What’s the old saying? If trading was easy we wouldn’t have to do it? Or we would be retired? Or if it was so easy we’d all be rich? Well, let’s face it, with algorithmic and program trading making up as much as 70% of the volume, you better have a plan.
Buy S&P / sell bonds
While the real money comes from following the trend, it sometimes gets hard seeing the forest for the trees. After the big push back up in the ESU it looked like it was firming up, but not until it sold off down to 1594 and then went back down to 1609 did we get a clear picture of what was going on. Both lows set the stage for a bounce. Traders have to be able to switch gears fast, and when the sell programs and selling starts to show up you have to be willing to buy into it. In the most recent decline from the 1685 high to the 1554 low the S&P sold off 130+ handles. At the time, the word “taper” was front and center in almost everything the Fed said. During the selloff few said anything about it, but they are now: Can stock rally as yields go higher? Currently the answer to that is yes, but that doesn’t mean there will not be another shakeout, it means that for now the S&P has switched from sell bonds / sell S&P to buy S&P / sell bonds.
The Thursday / Friday Low
It all comes down to profits and losses. It’s win, lose and no draw. In today’s high-flying world of electronic trading, retail and professional futures and options trader don’t just buy and sell without a methodology. As we have said many times, futures traders don’t do all the buying and selling like they used to. They know that in order to keep up they need the right tools. Some tools cost a million to make, while others require only some common sense. We agree that using Mark Fisher’s ACD method of calculating pivots by using the opening range is a great method, but we also think there are certain patterns that exist, that if you’re looking for them in advance they can help you stay on the right side of the trade. Today’s rule is the Pit Bull’s “Thursday / Friday low the week before the expiration” trading rule. While it may sound basic, it really isn’t. Years ago the Pit Bull noticed a pattern of the S&P selling off or making a low the Thursday or Friday before the expiration. When the S&P would pull back on those days the Pit Bull would set up long positions into those selloffs. Originally the rule only applied to the quarterly expiration, but over time I added the monthlies.
Fed minutes & Monday’s mid-month rebalance
There is always going to be a reason to sell the S&P, but at the end of the day the Fed bond buying program is still spending $85bil a month. After shaking out many of the longs and getting many of the big funds to both hedge stock positions and put on speculative short positions, the S&P has come racing back up. Yesterday the Russell 2000 made an all-time new contract high. While today’s headlines may cause selling and there is resistance at the 1650 to 1660 level, it’s hard to overlook the flip in the price action, next Monday’s rebalance and the July expiration. According to the Trader’s Almanac, the Monday of the July expiration has been up 7 of the last 9 occasions.
It’s time to get your playbook set up for next week’s July expiration, and there is no better way to do that than with the Ned Davis Expiration Study – https://mr-topstep.com/index.php/equities/3687-expiration-study-for-july
Our view: Asia closed higher and Europe is mixed to lower. Did you know the S&P futures have closed higher 9 out of the last 10 trading days? And up 4 in a row? Today we get another look at what the Fed had to say and we all know that most of it surrounded the word “taper.” Yesterday the ESU stopped short of S&P 1650 by 1 handle. It’s our feeling that the S&P and the bonds have detached for now, but today will be a test of that theory.
The following are the last 10 days in the S&P:
Tuesday June 25 +15.2
Wednesday June 26 +14.1
Thursday June 27 +11.1
Friday June 28 -7.3
Monday July 1 +7.4
Tuesday July 2 +.50
Wednesday July 3 +1.9
Friday July 5 +18.2
Monday July 8 +8.2
Tuesday July 10 +10.1
As you see, it has been quite a run. What we don’t want to happen is to get caught projecting higher prices after the S&P has rallied so much and sitting at the psychologically important 1650 level. We lean to selling rallies with tight stops, but we also want to repeat that there are a ton of buy stops that start above 1649 all the way up to 1656. Overall we still think up, just not sure about today.
As always, keep an eye on the 10-handle rule, and please use stops when trading futures; live to trade another day.
- It’s 8:15 a.m. and the ESU is trading 1644.50, down 1 handle; crude is up 1.55 at 105.08; and the euro is up 27 pips at 1.2817.
- In Asia, 8 out of 11 markets closed higher (Shanghai Comp. +2.17%, Hang Seng +1.07%, Nikkei -0.39%).
- In Europe, 7 out of 12 markets are trading modestly lower (DAX -0.18%, FTSE -0.41%).
- Today’s headline: “S&P Futures Seen Lower Ahead of Fed Minutes”
- Total volume: LOW 1.26 mil ESU and 5.6k SPU
- Economic calendar: MBA purchase apps, wholesale trade, EIA petroleum status report (API), 10-year note auction, FOMC minutes, Ben Bernanke speaks.
- Fair value: S&P -2.02, NASDAQ -3.72
- MrTopStep Closing Print Video: https://mr-topstep.com/index.php/multimedia/video/latest/closing-print-7-09-2013
- Ned Davis Expiration Study for July – https://mr-topstep.com/index.php/equities/3687-expiration-study-for-july
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