I touched on something yesterday that bears some attention this morning. I pointed out that the S&P 500 Index Futures overnight action is speculative, as the underlying stocks are not trading. That is why Globex trading has to be kept in perspective.
Related to that concept, the S&P 500 Futures Contract and even the SPY Index ETF are parasites on the index even during the regular session. Through constant arbitrage, these instruments are kept in line with the “cash” index, which is the pure mathematical construction of how the underlying index members, slightly more than 500 of them, are trading at any given moment.
As parasites, the futures and SPY tend to move slightly above and slightly below the index throughout the day, giving a bit rougher appearance to their candles when compared to the cash index. With futures, when you include the overnight action on the daily candles, the action can really look rougher than the cash index. The point is, it bears to pay attention to the cash index, so I plot both in all of my analyses.
To that end, I spent some time last night on the cash index, trying hard as I can to justify higher prices. It was a useful exercise. As you will see from the chart above, we are in striking distance now of the top bull channel line, which comes in around 4600 on the monthly chart.
Moreover, using standard price movement and measured move techniques, if you project the breakup of the China Virus decline from its peak, the number also comes in right around 4600. And that is not all, as 4600 projects the A wave as the C wave from the B retracement of the rally that has ensued from the China Virus bottom. This is so much clearer on the cash than the futures index, and the coincidence of this intersection is stunning. Of course, there are no coincidences. The big boys and girls will tune a lot of computers to these levels.
Given that we are approaching 4500 on the index this morning, 4600 is only 100 index points above us, which is not much in the scheme of things. And there is no guarantee we achieve the target, but it is more probable than not. I am communicating this when market internals continue to deteriorate even though the index is hitting new highs.
Just because we hit the target does not mean we crash. Look at the 2014 period where the monthly range was tight and hugged the top channel line for some time. Given the strength of this market and the new spending spree coming out of Congress, I am not predicting Armageddon. I would be happy with a 10% correction to get some cash invested and sit for a while. So awareness is the key.
For now, the market held up overnight and is marking time until Friday’s Fed talk. I am still focused on the overnight swing low from the 24th as the main downside level to watch today. As with yesterday, there can be no change in tone unless this level is broken. If it is, monitor for continuation and see if the single prints and gap sections below us come into play or not.
Otherwise, let’s see if we have a range day or not and continue to buy the dips.
A.F. Thornton