Short Term Trading Week Starting: 25 Jan, page-48

Happy Australia Day

Early in the US session we had a fast liquidation on no particular news.  That is something that happens in an environment where people get too frisky with high fliers.  The scene this week is pretty much the same as last week with a few extra things.  The backstop is our double-edged fix: a near doubling of the Federal Reserve's balance sheet since last spring as well as trillions more in fiscal packages that have become a sizeable part of US GDP and the budget deficit.  More stimulus is being debated, too. The measures provide time to get and keep the pandemic and its economic consequences under control.  The imperative that keeps the US and its global partners from slipping into even more serious disrepair props up risk assets.  The economic and moral hazards are obvious, but short-term participants put the specter of long-term consequences on the back burner and concentrate on the perceptions. Market actors keep cycling through sectors and indices to push stock prices higher with a hope that springs eternal.  Hope turns into ambition, and liquidity is exploited in the derivatives market, where leverage begets upward momentum.  Easy going bulls are extended in a few definable ways: not least via the heavy selling of protection to participants who are keeping implied volatility measures at relatively high levels.  The VIX is still over the 20-handle for good reason.  The futures that inform the fear index are still in a battle-ready posture; the term structure reveals worry.  Some expect that to decline soon, but that implied volatility situation should be watched closely.

Living in the moment can be hard for fundamentalists, but the economic positivists among us seem to make a good living lately.  If you trade by exploiting and responding to range extension (a fractal, relative thing that you can apply intraday or long term) you compare an instrument's distance from areas (stationary and moving) where there was/is an obvious consolidation of price.  This is sometimes referred to by futures traders as value.  Nothing is simple, though, and short-term traders who measure range extension (on their chosen time frame) are continuously factoring in background things like surveyed sentiment, market tone and much more.  Tone is easier to interpret in a sector or index, but many small stocks endure the effects of broader momentum - especially when traders are waiting in limbo for some news input.  You intraday traders know what tone and tempo feels like.  We know that something could happen to change the tone and manage risk with position size appropriate for our situation and the degree of extension, structural defects (gaps and places where little time was spent) below, and other stuff.

This week, the US indices have the advantage of two stabilizing factors: some big tech earnings releases and the FOMC policy meeting.  The market is usually in cruise control on the approach to Wednesday.  Things can get volatile on and just after the events, but we usually have reversion to the mean soon after.  A positive feedback loop is at work here: Federal Reserve members are worried about making a policy or even rhetorical mistake and larger participants have become dependent on the Fed’s caution and commitment to success.  Together, those forces move price through ascending levels of excess and subsequent repair that we can measure and trade.  More broadly, it does help that our new Treasury Secretary and former Fed Chair is an able policy engineer. I will say it again: do not mess with or doubt the capabilities of a Brooklyn girl.

Early to mid-week support is SPX 3830 followed by a big wall at 3800.  Assuming price over ES 3824 (the top of the previous bracket of consolidation), we have and three points of resistance: initially at ES 3853.75 and the overnight all time high of 3859.75.  That is followed by uncharted territory with weekly resistance at 3870 and 3900.  This resistance picture will change a bit going into Tuesday's open and if it changes very much, I will post an update.

Monday's volatility has made repair of some of the poor structure in the form of an unfilled gap from ES 3811.25 down to ES 3797 and then a naked point of control at ES 3789.  Underneath those repairs is another point of control at 3770 (this was created just before a half-day session last Monday) and then the bottom of the last consolidation bracket around 3750.  The advantage is clearly to the bulls and they may exploit dips to any of these levels (they are doing so today).  Longer term participants are eyeing that 50-day moving average that comes in about SPX 3690.  Their willingness to dive in at these supports will be governed by things that happen intraday here: the market tone, cadence, market internals, sector/index rotation and the character of the news that accompanies any such moves.

Good to see you there on the weekend @ColonialCousin. Thank you for putting so much hard work and taking time out to keep the forum going.  You make it look easy, but we know that it is no small effort.  And thank you again @ammie for always looking after everyone and keeping things going so smoothly.  Wishing you all a safe and happy week.