It is quiet in here so you all must be out with the ladies doing the right thing. Things are starting to get more difficult to read. Less easy? Whatever, you know what I mean. With bullish looking charts, we know the TA-only people continue to ignore the forward and trailing 12 month earnings average and must figure out how long this can hold despite impending inflation, inevitably higher interest rates and probably higher taxes to pay for all this spending. They will continue to look at price action in a vacuum until the March 2020 based trend gives way. The fundamentalists think we are overextended, but that is common sense and common sense doesn’t work real good lately. We've come a long way and the fret factor has probably helped. Old timers are reserved, people new to the markets are enamored with the momentum. Big tech is waning, and small caps are treading water and you know the rest.
This week, traders will try to vet the above realities against Friday's breakout from balance. Auction market theory is one way, but there are many ways you can filter what the market is both doing and often what "it" or "they" (most traders) are attempting to do. I'm sure you have your own. Pros tell us that what the market does not do is more important than what it does do. SPX has not been able to come close to March 2020 based trend. NDX is flirting with the idea. The industrials and DJIA are taking up a bunch of slack and RUT is still in limbo.
Short termers have the intersect of time frames to consider, even as we ride the waves higher. Even scalpers keep a finger to the wind. I reckon professed agnostics know to be aware of the bigger picture when you're trading intraday or on a swing basis. Everyone is too cool for fundamentals until they get into a foxhole. But for now, there are many tools for parsing the validity of price action, and it's probably best to use as many as you can -- if for no other reason than the fact that markets are constantly evolving. Hedging techniques are evolving. Monetary policy is evolving so much that we are timing the market with fed funds futures. But there are still some old school realities to price action that can help retailers who don't have access to sophisticated real-time changes in derivatives structure and other things that big funds spend a lot of money on.
What happened in Thursday night's (your Friday afternoon) overnight ES session and Friday's short covering? You can see we made the single print surge on Thursday's cash session and then, importantly, you see a well-balanced overnight session taking place in the period between Thursday's settlement and Friday's cash open -- or more specifically, the 08:30 release of monthly employment data that was far below expectations. Both the cash session close and the overnight action gave of a vibe of purpose. The price action showed that participants were clearly waiting (benefit of hindsight admitted) for something. They were confident that we would go higher. We've seen this movie before in the runup to jobs or other economic data. The only thing I knew was that if you stay within or, better, above the single prints (we gapped higher as well) that it was "bullish". At sunrise, people are sitting there drinking their coffee wondering why we get an 08:30 candle with long shadows on both ends that leads to an opening range (initial balance) that chugs higher on some NDX and quite a bit of RUT strength. They look again at the jobs data and wonder if bad news is actually good news. They wonder if this report was an anomaly or the direct result of jobless benefits. Maybe it is both. Never mind, for soon, all sectors went green and shorts started to peel out. This is typically a slow process at first. But then, as more and more short positions start to throw in the towel, the punch to the upside becomes pronounced, as it did on Friday. We started to slow down around ES 4220 and then accelerated again to 4230. Please have a look at the long stem in the rth profile posted above. That stem with its flower like top is classical short covering followed by a holding pattern. We've seen this patten again and again lately, especially when bears start to get excited about a potential drop.
What now? This move will be considered bullish. But the last two weeks of action and our current loft means that even bulls must be wondering. The bears are right a few times a year and they make bank on volatility spikes, but that is a difficult way to ensure an annual profit or very stable income. Don't get me wrong, I love those 5 and 10 percent drops on high volume and torrid breadth. They can net you a year's worth of struggle in a few days, but that is not the norm and it is pretty hard to pull off and get out of unscathed. If that's your thing, keep watching because it will happen sooner or later. But you've gotta wonder if our monetary policy scheme is making that short game harder than ever before.
For now, we look at the top of the ES futures profile at the high of 4232.25. It is angled with two ticks of excess. I assume this as auction completion until we open higher. The next thing traders will look at is how Monday's value relates to Friday's value area (4220.25 to 4230.25) and the single print stem that supports that holding pattern at the top of the profile. Halfback is at 4214 and the single print stem top is 4212.25. Traders will first look to see if we get acceptance above the stem. Zooming out from the intraday process, they will check if we can stay on top of the previous balance area around 4190. I'm not going to concentrate on the upside because all this is only indirectly related to what people on this forum are trading, and my reason for posting here is to give opinion on what they are thinking about with regard to potential weakness. The strength is already clear. Unless I've overlooked something it's possible that the USD action on Friday combined with the equity indices means that if you went out long in a related instrument on your Friday, you should be ok for Monday. I should repeat that this is all in a news vacuum, but also that the levels below will apply no matter what the catalyst for a move.
Starting with the downside protection, SPX 4100-4120 should become stronger than it was last week. We may not even get near that area but that is where we might assume tone would change. Further up and more pertinent, we have 4150 as another major support. For early in the week, the big primary support is SPX 4170, and the weekly point of contention looks like 4200. Price over 4170 means the top weekly resistance of 4250 stays in play. The absolute top goal (as of now) and from what I can see is SPX 4250/4260. That does not mean we can't go through that overhead barrier, but I assume that we would struggle there without a catalyst. Since the VIX imploded on Friday, many options mavens assume a tight, high gamma crawl to that area as long as implied volatility stays near or under the past week's highs. If we balance or continue higher, traders keep track of structure as we go and we always keep in mind that fast liquidation phenomenon if the boat gets loaded with bullish options plays - that in themselves drive the ES futures. We are always prone to liquidations out of the blue. The character of the rebounds off those liquidations will determine the health of the momentum. I don’t' personally see the impetus for much higher, but what I think doesn't matter. If we can we hold our ascending levels on a closing basis, maybe we can at least form a bracket into May expirations. Despite Friday's bump, the market seems confused here (to me) and it might pay to remind ourselves that Friday's action was a breakout from an area where we spent the second half of April. Breakouts are usually bullish, but traders who track valuations will probably view the most recent one in a more cynical way than they did in the runup to our current levels. Well, at least until the NDX cooperates. For now, we wait to see how Asia and Europe interpret our closing action. Those markets will influence the overnight futures. Remember that our overnight ES session is extremely low volume, and that what really matters is the cash equity session. Wishing you all a happy Mothers Day and good week ahead.
