Market Prep: Week of Nov. 28, 2022

Can you believe it's been a year already?
 
 It never ceases to amaze me how quickly time goes by. I started publishing my weekly trading thoughts a year ago, and I just wanted to take a moment to thank everyone for the support you've shown over the last year. I never could have imagined the growth we've seen at Traderade and it's all thanks to you.
 
 If you're new to Traderade, welcome to my Weekly Market Prep. Truthfully, I write this blog every Sunday for me, but I'm humbled to have so many faithful readers. This blog is a chance for me to gather my thoughts and prepare for the week ahead, focusing on areas where I'd be interested in engaging in the markets. My primary trading vehicle is the S&P500, so most of the charts you'll see in this write-up will be different timeframes and views of the S&P500 and my attempt to glean clues from the market to aid my trading. Some weeks the clues are obvious while other weeks I'm left scratching my head.
 
 As a trader, my goal is to stay on the right side of momentum. I am not a contrarian trader, I believe the markets are a twisted popularity contest and going against the herd is a painful way to trade (in my experience). There's a lot of different opinions about how to define "momentum trading," but I try to keep it as simple as possible. Essentially, momentum can be defined as present control...i.e. who is in control at this moment, buyers or sellers? One of my goals in this Weekly Market Prep is to identify at what level/point control has changed so I can adjust my bias and stay on the right side of momentum. Traders often refer to this concept as a "pivot."
 
 In my trading, there's always 3 pivots that I'm conscious of:

Thanks to the relentless Bear Market, it's been a while since I've been able to discuss the "Big Picture" Pivot, but the S&P500 has now reached a place where I think it's worth discussing this week.
 
 Before we dive into the charts, allow me to summarize my directional sentiment for the week ahead:

 Despite the bearish macro outlook, the buyers are currently in control and I am bullish until the 200DMA where I'll be looking for evidence of control changing hands to the sellers. If aggressive sellers do not step in at that juncture, I think we have another ~100pts to the upside before we run into the Big Picture Pivot.

Clear as mud? Let's look at the charts so I can explain my logic.

The daily ES_F chart above shows the key Moving Averages that I care about. You may prefer others, but the 20, 50, 100, and 200 are what work for me. As you can see, we are dangerously close to the 200DMA, which is arguably the most important DMA in all of trading. Both institutional and retail traders alike often use the 200DMA to gauge momentum and sentiment. Considering the most obvious trade is often the best one, I see no reason to get bearish until the market has at least tested this key level.
 
 My reasoning isn't just based on the S&P500, we also need to respect the US Dollar as well:

I've spoken exhaustively about the importance of the relationship between the S&P500 and the Dollar (represented here using the DXY). Since the strong negative correlation between these two returned a few months ago, we've all basically been Forex traders whether we like it or not. Taking that into consideration, we should be conscious of where the DXY is now...also dangerously close to its 200DMA (what a surprise).
 
 For the past couple weeks I've stated the buyers are in control of price action, and I've been hesitant to fight against that. The question now is "What would cause the sellers to regain control?" Apart from the Fed's agenda, I'm personally looking at 2 main catalysts to answer that question:

Based on recent media coverage, I think it's safe to say China remains firm on their lockdowns for now. As China is one of the biggest "players" in US stocks/bonds, the uncertainty there is unlikely to produce a massive wave of buying in US stocks/bonds for the time being. Now what about #2, the DXY? It's possible the 200DMA could provide a rebid in the USD and this momentum shift would most likely be bearish for the S&P500 if the strong negative correlation remains (...obviously I think it will remain, I have no evidence otherwise). When we combine these 2 factors, I don't think things are looking too good for a "Santa Rally" in equities this year.
 
 So how do we monetize this thesis? Well for now...we wait.
 
 That's not a cop out, that's my actual plan. I am waiting to observe the reaction to the ES_F 200DMA and DXY 200DMA before entering swing shorts.
 
 "But Horse if you think we're unlikely to get a significant Santa Rally why not start shorting now?"
 
 Good question. The answer is simple: Because the bulls are still in control and I think there's smarter places to enter short-side swing trades. The following charts will explain my thinking:

First and foremost, momentum favors the bulls across all of the various momentum indicators I use to make that determination. The daily SPX chart above shows we're over 50 RSI and over the 50DMA...that's historically good for the buyers.

We also haven't seen any significant signs of exhaustion from the buyers yet. The ES_F TPO Chart above shows some recent poor highs, which the market typically takes out in dramatic fashion. Personally, I need to see a clean taper on the volume profile and/or TPO before even thinking about shorting a market driven by low-volume buying.

The ES_F 1hr Range Chart above shows those key moving averages trending up, which is good for bulls. We can also see price floated above a key trading range last week and the confluence between the Red 200DMA and Purple Trend line looks ripe for the taking...again, not a great place to enter a short in my opinion. If we don't see aggressive sellers step in after tagging to 200DMA, there's another range on the chart we should be paying attention to...it's an old but important range, let me show you why:

The 4120-4160 range is very important to me for several reasons. First, it's been confirmed before, meaning the market respected the trading range and the last large selloff resulted after testing the top of it. This range is also right in the middle of the previous Point of Control (POC) from a long-term perspective:

We can see the large High Volume Node (HVN) just above us. This is another reason I'm not interested in shorts prior to the 200DMA. If we trade through the 200DMA and buyers really step in, I think we head back to 4120 very quickly.
 
 "Ok so there's a buncha volume up there, what's the big deal?"
 
 Another astute question...I'll tell you what the big deal is:

In my trading, retracement levels are important, especially 50% retracements or any increment of 25%. It just so happens [sarcasm] we have some serious confluence of retracement levels overhead in the middle of that 4120-4160 range. Remember the "Big Picture Pivot" I mentioned earlier? Well here it is.
 
 4155 represents a 50% retracement from the YTD highs to lows. ~4150 represents a 75% retracement from all-time highs to the Covid Crash lows. Obviously, this area is important...and it's the main reason I want to wait and see what happens at the 200DMA before placing any swing trades because if we don't reject the 200DMA (~4060ish now) then I'd say the odds of the Bear Market Rally continuing up to 4120-4160 are very high and I'd like to stay on the buyers side for that extra 60-100pts.

In the event that we take out the 200DMA, I'll be watching my trusty parallel crayon lines to help determine when to exit longs and/or enter shorts. If we continue to drift up on low volume and sellers finally step in somewhere between 4120-4160, then I think the Risk/Reward on swings back down to the new Yearly POC at 3970 makes sense.
 
 Until then, stay safe, stay on the side of momentum, and stay observant.

My Weekly Pivot this week is 3965. Other key levels and extensions include:

Happy Trading,
 
 Horse