Greetings! I hope everyone had a nice weekend and survived an event-filled week in the markets. I had a chance to do a little trading on Friday after I thought most of the anticipated choppiness was over and it felt good to "flex" the day-trading muscles a little bit, but I'm still largely in observation mode until the new year.
I was hoping this coming week would make for "cleaner" (i.e. less volatile) trading, but after reviewing the charts for this week's Market Prep, it looks like another potentially wild week ahead. At the risk of sounding like a broken record, I still think trading small or not at all is the wisest course of action for the rest of the year. That's probably not what you want to hear from a trading service you pay for, but at Traderade we remain committed to using a data-driven approach to help others with their long-term trading/investing goals and sometimes that means being the bearer of bad news. In the scope of your trading/investing career, a couple of weeks is insignificant and the last 2 weeks of the year are rarely a good time to doing anything heroic.
In terms of my directional bias for next week, I'm not going to try and outsmart the market, but rather I'll keep things very simple: Considering the amount of volume and time we've spent at 3950-3970, it's likely to be a magnet for price in the final weeks of the year, but the overall trend is definitely down and I won't be fighting that trend under the 50DMA.
Let's dive into the charts.
During Friday's session, I was looking for long trades on ES as things appeared a bit stretched to me and the buyers were quite aggressive near the lows. The signal my trusty ol' SPY Model printed confirmed a violent shift in options positioning, which usually leads to a reflexive "pop" during the following trading session. This signal is way more reliable in a bull market, and with the natural noise generated by a very large options expiration, I'm very aware this signal could dramatically fail like it did back in June. So, I'm simply interpreting this signal as a warning for near-term volatility considering its directional trustworthiness is diminished in a bear market.
As mentioned, we can see the aggressiveness from the buyers at the lows by examining the weekly volume profile...the auction generated some significant activity on Friday. The other thing we can confirm using the weekly profile is the strong rejection from the weekly highs. If you've ever wondered what a "hard top" looks like, there's a great example: Nice clean taper at the top of the profile, long wick on the 2hr candle, and notable follow-through from the sellers.
On the bull side, it's hard to ignore the volume we've built at 3950-70. As technical traders, we can call that area "home base" for price. In other words, it's where most market participants think "fair value" is for 2022, so it should not surprise us if the S&P500 finds its way back there. In the meantime, price has left home base and ventured into exploratory mode (aka "A Market in Motion"). As a trader, we should be thinking about where price is likely to return to "A Market at Rest" (consolidation) and how to position ourselves accordingly. For me, I think the 50 Daily Moving Average will be the best way to gauge that next week:
We already established 3970 is the most probabilistic place for price to gravitate toward from a volume perspective; however, we also have other key indicators lurking in that area which gives us strong confluence and even less reason to be surprised if we bid back there. The 1hr ES Chart above shows a well-established trading range up there from 3960-4015, as well as the 100DMA, the 20DMA, and a short-term trend line. In an effort to not overthink things, the 50DMA (green line) seems like a great Weekly Pivot for me, favoring longs above and shorts below.
So that answers part of our question ("Where is this Market in Motion likely to take a rest?") as we've covered the upside scenario, but what about the downside? To answer that question we have to go back to October:
The first area I'd be looking for support would be 3835-3847.50. We have some overlapping value and 4 previous session Points of Control, so it's logical to assuming there would be another battle in this area before bouncing or continuing the journey downward. If price pushed through 3835, I think there's an awesome short opportunity to fill the remaining singles left in the wake of that insane Nov. 10th rally. If these singles get filled, it could set up the only long I'd be interested in below the Weekly Pivot. Let me show you what I'm seeing:
We know price is volatile and moves quickly in the Ichimoku Cloud, right? Right. So if we enter the Cloud, the most likely scenario is a push to the downside back to our main Daily Trendline (white line on the daily chart above). BUT, there's one thing I'm watching that could throw a wrench in that plan for the sellers...filling those pesky singles:
Filling the singles would put us right near 3810, which would be the bottom of the Cloud on Monday or Tuesday. For this reason, I'd be careful with shorts at 3810, as a bounce is likely. If it doesn't hold, then the most obvious play is to continue short towards the Daily Trendline near 3750. If we do see buyers step in and price bounce, the top of the Cloud would be at 3840 and bulls would want to see 3847.50 taken out (top of overlapping value range) before longs back to the 50DMA would be the high-probability trade.
Apologies if that got too detailed or confusing, I try to point out anomalies and probabilistic scenarios like that for the day traders when I see them, but we should probably wrap up this Market Prep by returning to the "big picture"...
Let us not forget the trend is still down. The Traderade+ Discord VIX Model flipped to short, and under the 50DMA it's tough to justify trading the long side any more.
It also appears the correlation between VVIX and SPX is returning, which is not typically a good sign for bulls; however, it is worth noting that we don't usually see a strengthening in the correlation after a big selloff, so that is indeed atypical and quite the ominous sign, in my opinion.
Speaking of volatility products, the Relative Volatility Index shows me there's still more room to the downside before I'd actively be looking for a sustainable bear market rally. So far during this bear market, Mayhem and I have done our best to alert people that a longer-duration bounce is likely when the technicals point to it...this is not one of those times. Other than the magnetic area of 3970 from a volume perspective, all signs point towards the sellers being firmly in control of price action.
Truthfully, I really only found 2 bullish charts this week, so allow me to share those in the spirit of unbiased research and in hopes that Christmas won't be ruined:
The 4hr ES/RSI Bullish Divergence has returned. This is really difficult to trade from, but it should be in the back of our minds as we navigate the market intraday. The daily trendlines are also pictured on the chart above...it's basically a coin toss to me which line we'll visit first. All I know is I'll definitely be looking for the "magnetic" trades as we near one of them. For newer traders, this means as we get very close to one line, I'd lean hard into trades towards it then play a rejection/bounce trade away from it. By "very close" I mean close, like within 10-20pts. You might scoff at that, but I prefer "easy money" vs playing 3D Chess with the market.
The only other "bullish" chart I found that is worth watching is the Dow...and bullish is a stretch. The only reason I say bullish is, as a technical trader, you have to give the buyers the benifit of the doubt any time price is retesting a prior breakout level. The Dow did retest 2 key levels on Friday and did bounce, albeit it not much. Nevertheless, it's a small win for the bulls considering the nearest support below these lines is quite a ways down. Keep an eye on the Dow this week.
To recap, the 50DMA will serve as my Weekly Pivot this week. Other key levels/extensions include:
4099
4018 (Mid from last week)
3936 (-0.25 Extension from Prior Week's Range + Daily Trendline Resistance)
3855 (~Last week's lows)
3775 (-0.75 Extension from Prior Week's Range)
3693 (-1 Extension from Prior Week's Range)
I hope you have a great trading week ahead, but most importantly stay safe and rest up before the new year starts.
Happy Trading,
Horse