Greetings! Typically the first week of the year is not an ideal time for a vacation as a trader, but considering the choppy market action to start the year I don't think I missed much (and the vacation was long overdue). After being stuck in airports for way too long, I made it back in time for Friday's trading session...just to commit one of the biggest cardinal sins in trading:
I'm a Breakout Trader...and I didn't take the breakout.
Whoops.
This was one of those cases where not making money felt worse than losing money. It also goes to show the importance of sticking to your strengths and proven strategies. I'd like to blame my indecision on the vacation, but I won't...I simply didn't take the trade and I regret it. I sat there like a deer in headlights watching ES grind upward, shaking my head as I refused to chase it.
Why didn't I take it? I guess I let "feelings" get in the way of strategy. I didn't "like" the setup, especially with the large VIX gap down. Truthfully? I still don't like the breakout. It screams "False Breakout" to me, but thankfully we now have a new range to guide our trading this week:
It's a big zone, but I'll be using this 70pt ES range from 3830 to 3900 as a guide this week. My goal is to not enter a new position inside the range because obviously chop is highly likely. I have to respect the decent Relative Volume (bottom of the chart) that we're seeing so far in the new year. If the buyers really want the market higher, I need to join them at some point. So far, I'm looking at a rebid at 3875-3900, otherwise I'm going to wait until the 50 Daily Moving Average near 3940 to enter the party*. It's no secret the 50DMA is my favorite simple indicator for gauging momentum:
If we trade above the 50DMA this week I'll only be interested in buying dips because, well, history and statistics. However, we have some important economic data drops this week as well as some Powell jawboning, so I'm not sure it'll be smooth sailing just yet. Let's stick with the bull case for now before we examine the bear case.
So far on the bull side we have the following encouraging developments:
We broke out of that 70pt range to the upside
We're dangerously close to trading above the 50DMA
We're in the Bullish Ichimoku Cloud (more on that in a moment)
We're over 50 RSI
Fairly strong new year volume
Bonds are shockingly well bid
Let's examine a couple more things in favor of the bulls:
I love this momentum indicator from nextSignals on Twitter, and it just flipped bullish. The interaction between SPX Implied Vol vs Historical Vol is also starting to looking frighteningly similar to the last aggressive Bear Market Rally.
I mentioned the Ichimoku Cloud earlier, and here we see price ripping towards the top of it where (conveniently) the 2022 Point of Control (POC) was, as well as a cluster of key DMAs like the 50, 100, and 20 just below. There's also a very important daily trendline (the red one) that should provide support to the market in the 3880s (more on that in a moment).
Long story short, things look rather bullish.
...so why am I having these hauntingly bearish thoughts? Truthfully, because nothing has really changed from a macro perspective and we need to get past Powell and CPI this week before I'm convinced the change in momentum is legit.
There's still a sizable Put Option "wall" down at SPX 3800 that concerns me. A wild Powell speech or gnarly CPI print could push us below, exacerbating volatility to the downside. I'm not saying that'll happen, but my guard is up this week...especially below 3830. That's my personal cutoff for long trades; under that level and it'll be only shorts. Let's look at that bear case a little more:
The Weekly Volume Profiles on the 2hr ES Chart above shows us the Balance Zone pretty clearly. We have a decent bullish volume shelf from 3875-80, where I'd expect a rebid if sellers push us back inside the 3830-3900 range. If that fails, I think all eyes should be on 3830 ES, which is very close to that SPX 3800 Put Wall.
The chart above is of Friday's trading session and we can see 3875 is where the buyers really went on the offensive...I'd expect them to defend that untested level now. Underneath that we can see the sellers got ahead of themselves at 3830-40, but I'm inclined to join them now should they retest that area.
Continuing the discussion on the bear case, I also noted a signal on my SPY Model that I don't see a lot, indicating things got a little "stretched" in the options market on Friday. I interpret this as "volatility is likely Monday with a bias to the downside," but the signal has failed recently so take it with a grain of salt.
I'm also conscious of the Traderade Discord VIX Model that recently flipped short (only to get absolutely stuffed on Friday).
So what have we learned? Honestly, not much. There's mixed signals on both sides, which makes sense considering the consolidation pattern the market has been in for the past couple weeks. I wish I had some stronger directional clues to share with you all, but the reality is they just aren't there. I think we need to see how the market reacts to Powell and CPI. With that said, I am not planning on initiating swing trades this week, instead I'll be focused on day trading. I think we'll have a better idea of where we're headed after this week.
I'll be using ES 3875 as my Weekly Pivot, favoring longs above and shorts below, but no aggressive shorts until we're under 3830.
Other Key Levels/Extensions:
4100: +2 Fib Extension from Last Week's Range
4042.75: +1.5 Fib Extension from Last Week's Range
3985.75 +1 Fib Extension from Last Week's Range
3900: Top of Trading Range & +0.25 Fib Extension from Last Week's Range
3843: Last Line of Defense for Bulls & -0.25 Fib Extension from Last Week's Range
3757.25: -1 Fib Extension from Last Week's Range & Top of Old Trading Range (High Probability of a Bounce Here)
Happy Trading,
Horse
*Note: I am using the "Last" setting for the DMAs in SierraCharts, rather than Open, High, Low, or Close...which is why my DMAs might be slightly different than yours (I like mine more).