Hello friends, Happy Sunday! Hope you had a great weekend and took some time away from the screens. It's time to start preparing for the week ahead. Let's dive right in.
From a longer term perspective, the S&P500 broke out of some key technical resistance areas last week, ending the week on a +5.6% run from lows to highs in just 4 trading days...which is quite incredible. The daily chart above shows momentum building for the bulls as we're well above the 50DMA and the RSI is in favorable territory +50.
On a personal note, one of the things I struggled with last week was believing the rally enough to hold my positions...I did a terrible job at that. I remember seeing a random Tweet last week to the effect of "There's a difference between having a solid trading plan and actually trading it well" and last week was a prime example of that dichotomy for me: I had a great plan but struggled executing it. In retrospect this is quite natural and one of the challenges of trading through bull and bear markets. As a momentum trader, you become conditioned to favor price-action in a certain direction, e.g. trading the short side has been the more rewarding bias for 2022. However, when momentum changes (as it did last week) it's easy to get stuck in your habits and not completely "trust" the new price action. That definitely happened to me last week; I was on the right side of several trades and got out too early. At this point in my trading career that's more frustrating to me than getting stopped out.
So the big question on my mind (and probably your mind) is "Is this just another Bear Market Rally or is the bottom in?"
Truthfully, I have no idea...but I was definitely pondering that question a lot last week and probably will continue to do so this week. As far as further upside goes, ES_F 4224 is a really big deal to me now. If the lows are in, that level marks a 50% retracement from the YTD highs to lows, and I suspect any further upside could be temporarily capped there. Not only do a lot of traders watch Fib levels on various timeframes, but additionally you can see that cluster of daily candles just under that level on the chart above...we weren't able to thrust above in June and battled just under that level for what seemed like forever. To me, that is THE level to watch now. Breaking out likely sets up 4500 in 2022.
So rather than speculating if this is a real breakout or yet another Bear Market Rally, let's get back to looking at the technicals and figure out what is likely to happen this week. Let's start by analyzing some ranges:
If there's still any doubts about how important the 50 Daily Moving Average (DMA) is, last week should put those doubts to rest. We saw an absolutely glorious bounce from that key DMA when it reached the confluence zone of 3922 where the top of one of our trading ranges was lurking. From there, ES_F catapulted all the way up to an old trading range I've discussed quite a bit from 4080 - 4165. In that range, ES_F went head-to-head with yet another very important DMA, the Mighty 100. If the 100DMA doesn't hold, there's 2 very important levels for me this week: 4075 and 4030. I'll discuss each of them separately.
While we're on the chart above, the Purple Pivot Line worked very well as a Weekly Pivot last week, and while I still "like" that Support/Resistance Line (meaning I'll leave it on my chart), another Crayon Line is catching my eye (see the White Line) and probably worth watching throughout this week. Why? Because new trendlines develop all the time and there's only alpha in using them if you can recognize the development before everyone else does...and also because there's a potential confluence setup with 4075 (just below it, but we know how these trendlines work in real life so that's okay). By confluence I specifically mean I'll be watching for a burst below that white line and a rebid around 4075. We can see on the Visible Range Volume Profile on the right there's definitely something unique about 4075...the big players hit that level hard last week. It's natural to expect some sort of defense should we approach that level again. If 4058 doesn't hold, I'd be positioning myself to short back down to the Purple Line from last week.
The final thing to note on the chart above is the Relative Volume...there were some significant printings sprinkled in last week. So while the permabears like to scream on Twitter about how "low the volume was on the rally," you can kindly remind them that 1) Low Volume tends to be bullish and 2) it wasn't actually that low, from a Relative Volume perspective it was higher than normal during many parts of the trading week (not just FOMC).
Here we see 4075's prominence again on a 2hr Chart. Notice this region around 4075 also coincides with a notable Low Volume Node (LVN) on the Year to Date Volume Profile (far right). Again, large market participants will be forced to make a choice should price return to that area...we going back up or back down? We're unlikely to linger there too long, as seen by the lack of interest throughout the year.
The final thing I'll say about 4075 involves the top of the Ichimoku Cloud we just burst through. If you're not familiar with Ichimoku, here's a VERY basic Rule of Thumb to keep in mind: Price rarely spends a lot of time in the Red Clouds. Based on my own backtesting, price tends to rip through these areas. Guess where the top of this current Red Cloud is? Yep...4075. Again, I'd be looking for buyers to defend if there's more upside in store for this rally.
Now what about 4030? Well simply put, it's a 50% retracement down from the sustained bounce off the 50DMA we saw to the highs. It's also the "last stop" before 4020, which we discussed last week as another noteworthy HVN (and it also basically capped the prior week's trading, so if buyers are serious they'll defend).
From a TPO Chart perspective, I've added this new range to my chart. It might not materialize, but I'd be looking for a bounce off 4105 in the even of a pullback. This is a small point, but hopefully useful for the scalpers out there.
One final chart about potential upside:
It's easy to lose perspective when we're caught up in day trading and watching specific levels. The chart above is a friendly reminder about where we are from a month to month perspective. To summarize in plain English: Not Bearish. If I were you, I'd definitely have a horizontal line drawn at 4135, looking for breakouts above. A LOT of traders look at these simple reversal strategies in their trading, and a break above 4135 would represent a bullish break from the past 2 months of trading (and the close from the month prior to that). These scenarios are likely to produce continuation.
And finally, here's a quick look at my favorite breadth indicators, % of Stocks above their 200DMA and 20DMAs. The 20DMA (MMTW) looks ripe for a pullback, but the move we saw from the 200DMA Breadth Indicator is what some would describe as a "thrust" and is viewed by many as a catalyst for sustained bullish momentum. I think it'll be important to watch this on Monday/Tuesday to see if it get's hammered down. In my own personal use, as long as the % of Stocks Above 200DMA stays above a reading of 30, then the buyers are in control.
If this week's Market Prep was a tad confusing to you, there's a reason for that...I think the market has reached a critical point. When I see this many mixed readings on various indicators and gages of momentum, it usually means the market as a whole has reached a precarious point where we'll know quickly (potentially violently) whether this was "just another Bear Market Rally" or if it truly has legs into the end of the year. I know I sound like a broken record saying this, but be careful.
Needless to say, I'll be using 4075 as my Weekly Pivot this week and looking for a pullback on Monday due to how far and fast we closed last week (and historically Monday's aren't great for Bulls).
Other Key Levels/Extensions:
4259 (+1 Fib Extension based on last week's range)
4201
4144 (Breakout over last week's highs)
4029
3971.25
3856.25
3798.75 (-1 Fib Extension based on last week + Trendline Support)
Thanks for reading and as always, happy trading.
Horse