My best assessment of yesterday is that we got the expected short-covering in the morning, but the market (as represented by the S&P 500 Index) sputtered from there. Essentially, the NASDAQ 100 rolled over, weighing the S&P 500 down, while some of the cyclical sectors provided support, particularly energy.
There is some WWSHD (When What Should Happened Doesn’t) MGI (Market-Generated Information) potential if we start the first few days of the month weak – with all the payroll contributions unable to take the markets higher. As well, the contributions could be cushioning what would otherwise be a steeper decline. Add that to your narrative.
So we come in this morning with a True Gap down. Gap Rules apply, focusing particularly on Rules #2 and #4. Overnight inventory is 100% net short, leading to a counter-auction (some temporary buying) at the open. We will be opening well out of yesterday’s range and at the bottom of the overnight range.
About an hour ago, the S&P 500 rolled over hard, taking out the bottom of the balance area at 4166 and bouncing off the high region of the single prints I had been mentioning the past few sessions at 4160. This also puts the index below the 10-day volume point of control at 4181, which should have provided support.
The NASDAQ 100 now sits just below its 21-day exponential moving average but just above its Weekly Expected Move low at 13,622. The NASDAQ WEM low is powerful support, along with the ’50 handle on the S&P 500 index at 4150. These levels could damage the indexes and would not violate the concept that both indexes are completing a “4” wave consolidation in Elliott parlance.
A pivot higher at the aforementioned levels would allow for one more final push in a 5th wave. That would help me reconcile the bullish, ascending triangle pattern I see in retail stocks (XRT) as well as a new move higher in oil and energy stocks (XLE) seemingly underway. The final wave, should it present, looks to be all about the cyclical and value stocks. We will see.
In fact, this sector rotation keeps the S&P 500 afloat. If the S&P 500 stays above its 21-EMA and the NASDAQ 100 below, they can cancel each other out. The NASDAQ 100 (largely tech and growth stocks would still weigh on the S&P 500 index, stunting its progress. Put another way; the anticipated correction will not get seriously underway with a solo; it needs the entire orchestra.
My best advice today is to focus on two factors in the S&P 500 index. First, if there is acceptance in the regular session below the balance area, it does raise the possibility that the consolidation was distribution rather than accumulation. For the buyers with poor location, there will now be overhead supply. The second is how prices will react to the large single print section from 4160 to 4150 from April 23rd and as mentioned above. While overnight activity has just started to test this area, there has been no regular session activity there since traders printed it, and thus it remains in the narrative and play.
Early trade today will tell us a lot about the strength or weakness of the market and whether or not overnight traders have the direction right. As mentioned above, overnight inventory points to an early counter-trend fade, but the overhead structure may curtail it. The bottom of the balance area at 4166 would be the first target on the counter-trend, inventory correction rally higher, and there should be sellers there. If not, then target the overnight halfback around 4171, and eventually the full gap fill and carry forward that stronger sellers are not present.
A gap-and-go scenario will play out one of two ways today. We can get an early fade that will fail where we would expect (see above), or we could have an initial drive lower that puts the single prints into play right away. The short is either at the balance area low or on a cross back down through the open in the first setup. The second setup is always harder to pull off, as there is less reference to where to place a stop.
On the NASDAQ 100, I am always reluctant to fight a Weekly Expected Move low, so I am covering my shorts this morning and direct my attention to the S&P 500.
Good luck today!
A.F. Thornton