Another new week has arrived, but little has been resolved on the surface of our perpetual S&P 500 balance area. Yet, arguably the market is in a rally phase, most notably and surprisingly carried by the NASDAQ 100 and growth stocks. Admittedly, a NASDAQ 100 rally that would flirt with new highs did not seem like the most likely path to carry the market higher a few weeks ago, but that is simply part of the markets’ mischievous ways.
I am calling it mischievous math because, but for the mix and weighting of the sectors and leaders, the S&P 500 would be rallying too. Sometimes we call this a stealth rally. And every once in a while, we have to go outside our core S&P 500 index for opportunities. For the most part, however, I find I can meet my day-trading needs by trading the index futures.
Currently, the S&P 500 index is in a rising wedge pattern with waning momentum. That combination is negative, at least pointing to somewhat high short-term risk. We have recently discussed the concerning complacency reflected in the VIX and CBOE Put/Call ratio. Adding to the quandary, the S&P 500 / U.S. Treasury ratio has been rolling over of late. This is as much due to the treasuries rallying as it is to any weakness in the market itself – which we know to be trading sideways. So we must ask the question, why are treasuries rallying? Why is the ratio weakening?
There are three possible reasons. First, the treasuries might be rallying as an indication that inflation fears have abated. Second, there could be fear of economic weakness ahead. Third and finally, market participants might be getting defensive. To a degree, all of these concepts are applicable and related.
For now, I will resolve the inflation issue favorably as the TIPS / U.S. Treasury ratio is consistent with inflation expectations abating. TIPS are the inflation-sensitive bonds issued by the government some years ago. The recent jump in growth stocks is related and consistent with interest rates behaving or benefitting from an option pairs trade. The NASDAQ 100 is leading again this morning.
Other risk-on / risk-off ratios are not sounding major alarms. So the idea that market participants are getting unduly risk-averse does not hold water quite yet. Nor has any warning of economic weakness manifested; recent economic reports have been telegraphing quite the opposite. Still, given the intermediate risks, it is unwise to establish new swing positions here unless you trade a smaller timeframe chart, as with something less than two-hour candles.
Today’s Plan
On Friday, I laid out a good synopsis of the day-trading strategy. Use it as a continuing reference. Once everything is password-protected, the discussion will be set forth with even greater detail, as I do with the Founder’s Group.
In general, I don’t trade on Mondays, and I am usually in cash mid-month. I have found over the years that strange things tend to happen on Mondays, likely because assessments made in the calm of the weekend may cause traders and portfolio managers to change their holdings. As to the monthly cycle, I find that the month often looks like a smile. The indexes are strong at the beginning and the end but weak in the middle.
In sharing this information, I am describing tendencies. It is always important to keep an open mind. We always trade the chart in front of us with price as the most important indicator. As such, the 5-day EMA did catch the fall on Friday and remained a short-term line in the sand. That was an important test. From a day trading perspective, then, the bias remains positive above the 5-day line.
The S&P 500 has a 63 point expected move going into Friday. So that is a 126 point total range and volatility for the week. Keep the WEM highs and lows in mind. You can add and subtract 63 points to Friday’s close to calculate them.
Use Friday’s key levels as a reference – but bring the variable numbers forward. Not much has changed. This makes sense because the value (high volume location) was unchanged on Friday, and there was no new regular session high. Carry all this forward into your narrative.
The overnight distribution has a classic 45-degree angle which traders should note. As always, consider Globex distribution patterns to be of slightly less import than regular session ones, but note them. In my education and experience, the 45-degree line is really the only Globex pattern to carry forward into the day session. In addition, the 45-degree line portends that the Globex low should be secure. Should it be lost, that is an important piece of information.
There is an FOMC meeting this Wednesday (6/16). Market participants will anticipate no change in rates. However, if the Fed acknowledges that inflation is becoming a problem and even hints that they may have to start tapering QE, expect some fireworks.
This is not a market opening I would trade early, given the current context. Some cross-currents of strong overnight activity mark a new all-time high well above the two-day range. But read that in the context of current prices now deep into the overnight distribution range. And even though prices are low, they had difficulty getting much lower thus far – hence the 45-degree line and low. The Globex low is right at Friday’s settlement.
I need to mention that I would technically consider the Globex low “weak,” – meaning it is an identifiable reference point that amateurs trade. Given the importance of the 45-degree angle and low, consider a violation of this level as a potential short trade.
Conversely, holding above the two-day range would be new, all-time high territory and “should” have us long-biased. Day traders should note any failure or struggle to do so.
All that being said, we are trading in a rising wedge. Watch the top line of the wedge. Wedges often experience a throw-over to suck the last buyer in before the market rolls over. Don’t be fooled. Be wary of holding above the wedge topline.
A.F. Thornton