Good Morning:
The S&P 500 E-Mini ripped through the WEMH (Weekly Expected Move High) at 4795.75 early this week to peak at 4804 on Monday. It was a rare, three-sigma move on the day, triggering buy signals in our Daily and Hourly strategies as announced belatedly in this Blog yesterday and live to subscribers on Monday. As with most first rally attempts after a pullback, the first run can be attributed to short-covering, and then we look for follow-through.
After the three-sigma run, Dealers and Market Makers brought prices back inside the WEMH by Tuesday, and prices have been moving sideways since. Essentially, prices are marking time for the big event of the week which comes tomorrow (Thursday) when the CPI report is released pre-market. So investors will be fighting Dealers for any ground above the WEMH at 4795.75 for the remainder of this week, and they have been somewhat successful thus far.
The current pattern on the hourly charts could be part of a BULLISH cup and handle or a flag for another leg higher. But it could also be a wedge to go lower for a test of last Friday’s 4702 low before a new rally can support higher prices. It would not surprise us to see prices test December highs at 4841.50 but from a 4702 retest. Perhaps the inflation reports will act as a catalyst to resolve price direction. All-time highs at 5028.25 could even be achieved before prices encounter the top of recent channels. You can find analogous levels to those quoted on the SPY ETF and SPX cash index.
For now, whether prices can close above the WEMH before next week is an open question. Prices will encounter the usual resistance at a roundie (4800). The CPI and PPI inflation indexes will exert some influence in the next few sessions. It also pays to monitor transcripts of Fed Governor speeches this week for any Fed policy hints. Quarterly earnings announcements and forward guidance will begin to drive prices as reporting season gets underway this week. The 10-year Treasury Auction today will also be scrutinized for demand and the bid-to-cover ratio.
As a side note, the DEM (Daily Expected Move) remains +- 21 for today’s session, and prices may GAP slightly higher at the open. But it will not be a True Gap above yesterday’s high, just yesterday’s close.
The best short-term strategy is to buy pivots from the 5-day line with a three to five-point stop. Then target the WEMH and/or stop runs above Monday’s 4804 high until the round trips stop working. Buy a true breakout above Monday’s 4804 high or short a true breakdown from the five-day line.
Notably, prices manifested a double bottom near the 5-day line overnight in Globex, with the successful retest low landing just above the 5-day line at 4787.75 around 9:00 am EST. Work the ranges if you are day trading. We are raising stops to 4787.25 on our recent Daily and Hourly buys at 4760.75 to begin locking in profits.
The WEMH is not written in stone and Monday’s impulse through the DEMH (Daily Expected Move High) might have been a bullish harbinger for the rest of the week. But statistically, there is a 67% chance that prices close below 4795.75 on Friday. It is risky to bet against those odds, though it is successful 33% of the time. And prices can exceed the WEMH early in the week, but still close back inside the level by Friday.
The new Zero Day to Expiration Options (0DTE) crowd may try to push a “Gamma Squeeze” on Dealers, buying at the WEMH to keep it above 4795.75 at Friday’s close, forcing Dealers to buy futures or lose their proverbial butts. Dealers who fear this may take the opportunity to hedge on visits back to the line early in the week. in such cases, the opposing actors cause the WEMH to act as support rather than a cap on prices. A big report like the CPI tomorrow is a perfect opportunity for manipulation by these market participants.
From personal experience, this 0DTE crowd has wreaked a lot of havoc on day trading generally – obfuscating many day-trading strategies that previously worked for years. A similar thing happened to the broad markets, as options grew to dominate the investing landscape over the past 10 years and become the proverbial tail that wagged the dog.
A mini version of the option tail wagging the dog is invading day trading and the influence is growing as more and more securities have options that expire daily, instead of just weekly and monthly. Like the broad market, we now segregate and monitor significant gamma levels as well as Call and Put Walls for same-day expiration options. That is a lot to monitor to trade as a manual, retail trader against quantum computers which provide 80%+ of the intraday volume. I don’t recommend day trading for the faint of heart.
We handle the Dealer/Market Maker battles in real-time – but thankfully this is less important to the Daily and Hourly Swing Strategies, which focus on options or spreads with longer expirations than one day, or the same day. But if you insist on Day Trading against quantum computers with programs designed to induce you into bad trades, you need to be aware of these recent developments in the options market and reflect them in your trading.
Never forget that trading is a zero-sum game. Either you are taking someone else’s money or they are taking yours. Which do you think is easier? Quantum computers taking money from retail traders like you, or other quantum computers?
Note that prices are near the top of their trading channels (see chart above), with limited headroom absent a melt-up. And underlying market/support structure is weak, with so many unfilled gaps since the October 2023 lows. Not to throw too much shade on the party, but bullishness remains near extremes, and the bear still has a slight chance of coming out of hibernation. It would take a Black Swan trigger, but doesn’t everything look like a Black Swan these days?
A.F. Thornton