Pre-Market Outlook – 5/11/2021

Be sure to read the View from the Top – Interim Report from earlier this morning. From all appearances, the 18-month cycle peak has arrived. A reasonable target for this correction in normal circumstances is the 200-day moving average – not necessarily a straight shot to that level but more as a destination. This morning, the 200-day line sits at about 3665 on the cash S&P 500 index. On the NASDAQ 100 cash index, the line is at 13,324.

Gap rules will apply this morning, as both the NASDAQ 100 and S&P 500 indices will gap down with true gaps. The NASDAQ 100 is still leading lower this morning, but there is slightly more parity with the S&P 500 now.

As with any large true gap, the early focus will be on the fill, complete lack of fill, or partial fill. Every one of those scenarios will tell us a different tale about how much conviction overnight sellers have. Gap rules #2 and #4 should be at the forefront of your mindset when navigating this open.

On the S&P 500, pay close attention to the May 4th swing low at 4188, as it was the last pullback low before the market made a higher high. The level also represents the last cycle low, the violation of which confirms the top. This level has already been breached on the NASDAQ 100. If there are no buyers at the level on the S&P 500 index, that is further market-generated information regarding the weakness at hand.

As usual, with a large gap, assume the potential for fade early in today’s session. Either buy the first one-minute high or cross back up through the open should the opening drive be lower. Taking out the overnight low and moving back into the overnight range can also be a strategy. Monitor for continuation and context.

Gap and go scenarios from gaps this large are relatively rare. That means that they usually play out along the gap rule #4 and spend most of the session digesting the overnight move. That would be bearish in the bigger picture, but offers little opportunity for day timeframe futures traders. Those looking for short-term opportunities should know that Individual equities often trend better.

Trying to “buy the dip” or pick a bottom in the circumstances can be treacherous at best. Sometimes, it can be wise to sit out a few sessions and let the market telegraph more certainty.

Good luck today.

A.F. Thornton