of 2000.00 which could offer resistance and 1950.00 which should be initial support. We do think there are buy stops above Friday’s high of 1992.75 that will quickly take the market higher to 2000.00 but at this point it would need a 18 handle rally to get there and it may be out of steam if it trades there on first touch today. Even with major moves in recent days this has still been a two sided market and we expect for it to remain that way on an intraday basis. The truth is we don’t know which way the market will move next and we are not afraid to admit that, but our call is still to fade is early moves and look for a change of direction while not hesitating to take a profit and keeping stops very tight. Don’t fall in love with your positions.

And always remember to use stops when trading futures and options…

In Asia 6 out of 11 markets closed closed : Shanghai Comp. -0.82%, Hang Seng +0.27%, Nikkei -1.28%
• In Europe 7 out of 12 markets are trading lower (6:30 am CT) : %, DAX -0.74%, FTSE +0.90% at 6:00 am CT
• Fair Value: S&P -2.45, NASDAQ -1.43, Dow -19.88
• Total Volume: 1.9 mil ESU and 3.2k SPU traded
• Economic calendar: 7-Yr Note Settlement
  2-Yr Note Settlement,5-Yr Note Settlement,5-Yr TIPS Settlement, Chicago PMI 9:45 AM ET Dallas Fed Mfg Survey 10:30 AM ET, 4-Week Bill Announcement 11:00 AM ET, 3-Month Bill Auction 11:30 AM ET, 6-Month Bill Auction 11:30 AM ET, Farm Prices 3:00 PM ET
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