Start of a Pullback? Rate Expectations Creep Higher

S&P puts its five-week win streak to the test.

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Our View

In terms of events, last week was a doozy. But guess what? The market made good of just about all of it. CPI, PPI, the Fed, Quad-Watch — it didn’t matter. The ES rallied in four out of five sessions and gained more than 100 points.

One thing that I do want to point out? Interest rates.

While many investors seemingly don’t believe the Fed at this juncture, the market is still pricing in an upside move for rates. For the July meeting, odds currently suggest a ~75% chance of a 25 basis point rate hike.

A week ago, that figure stood at just 60%. A month ago, just 19%.

The bigger question isn’t whether the Fed raises rates another quarter point. Instead, it’s are we nearly done with the rate hikes? Even if there’s one or two left, the consensus seems to be yes.

The way I see it is, the main risk is stubborn inflation/recession. If inflation is stubborn, it will force the Fed’s hand and “higher for longer” will persist, leaving us with a potential recession in the future. That said, the macro stuff is easy to get tripped up on, which is why I prefer to stick to the price action and the trends.

Our Lean — The Start of a Pullback?

Friday gave a great dip-buy right off the open, but then chopped around in a frustrating fashion. That’s to be expected on a quarterly expo, though.

As for today, the ES is starting off under pressure, pulling back to 4432. We enter Tuesday with the ES riding a five-week win streak and having gained almost 300 points in that stretch.

The ES made a great move higher after consolidating between 4310 and 4350 — running almost 200 points in just 7 sessions — but a pullback would be healthiest at this point. We’re through the quarterly Opex and while we have the end-of-June/end-of-quarter action coming up, the seasonality stats are not great over the next few months.

Our Lean: Expect a multi-day pullback, but remember the predominant trend remains with the bulls. We want to sell the bigger rallies on low breadth and look for the good dip-buy zones. The best area I see right now is around 4400, but I don’t know that we’ll see that level today.

I’m also watching 4420 on the downside. As for the upside, keep an eye on 4460-62, 4480 and 4495 to 4505.

MiM and Daily Recap

The ES traded 4493.75 on Globex and opened Friday’s session at 4492.25 and fell right out of the gate, trading 4469 at 9:45. From there, it bounced 17 handles and traded up to 4486 at 10:25, pulled back 16 handles and avoided a lower low, but then bounced just 11.50 points and made a lower high when it traded 4482 at 11:10. After that, it made a lower low when it traded 4465 at 11:25. The ES back-and-filled in a tight range between 4467 and 4472 for the next 30 minutes, popped to the upside and then rallied to 4486.25 at 12:50.

That rally marked the afternoon high, as the ES embarked on a steady decline to new session lows. It traded 4455 at 3:15, bounced 10.50 points to 4465.50, then traded 4462 as the 3:50 cash imbalance showed $260 million to buy. The ES traded down to a session low of 4451 and traded 4455.75 on the 4:00 cash close. After 4:00, the ES bounced a bit and settled at 4459 at the 5:00 futures close.

In the end, the ES opened near its session high, chopped, then faded on the day. In terms of the ES’s overall tone, it was mostly choppy (as to be expected). In terms of the ES’s overall volume, it was steady at 1.89 million contracts traded.

Technical Edge

For individual stock traders, updates below on current entries/setups are under the Open Positions section.

S&P 500 — ES (September Contracts)

Still looking for that 50% to 61.8% retrace zone and the 10-day ema as a dip-buy spot. Seems so simple, but it’s a test in patience.

SPX

As for today’s levels:

SPY

All the same with the S&P… we want to see how the SPY handles the $432.75 to $434.75 zone. If it’s support, bulls remain in control. If it fails, they lose some momentum. Until it fails though, we have to assume it’s a buy-the-dips tape.

NQ

On Friday, we had two dip-buy opportunities out of that “If the NQ trades down to the 15,300-325 area early” setup. Today, we’re starting a bit more offsides, although bouncing nicely from the Globex low.

Open Positions

Down to Runners in GE, CAH, LLY, ABBV, AAPL, MCD & BRK.B. Now Add META, AVGO, UBER, CRM, AMZN and CVS.

Go-To Watchlist

Feel free to build your own trades off these relative strength leaders

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Economic Calendar

Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.

Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!