During last week’s shortened holiday trade, higher prices were favorable as the major equity index futures rallied higher to close the week with modest gains. However, the S&P 500 futures were unable to hold anywhere near its high of the week and once again failed to reach and hold near the 2000 area. This suggests to us that while buyers are convicted to buy the lower end of the range, they are nowhere near ready to take prices higher, especially on the heels of what could potentially be a headline driven and volatile week.

Since late June the S&P 500 has not closed consecutive weeks in the same direction, and has been in a back and forth pattern, with last week closing higher. Up and down and all around is the name of this game. Get too bearish and the S&P rallies, get too bullish and the S&P goes down. After all the thrashing, the Dow ended the week up 258 points or 1.76% while the S&P closed up 34 handles, 1.75% higher, and the Nasdaq closed up 135 handles, over 3%. The S&P is trying to dig in, and rallied late on Friday, but the index is facing another round of Chinese economic reports and we can’t rule out some type of drop.

For much of the year MrTopStep had been noting the 2100 pivot in the S&P 500 futures. For 27 weeks (or just over half a year) after the first touch of that price the index traded within 25 handles of that pivot. For 21 weeks it traded on both sides of that key area. Beginning in late August, when the futures began to move further, MrTopStep noted how the 1950 area seemed to be the new price magnet, and since it first touched that price it has been trading within 10 handles of 1950. This has lasted 16 days, often crossing back and forth. We also noted this summer how volume tended to be much higher below the 2100 pivot, and above that volume dried up, which suggested to us a danger warning weeks ago, well now we are seeing the same type of volume action concerning the 1950 price as volume builds higher, price trades below, and get’s much lighter as it surpasses that key area.

ALL EYE’S ON THE FED

That’s how it works these days, everything is interconnected, and today’s trade is a perfect example of just that. Yesterday in China, economic data showed continued weakness across large swaths of the economy, placing more pressure on the government to seek to further stimulate activity. Additionally the National Bureau of Statistics warned of continued headwinds. On its web site the bureau went on to say that “The foundation for the recovery is not solid”. Many economists expect China to again cut the required bank reserves in the next few months. While the S&P futures (ESU15:CME) went out on its highs on Friday, China is important but it’s not the only show in town this week. The Federal Reserve will announce whether or not they will raise interest rates for the first time since June 2006. The two day meeting that starts on Wednesday and, will have investors around the globe glued to their trading screens waiting for Thursdays FOMC announcement and forecasts at 1:00 CT, and the Fed Chair press conference at 1:30. MrTopStep still does not think the fed will raise rates in this meeting but we do think they are determined to start at some point in the near future. Then once the fed announcement has passed the markets will trade into the September Quadruple Witching expiration.

Sell Rosh Hashanah / Buying Yom Kippur

According to our good friend Jeff Hirsch of the Stock Trader’s Almanac, the September Triple Witching week is basically 50/50 with gains slightly more often than not, but it has suffered many large losses. DJIA, S&P 500, Russell 1000 and 2000 have recorded gains on Monday of expiration week for three straight years 2009-2011. NASDAQ has been down three straight years since. Triple-Witching Friday has been firm the past ten years with every index advancing at least eight times.

The week after Triple Witching has been brutal, down 21 of the last 25, averaging an S&P 500 loss of 1.1%. In 2011, the DJIA and S&P 500 both lost in excess of 6%. So selling Rosh Hashanah this year into any strength next week and buying Yom Kippur – as the old adage goes – may not be a bad idea. The end of Q3 is often weak as fund managers tend to clean house in anticipation of Q4, so be careful rushing back in if another down-leg ensues.

According to Hirsch, after October 1st, his model will wait for our Best Six Months Seasonal MACD BUY Signal to trigger.

In Asia 7 out of 10 markets closed higher, and in Europe 9 out of 12 markets are trading lower this morning. This week’s economic calendar includes 17 separate economic reports, 11 T-bill or T-bond Auctions or Announcements, 2 day FOMC Meeting and the September Quadruple Witching. Today there are no economic reports.

REASON TO BE CONCERNED

Our View: Whos winning in this mess? The algorithm’s and high frequency trading models are winning, that’s who! It’s hard to take a stand right now, and with the VIX moving so much you never know when your going to get stuck in the wrong direction. It’s best to get in, get out, and do not fall in love with your position. I think there is reason to be concerned this week, I don’t think we’ll will actually break out until late in the week when the fed’s decision on rates is out, and the September Quad Witch approaches on Friday. In addition to the fed, there are also multiple noticeable economic reports out this week too. Our view is … get ready for the roller coaster. We lean to selling the early rallies and buying weakness. Despite all the ‘bad’ possibilities, the ESZ15 seems like it wants to go higher. 

September Options Expiration Stats

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• In Asia 7 out of 10 markets closed higher : Shanghai Comp. -2.67%, Hang Seng +0.27%, Nikkei -1.63%
• In Europe 7 out of 12 markets are trading higher : CAC -0.37%, DAX -0.24%, FTSE -0.12% at 6:00 am CT
• Fair Value: S&P -10.94 , NASDAQ -13.91 , Dow -110.29
• Total Volume: 2.5mil ESU and 23k SPU traded in the pit.
• Economic calendar : None .
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