Everything I need to know about life I learned in Kindergarten, right? Remember that book? Lesson 57 – How is this one not like the other one? Compare and contrast?
Comparing recent lows is the central question this morning because this one looks just like the rest of them. So far, the market is emulating every other pivot off the 50-day line this year. And it presents the exact problem I feared Monday. We are out Friday, at least as to our sole, remaining 10% XLF position. Now, do we go back in? That is more of a swing than a day-trading question, to be sure, but it is quite the dilemma.
Then there were the fund flows yesterday. Treasuries backed off their Monday blow-off climax. Value and cyclicals (including XLF) clobbered growth and technology. Small caps came back to life as well. My first inclination would be that the rotation I expected last Friday is coming a bit late off the liquidation break. The day after monthly options expiration is notoriously bearish, as is mid-month anyway. So the deferred gratification is explainable.
Yet, what if all of yesterday was just massive short-covering? I could see the shorts piling on the weaker value, cyclical and small-cap stocks and indices Friday and Monday, saying to themselves – this is finally it – the 10% to 20% correction. Why not short the weak sisters? More short positions to cover, so more gains yesterday? Maybe rotation, maybe not.
Acceptance is a huge issue in life, and particularly in trading. So do I accept that this is another gigantic “liquidation break?” Is it the beginning or end of something? Do we get the double-dip like May or the “V” bottoms like the others? Is this the 18-month cycle peak? This bottom looked more rounded than a typical “V,” but one must keep an open mind.
Then there is always this: how will the market screw the most people? Aha! We will make the dip look just like the others, draw them all in, then Whack A Mole! Do you see why I have preferred day-trading lately? How can anyone sleep at night worrying about that?
For day-trading, the decisions have been both easier and rewarding. I will take credit for calling the bottom Monday to the tick. I have to take credit when I can – as it makes up for the bad calls. And I had two good trades – pointed out in these pages practically in real-time. There was the short squeeze into the close on Monday. Then there was the Gap and Go that gapped and went per the Gap Rules yesterday.
I hope you don’t mind me sharing these thoughts. As I often say, the circus in my head would make Barnum and Baily envious.
Today’s Plan
Yesterday’s rally had a virtually perfect inversion of the bearish internals from Monday’s rout. The structure was very poor, with the market profile split into multiple distributions. This is normal on a day that is dominated by short-covering, which is an emotional event. While I’m not outright calling for it, note that most rallies off lows start with this type of day structure.
This morning we have a bit of divergence between the S&P 500 and the NASDAQ 100, with the latter trading negative and much weaker. This dynamic and the very balanced overnight inventory in the S&P 500 likely sets us up for some balancing and range day trading for today. When they negatively diverge, the NASDAQ 100 will draw gains from the S&P 500 and vice versa.
The action on Monday left a poor low at the bottom of the distribution. Carry that forward as in need of repair.
The outlook is more neutral in the bigger picture now as both the S&P 500 and NASDAQ 100 have rallied back to about the midpoint of the recent downdraft.
My signposts for potential change would be the ONH at 4338.50 on the top and the start of the single prints at 4303 on the bottom. Price action between these levels would indicate a balancing of yesterday’s one-sided trade. Price action outside of it gives us the potential for change.
Also, pay attention to divergence today. The spread between the /ES and /NQ is quite large currently coming into the open. If you are not sure which is dominant, wait as they usually sync later in the session.
A.F. Thornton