I'd like to start today's Market Prep by zooming out conceptually and discussing the state of the market through the most simplistic lens possible: Stocks making new All Time Highs (ATHs) tend to continue to make new ATHs in the near-term. This is just an indisputable fact based on historical observation.
We have a bit of a problem though. Stocks aren't really making new ATHs, a small handful of them are...in dramatic fashion. Take this weekly chart of META, for example:
META experienced its largest up-move in history last week, while the rest of the S&P500 remains unimpressed:
"But Horse, you're just cherry picking META here as an example..."
Fair, but stay with me a sec, we're building something here. Let me cook...
What I'm trying to say is this: Historically, some of the largest market gains (velocity of price change over time) have come during these periods of thematic, narrative driven bubbles; however, some of the most dramatic market losses have come directly after.
So far, I have not said anything you don't already know, but I think it's a good reminder to acknowledge the environment we're in because how you chose to trade it from here is entirely up to your timeframe, life goals, and risk tolerance. In other words, I think at this particular moment in time both Bears and Bulls are correct in their assessments. Timeframe is what matters now. If you're bullish in the short term, you're correct to be feeling that way as we watch the indices rip higher ignoring every whisper of bad news around the globe. If you're feeling bearish and thinking "This is getting ridiculous" you're also correct...it is.
Let's take a moment to get in the "Way Back Machine" and look at the original (OG) equal weighted index, the Value Line Geometric Index:
The monthly VALUG chart above is essentially just another way of visualizing breadth, but that rudimentary definition is so simplistic it's probably disrespectful to its creator Arnold Bernhard (to learn more, here's a basic explanation https://thebusinessprofessor.com/en_US/investments-trading-financial-markets/value-line-composite-index-definition)
The chart-crime above shows the S&P500 in orange and the Nasdaq in light blue vs VALUG simply to demonstrate the glaring divergence we're currently experiencing. When the rest of the stock market doesn't follow the S&P500 and the Nasdaq, large corrections happen. Period. It doesn't matter what the snake-oil salesmen on CNBC tell you, since these indices have existed there's no evidence these divergences are sustainable. Market mechanics and plumbing change over time, but human psychology doesn't.
Here's a Daily Candle look at VALUG vs the Nasdaq to demonstrate this phenomenon from multiple timeframes:
Now, you might be thinking "But Horse, what if the rest of the companies in the indices decide to catch up to the Mag 7?" Personally, I think that scenario is becoming less and less likely but it doesn't matter...if you're worried about missing it then just trade the breakout if it happens:
So how do we take this information and translate it back to something actionable as traders? That's a great question because these periods of dislocation can last for an uncomfortably long time. For me, this means I'm not interested in new long-term stock purchases at this time (unless they are uncorrelated to the S&P500 and have a very strong thesis). It also means my day trading bias will remain bullish until we get serious selling from the Bears (which I'd quantify as a -2% down day with bearish continuation the following day). If VALUG breaks out to the long side and the bearish divergences on the Index RSI/Price reset, I'll be reassessing my outlook. But, as we're now very close to SPX 5000, my outlook for the remainder of 2024 is now bearish:
This entire opening segment of my Market Prep is a very long winded way of saying you can be bearish the market without trying to swing short it to zero. Shorting bubble-like behavior is very difficult and I have no desire to sell my long-term holdings yet. I'm just not interested in new investments here as I believe there's a strong likelihood I can get better prices in the future if I'm patient.
With that out of the way, let's dive into the week ahead.
The S&P500 Futures (ES) ripped toward 5000 this week, falling short of achieving it by a few points. The trend remains extremely bullish over every key Daily Moving Average (DMA), but with an RSI/Price divergence that is screaming "Caution!" louder than we've seen in a long time.
From an Anchored VWAP perspective (anchored from Swing Highs/Lows) we can see ES struggling to pop above the Anchored Long Line (white) which is a bit concerning for Bulls; however, the steady rise in both AVWAP lines is very unusual and a testament to the relentless strength of the S&P500.
My Trusty Ol' SPY Model above got dangerously close to tagging last week's predicted Max Highs. I took a tactical short in ES at the end of Friday hoping this was "close enough," but we'll find out on Monday if it is.
I am still concerned about the atypical VIX/SPX Positive Correlation we're experiencing as that's typically a sign of impending volatility. The screenshot above shows the correlation is in the "Danger Zone" (Red Candles) on both the Daily (top) and Weekly (bottom) timeframes. Past periods like this have produced some gnarly corrections.
I also remain concerned the P/C Ratio is still near the "Bearish Extreme" line at 0.7. While SKEW has improved (indicating the presence of some hedging) the P/C Ratio still shows a market relatively uninterested in downside protection.
Let's chat briefly about this chart above. While my Exhaustion Indicator (red and white dots) was created to be used on a Daily timeframe, I noticed historical clustering on a Weekly timeframe is also not bullish in the months that follow. Again, I have no idea when/if the market will finally correct and reset, but the indicators are screaming at us that the odds are increasing.
To round out our discussion of the S&P500, let's get more granular for a minute:
I will be using ES 4932 as a Weekly Pivot this week. It represents the mid-point from last week's range and serves as a crucial Bullish Volume Shelf (as seen on the 2hr ES Chart above). The two day trade setups I'm most interested in on the chart above are 1) shorts under 4932 targeting the YTD POC at 4916 and 2) shorts under the Bearish Shelf at 4868 targeting the breakout level at 4841.75. Based on the chart above, it's reasonable to look for rebids first at 4932 and 48.41.75 should price return there.
The 1hr ES Chart above shows a classic breakout after ripping above 4925, retesting it, and ripping upward again (almost all of which was on high volume on a relative basis, as evidenced by the blue Relative Volume Bars). As previously mentioned, I did take a small short EOD Friday in case ES needs a reset before taking on 5000 again; if I'm fortunate enough to get some traction on this trade I plan to hold until 4900 instead of removing the core at 4925. This calculated decision is simply based on my distrust of "Double Bottoms"...4925 already held once in dramatic fashion, I wouldn't expect that to happen again. Please note this short is simply me probing the market for weakness, I'll abandon it quickly over ES 5000 since that will bring SPX 5000 into play and I'm sure the 0DTE Degens will be all over that strike again like the mouth-breathing button-mashers they are.
Back to the Weekly Pivot:
Another reason I like 4932 as a Pivot for the Week is because of the current "Godline" (Sorry, I know it's a dumb term but it makes me laugh. It's just a 135MA on a 10 tick Renko). ES 4932 would put price just under the current reading up near 4937, just enough wiggle-room to make me comfortable shorting under the Pivot.
Finally, above we have the 0.25 increment extensions from last week's trading range. A "normal" move this week could range from 5063.75 down to 4800.25...brace for volatility, my friends.
Before we wrap up, I want to highlight a few specific, individual ticker trade setups I'm looking for this week.
I'm still cautiously bullish the Russell 2000. I know it makes no sense, but as a technical trader I see a grinding market respecting both trendlines and critical DMAs. The 50DMA (White Line) is going for its second RTY save in the last couple weeks...not interested in fighting the Russell as long as it's above the 50DMA and the descending trendline (which it is).
From an Anchored VWAP perspective, RTY is actually still stronger than ES and NQ considering it's above the Anchored Long Line (white), while the others are below. For me, the next big RTY leg up would be from +2025 to 2167, so I'm waiting a little longer to get bulled up again.
On the bear side, I did take a simplistic short trade on KRE, looking for the bottom of this wedge to hit before price gets back over the upper descending trendline. With more rumblings about regional banking problems, this is a narrative + price-weakness driven thesis.
Crude Oil is likely to catch a bid after the weekend's geopolitical updates (I'll keep my comments here to myself, much like this Administration likes to keep its war-like actions to itself, far from Congressional approval). Considering the recent weakness in Oil, I'm waiting a bit before jumping in long this time. I'd like to see price over this 4hr trendline before taking a long, with stops below the 200DMA (on the 4hr timeframe). I'd be targeting the 50DMA (on the 4hr timeframe) for this trade. It's not a big move, but it's how I prefer to trade Crude intraday. I like to catch a strong scalp trade full-size, then cut to runners and let it ride...I don't know any other way to trade Oil, it's quite volatile and I'm not a global energy expert.
Finally, I like the Risk/Reward on TLT if it loses its 50DMA + Descending Trendline again. If this setup presents its self, I like putting my stops above the recent highs, targeting the lower trendline for the core position.
With most of the "Big Tech" earnings and new month inflows out of the way, I'm expecting some movement from the market this week. While I'm long-term bearish the market from here, I recognize the fact we're in a narrative-driven bubble (AI) and I need to be selective about my trades. Whatever you do this week, do it carefully.
Happy Trading,
Horse