The S&P Needs to Cool Off, but Bulls Keep Buying the Dip

The VIX has been crushed, too.

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Our View

I was well known during the Credit Crisis for saying, “Don’t fight the Fed, buy the dip” and it’s happening again. The overall price action of the ES is to sell off a little and then rally, and while you may have made some small money on trying to sell the rips, the real money trade is LONG or WRONG.

Right now you should have a sign on your computer that says, “buy every dip.” I know levels are important, but so are the patterns. Six weeks ago I started saying “buy every dip” and that’s when the pullbacks were sharp and deep (in the 100 to 150 point range).

Remember, on March 20th, 2020 the VIX (Fear Gauge) got up to $66.04, hit a bear-market high of $38.94 on January 24th 2022 and just recently traded down to $14.42 on June 2nd.

That means it took just over three years for the VIX to fall more than 80%. Even from the bear market high, it’s down more than 60% — and that’s not even mentioning that, despite 2022 being a bear market, the VIX didn’t even crack $40.

There is no fear in one of the laziest rallies I have seen in a long time, but as we all know…that also favors the upside.

Our Lean

It’s important to write out the things that work and one of the standouts is the PitBull’s rule that the ES tends to rally early in the day and early in the week during a bear market. If the ES follows the PitBull’s pattern, the ES should weaken a bit as the week rolls on.

Our Lean: Despite all the reasons to go long, I think the ES is setting up for a pullback. The support levels I am looking at are 4266 to 4277, 4255, 4242-46, 4237, 4229 and 4220.

On the upside, I’m watching 4299, 4305, 4313, 4320, 4336 and 4382.

I could be wrong, but there are a lot of sell stops building up under 4270.

MiM and Daily Recap

On Globex, the ES traded down to 4280.50, up to 4293.50 and opened Monday’s regular session at 4292. From there, the ES shot straight up, rallying to 4301.25 at 9:45, pulling back to 4288.50 at 9:55, shooting up to a new high at 4304.25 and then pulling back to a new low at 4285.75. It was a volatile start to the day, but that low helped set up a rally to a new high at 4305.75 that came just as we were going into the 1:00 hour and the start of Apple’s big WWDC event.

From there, the ES fell 33 handles down to the session low of 4273, where it hammered out a low over the next 45 minutes, bouncing hard at 3:00 as it rallied to 4287.25. The ES traded 4284.75 as the 3:50 cash imbalance showed $114 million for sale, traded up to 4286.75 and traded 4280.50 at 4:00. The ES climbed a few points after the cash close, then fell and settled at 4280.25 on the 5:00 futures close, down 7 points or 0.16%.

In the end, the ES was firm early and weak late. In terms of the ES’s overall trade, volume high for the type of range we had — and for a Monday — at 1.6 million contracts traded.

Technical Edge

Yesterday’s 1 pm selloff made too much sense. Apple literally ticked an all-time high going into the 1pm time slot — exactly when its WWDC event was primed to start. The SPX, SPY and QQQ were all at session highs too, while breadth was mixed at about 50/50 on the NYSE.

All of this lined up for a perfect rug pull.

As for today, some further weakness could setup a better buying opportunity later in the week.

S&P 500 — ES

I don’t know that it will line up this way, but I would love to see a pullback to the 4240 breakout area, especially if it aligns with the rising 10-day ema. I zoomed out the daily to show the significance of 4242.

SPY

Rejected right off the 61.8% retrace of the bear-market range at $429.61. Now we must ask if the SPY will fill the open gap down near $423.

Yesterday’s dip-buy zone worked out well as the ~$426.25 level/50% retrace held as support. The SPY is flatt-sih in the pre-market. If we rotate lower and take out Monday’s low, keep an eye on the 78.6% retrace + 10-ema combo on the 4-hour chart as a potential support area (below):

**For the SPX, the 78.6% retrace is at 4253.50 — Not a line in the sand, but just for traders looking at the index rather than the SPY.

SPX

NQ

QQQ

Up six of the last seven sessions and the Qs may need a rest. Daily down below $353.85 could give us some rest, even if it’s just down into the low-$350s. A nice reset would give us the upper-$340s and a tag of the 10-day.

Watch $353.85.

Open Positions

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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!