Greetings and Happy Sunday! We survived another wild and confusing week in the markets...hard to believe it's already time to prepare for the week ahead. This week's Market Prep will be very simple. If last week taught us anything it's overanalyzing things is probably not a good use of energy. We saw several moves in the indices and individual equities that "didn't make sense," so I'm going to do my best to focus on what matters most now: Key areas that I want to engage with the market. I'm not going to bother trying to read tea leaves or dust off the tinfoil hat, I'm simply going to trade from the areas that are most likely to provide a reaction in price.
In terms of sentiment, the bulls have been in control for a few weeks now, aggressively bidding up the market, from small caps to large. I still think there are some signs that favor a pullback; however, the reality of the situation is everything depends on what the large players slinging 0DTEs want to do...not just "want to do" for the week, but every single day. In my experience as a retail trader, I can't really remember a time with so many dramatic sentiment changes in things like the Put/Call Ratio or daily options flow. It feels like we're experiencing microscopic bear and bull markets every week and sometimes every day. As a day trader, this is primetime for ditching any long-term outlooks we may be clinging to and focusing on trading each session like the battle it is. So, that's what I'm going to do.
Let me begin by sharing a few charts highlighting some concerns beneath the surface I'm watching, then I'll end with some more granular charts for where I'm looking to place trades.
Continuing the conversation about the insane utilization of options, my Trusty Ol' SPY Model is still throwing signals indicating that things are getting stretched pretty far in "Options Land," which essentially means more volatility is in store...but I think we could have guessed that by now.
The Traderade VIX Model also continues to distrust this recent rally, and for anyone that watches the VIX tick-for-tick intraday, you've probably noticed some bizarre disconnection between SPX and volatility measures lately as well.
In other words, something stinks. While I may not be able to put my finger on what it is yet, I know it's entirely possible for the market to shrug off the stench and keep rallying, so I'm hesitant to equate a funny smell to bearishness, but I am going to give the sellers more of the benefit of the doubt this week than I have in the prior weeks.
I'm still concerned about the Daily SPX Chart above with Implied/Historical Volatility plotted below. If patterns do indeed repeat, this setup still points to a reversal. We shall see.
Similarly, the Relative Volatility Index is also throwing a Red Flag as the last time we saw higher lows after hitting "excessive" readings, the market pulled back dramatically. I think these patterns are worth watching more now than ever considering the aforementioned dominance that options continue to have in the marketplace.
I'm also now very conscious of the recent strong move in the US Dollar, reversing the initial FOMC move more dramatically than the S&P500 did. Why does DXY matter? Even though the incredibly strong intraday negative correlation between ES and DXY broke late last year, a rapidly rising dollar will still put pressure on the equity indices. With any style of trading, you always want the wind at your back. Swimming upstream is for salmon, not traders...keep watching the dollar.
If you want to play the dollar, I still think Gold is the best vehicle for now if you're not a Forex trader (I'm not, I have a family). It's top of my watchlist this week for downside continuation on a rising dollar.
Now that we have the concerning things out of the way, let's get a little more granular and talk about places where reactions are likely to happen. The first chart I'm going to share is very "zoomed in" and will act as my trading grid for this week. I am going to do my absolute best to only engage with the market at these dynamic levels:
I'm sorry I can't put specific prices on the 1hr ES Chart above because the areas of Support/Resistance I am most interested in this week depend on time. Nonetheless, these are the primary "Crayon Lines" I am interested in for the week ahead.
Zooming out a tad, if we do see downside continuation, I will have to give the buyers the benefit of the doubt to defend at that "First Line of Defense" trendline...especially considering it represents a breakout from the previous channel (remember, retests are common). If we trade lower than that then I think we simply have to consider the confluence between the 20DMA and the lower trendline providing support as well. Considering I'm as long-term directionally clueless as you're probably feeling, I'll be looking to trade initial bounces from these areas in size, leaving runners for a larger move if I'm to get so lucky.
I do think there's reason to look for a little more downside before getting outright bearish:
From a Volume by Price perspective, some "clean up" is needed from 4090-4130. In my opinion, we now have some imbalance left in the wake of FOMC and the prominent bullish Volume Shelf at 4090 should make a rather obvious target if ES can finally trade under 4135...a level where we saw significant absorption from the buyers on Friday:
In the 1hr ES Delta by Price Chart above, we can see the reason why 4135 will be challenging to get through: That level markets the largest area of outright aggression from the buyers that we've seen YTD, with some massive icebergs just beneath as well.
We can also see from the chart above a rather serious volume void under 4135, where I expect price to accelerate rapidly down to 4090 if the sellers can pull it off.
To allow myself some cushion and to ensure I don't get caught on the wrong side of such a move, I'm going to be using 4108 as my Weekly Pivot. There was some resting liquidity at 4110 for much of last week, and there's a chance the sellers fill that before price reverses, so I don't want to get caught in a scenario where I'm short targeting 4090 if it's not meant to be. Therefore, 4108 is my number this week favoring longs above and shorts below.
Other Key Levels/Extensions:
4309: +1 Fib Extension from Last Week's Range
4258.75: +0.75 Fib Extension from Last Week's Range
4158.25: +0.25 Fib Extension from Last Week's Range & Top of 4095-4160 Range
4057.75: -0.25 Fib Extension from Last Week's Range & Likely Rebid Level
3957.25: -0.75 Fib Extension from Last Week's Range
3907: -1 Fib Extension from Last Week's Range & Daily Trendline Support
I hope everyone has a great week ahead, focusing on likely areas of reaction rather than opinions and noise.
Happy Trading,
Horse