Happy Sunday everyone! Let me start by saying this week's article will be noticeably different than most because I admittedly have a strong bias heading into this week...
Not a directional bias, but a bias against trading at all this week. In my personal opinion, trading this week will be akin to tiptoeing through a field of landmines. Monday is filled with bond auctions, Tuesday we have inflation & Redbook data, Wednesday is FOMC, Thursday is packed with economic data, and Friday is a big (understatement) Options Expiration. People that crave action will probably love this week, but people like myself that hate whiplash and violent stopouts recognize this week as a great time to brush up on our research, backtesting, and overall mental health.
The other thing that makes this week's Market Prep different is the lack of trustworthy granular data. The purpose of pouring over our charts in preparation is to look for clues in the marketplace that can help us make better informed trading decisions...this is not a good week for identifying clues. Why? Because activity in the index futures markets are split across two different contracts right now, which makes piecing the data together a laborious & error-prone endeavor.
I take a probabilistic approach to trading, meaning statistics matter...a lot. In statistics there's 2 primary error categories, a Type I Error and a Type II Error. Essentially, a Type I Error is concluding that you have a meaningful statistical relationship when you actually don't, while a Type II Error is concluding you don't have a significant statistical relationship when you actually do. In other words, Type I is a false positive and Type II is a false negative. Because of futures contract roll, the risk is very high for making both error types this week. It's really hard to tell what is "meaningful buying/selling" and what is just noise due to larger players rolling their positions.
Long story short, based on the charts and data I reviewed, I don't have a directional bias heading into the week. Based on the technicals, I'd give the edge to the bears but the S&P500 is currently at a non-optimal place for initiating trades with conviction:
Please note, I have rolled all of my ES charts to the March 2023 (H) Contract. The 2hr ES chart above shows the trading channel that seemingly everyone is watching. Typically the first play here would be to try for the short, looking for a breakout swing trade. Honestly, that's probably the best trade given the larger macro picture; however, if you placed that trade now your entry would be right at the YTD Point of Control, reducing the odds that price will travel significantly far away from this area. We can see from the last 2 week's Volume Profiles the market is quite "bipolar" lately. Please forgive the crude analogy, but I mean bipolar in a literal sense, meaning the POCs flip-flopped from the extremes (e.g. it was at the highs of the prior week and lows of last week). In summary, things look bearish but the YTD POC is powerful and we're likely to see snapbacks to the 3965 area.
If ES loses the support line, I would look for support near the 50DMA and 3850, I think that's a strong confluence level (more on that in a minute). If you're a bull, I still think the best odds of catching strong long trades is over 4015. Patience will be important this week.
Ok back to that 3850 confluence level. Not only is there a pronounced High Volume Node (HVN) there, but we also have the top of the Ichimoku Cloud there. Obviously, shorts are the better trade under the 50DMA and inside the Cloud, back down to daily trendline support (white line on the Daily ES Chart above).
So let's summarize these breakout options in one simple chart:
Based on the chop we've been seeing, I would have no interest initiating trades between 3960 and 4015. I think the best Risk/Reward would be to trading a breakout from this range, but be conscious of the 3850 confluence area for a rebid in the market.
We can see something similar on a daily Nasdaq chart:
There's pretty strong confluence/support at 11400 between the 50DMA and the Ichimoku Baseline (red line), but if the bulls regain control I think longs above 11850 could have some legs up to 12275. Would I initiate a NQ trade where price is now? Absolutely not...it's still towards the middle of a 2 week Balance (Chop) Zone.
With all that said, my Weekly Pivot for ES would be 3995, and I'd be plotting the following key levels:
4156.75: +1 Fib Extension from Last Week's Range + 50% Retrace from YTD Lows to Highs
4075: +0.75 Extension
4035: +0.25 Extension
3915: -0.5 Extension + Repeatedly Tested Support (likely to fail now)
3874: -0.75 Extension
3833: -1 Extension + Likely Rebid to 3750 HVN
3752.50: -1.5 Extension + Daily Trendline Support (Panic Rebid Likely)
Considering the lack of trustworthy data we can glean from ES this week due to contract roll, it's probably worth taking a look at a few other critical markets that could impact the S&P500:
Chinese Markets and China's risk appetite in US Markets matters a lot, in my opinion. The daily chart above shows the China A50 at another important spot: Testing the 200DMA while pushing into overbought territory. I'd keep an eye on this one, the A50 hasn't been able to sustain trading over the 200DMA in about 1.5 years...a breakout from here would be a big deal.
Crude Oil can't keep itself out of the headlines either, and I think the trading opportunities this week in CL will probably be better than ES. This is the most sustained period of selling in oil we've seen all year and it's reaching oversold conditions again, which has resulted in a tradeable pops the last 3 times. Considering the aggressive short positioning in oil from hedge funds, this is a very intriguing Risk/Reward place for oil traders.
Finally, bonds have been bid lately, so much so that the Ultra Bonds (UB) actually hit overbought territory (I know, weird right?). This promptly resulted in a pullback off the 146'10 level which has acted as a brickwall. I don't know where bonds go from here, but as a breakout trader I absolutely have alerts set for 146'10, targeting a test of the 200DMA above that level.
As always, thanks for reading. My apologies if the format isn't what you're used to but I value honesty and transparency and I don't trust reading any deeper into the available market data regarding ES at this time due to the aforementioned reasons. Sometimes all we can do is accept that the market isn't providing blatantly obvious clues and wait for better conditions. Whatever you do, please be careful this week and brace for whiplash.
Happy Trading (...or not?),
Horse