Where Do We Go From Here After Yesterday’s Nasty Reversal

Gapping higher, the S&P may meet sellers near the open.

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Our View

Yesterday was a very tricky day and emphasized why traders need to utilize stop-losses and have ways to minimize their risk.

The S&P gapped up to new 2023 highs and pushed slightly higher in the opening minutes, only to reverse lower. While it looked like it was going to rebound after filling the gap, the sellers stepped back in and drove the S&P even lower.

The Dow snapped its win streak at 13 and panic has ensued about the current rally. I would just say that while yesterday’s action was nasty, we’re still in an uptrend as the market tries to digest earnings and the recent Fed announcements.

That’s not to say we blindly buy every dip or that the markets can’t go down. But it’s just one day of action. Let’s not get too twisted up on it.

Our Lean

Yesterday, Our Lean said that “If the SPX opens near 4600, traders can try to fade the open.” Well, the S&P did open near 4600, opening at 4598.25 and climbing as high as 4607.

However, I also said I’d rather be patient and buy the dips. That worked initially, as the ES fell about 24 handles into Wednesday’s high, then bounced 15.5 points. After that though, the sellers killed it.

So where does that leave us today?

Yesterday was T+2 and today is T+1, as well as the Friday options expiration. While yesterday’s drop exceeded most people’s expectations, it was overdue. Based on yesterday’s late drop and rip on the close, I think we could see higher prices while keeping an eye on the 50% retracement where we would look to be a seller.

Is the uptrend broken? No. but after a 795 point rally from the March low, a pullback is long overdue.

Our Lean: So far, we’re seeing those “higher prices” on Globex. The ES is currently up 30 handles from yesterday’s 4 pm close and up 26 points from Thursday’s settlement. The 50% retracement is up 4594, while the 61.8% is up at ~4604, just below multi-day resistance near 4608-10.

If we see an early push to this area — 4605 to 4610 — I am a seller. Clearly bulls are stepping in on yesterday dip. But when they gap them up like this after a big down day, it gets the sellers offsides. After the initial rally, it could be an opportunity to sell.

After the initial trade is set up, it will depend on the options trades and the gamma setup to determine the afternoon direction.

MiM and Daily Recap

The ES traded up to 4634.50 on Globex and opened Thursday’s regular session at 4629.25. After the open, the ES climbed 4.25 to a session high of 4633.50 — a point below the Globex high — then rolled over, trading down to 4609.25 just after 11:00. That set up the bounce as the ES rallied almost 16 handles to 4625 shortly before 1:00, then the wave of selling began.

The ES basically went straight down, falling 62.50 handles as it traded 4562.50 at 3:05, bounced 15 points and traded 4577.25 at 3:15, then went on to make new lows at 4553.75 at 3:45. The ES traded 4556.50 as the 3:50 cash imbalance showed $747 million to sell, climbed up to 4567 and traded 4563.50 at 4:00. After 4:00, the ES traded mostly sideways with an upward bias, settling at 4567.50 at the 5:00 futures close, down 31 points or 0.67% on the day.

In the end, the buyers looked like they were in control with the gap-up and then the solid bounce after the initial dip, but it was the sellers who were in control and they dominated in the afternoon. In terms of the ES’s overall tone, it was weak. In terms of the ES’s overall trade, volume was high at 1.83 million contracts traded, the highest figure since mid-June.

Technical Edge

Yesterday we wanted to see if they “sell the open” and they did just that, but prior resistance — $457 in the SPY, 4609 in the ES and 4580 in the SPX — was only initial support for a bounce. It did not sustain a larger bounce to new highs, nor did it contain the avalanche of selling pressure later in the day.

Now would be a good time for investors to also be aware of bonds and yields — the former of which puked yesterday as the latter surged.

Rising yields are a negative for equities and while many are trying to figure out where yesterday’s overdue selloff came from, rising yields are certainly one part of that equation.

SPY

Today’s a “proceed with caution” type of day. The S&P had a nasty outside day yesterday, opening above the prior sessions high, but closing below the prior session’s low.

That said, the buyers stepped in right at the 10-day ema and the $451.50 area. That makes it hard for me to get too bearish all at once. At the same time, we are gapping up 30 handles or ~0.65%, which is a pretty rich open, in my view:

The Bottom Line: If we gap up into the 61.8% retracement of yesterday’s range ($456.43) and the prior resistance area between $456 and $457 (but more specifically in the $456.50 to $457 range), it’s hard for me not to be a seller initially.

Yesterday’s $451.55 low will be a key line in the sand for buyers to defend. A break and failure to regain puts $450 or lower in play.

SPX

Keep a close eye on that 4575-83 zone, with the 61.8% retrace firmly in the middle at 4577. That range will be key to managing today’s gap-up.

Above is bullish, but if it’s resistance, we could have a fade setup.

S&P 500 — ES Futures

TLT

TLT faded hard into the $99 support zone. If this area holds, fine. We are not trading the X-th bounce attempt out of this area into the lower highs trend.

The setup above is simply for observation. If the $99s break, we could be looking at the $95s, as outlined above.

TNX

TNX had its best one-day performance since March 27th. Fading this morning, that’s giving the S&P some life. Keep an eye on this.

If 10-year yields go back above 4%, that may have equity bulls with their foot on the brake pedal.

Open Positions

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

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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!