Ever heard the saying "Begin with the end in mind"...?
If I were to apply that to this Market Prep it would go something like this:
tl;dr Stick to the 30min Opening Range this week & consider buying companies you want to own if SPX reaches 3505.
Welcome to another Weekly Market Prep where I share my thoughts and plans for the week ahead, primarily focusing on the S&P500 (ES_F in the futures). If you're new to Traderade, I perform this analysis every week specifically looking for areas where the market is likely to have a reaction. Reactions are tradeable events (i.e. exiting or initiating a trade). Normally, I try to get as granular as I possibly can; as a day trader points matter therefore specific levels matter. However, today's Market Prep will not be as granular. Instead, I'd like to zoom out and assess things from a broader perspective.
Starting with a daily ES_F chart, we can see the market is currently in "oversold" territory (judging from the RSI on the bottom of the chart). We're currently trading in "No Man's Land," meaning there's no blatantly obvious critical level near current price, like a strong Support/Resistance Line or a key Daily Moving Average (DMA).
Halfway through last week I was hoping to see an Inverse Cup & Handle Pattern form, but the market had other plans, establishing a brick wall at 3730 as the sellers continuously pushed price downward.
That doesn't mean the buyers weren't trying their hardest:
In fact, when we look at the Delta by Price chart from last week, the buyers were very active all week (as seen by the large green numbers on the chart). Despite their eagerness to buy, sellers were happily supplying contracts to them in rather astonishing quantities. If you were to force me to make a prediction for next week based on this chart alone, I'd have to say it looks rather constructive: You have aggressive buying mixed with that one idiot that aggressively sells the lows...large negative delta prints at the lows of a trading range are typically a good sign for a momentum shift in the near term.
HOWEVER...
Before anyone gets excited, that's just one chart and I'd like get out of the "weeds" of granularity to examine the bigger picture.
Allow me to present the "Mother of All LVNs":
Above is a chart of the S&P500 Futures going back to 2017 with a Visible Range Volume Profile on the right-hand side. If you're new to using Volume Profiles, the square I've drawn represents the lowest trading volume area (also called a Low Volume Node or LVN) for the past 5 years. Why is this important? Because LVNs represent key decision points for the market. Why? Because market participants have told us through their actions they don't care for price in the mid 3550s, they prefer it either higher or lower. Therefore, we can reasonably conclude we're approaching a significant turning point for the market: Will buyers step in and defend the LVN, eventually pushing price back upwards? Or will the sellers step on the gas and push us down towards 3300?
I don't know the answer to that question, I don't have a crystal ball. What I do know is how I'll approach this situation as a trader:
I'll do nothing and simply watch.
You might be snickering right now, but that's what I plan to do. For me, trading is about more than being right this week, it's about capital preservation over the long haul. This week smells like trouble to me, and I'm not just referring to the volatility that we're likely to see as the market battles it out over the "Mother of all LVNs"...I'm also referring to the lengthy list of geopolitical nightmare situations lurking in the macro background as well as the 14 Fed Speakers on deck this week (9 of which are speaking between Monday & Tuesday). The Fed seems hellbent on bringing equity prices lower, either via policy or by their seemingly never-ending speeches. As a day trader, I smell violent stop outs and choppy intraday trading ahead...not my cup of tea.
My job is not to find the bottom of the market; my job is to ride the coattails of whichever side wins the LVN Battle of 3550. So I'm simply going to chill for a week as the larger players fight this out.
"But Horse you said SPX 3505 earlier, where did that number come from?"
Great question. Not only do we have the LVN at 3550, we also have another significant market level to watch this week, which makes this zone thicc with confluence:
On the weekly SPX chart above, we can see 3505 represents the halfway point from the Covid-Crash 2020 lows to the market highs. I honestly don't know why the market loves 50% retracements so much, but it does and we tend to see large reactions at these levels. If we see the market trade down into that critical LVN and bounce from SPX 3505, then I'll definitely be buying or Dollar Cost Averaging (DCAing) into a handful of companies in my long-term portfolio. Does that mean I think the bloodshed is over? No not at all, but I am an investor as well as a trader and you simply have to be a buyer at times when it's uncomfortable to buy. If that backfires then I'll be waiting until the low 3000s before DCAing again. Obviously this is not financial advice, I'm simply sharing what I'm looking at and planning to do.
But there's a couple of other things I'd like to see before buying anything:
You don't have to be a quant to understand QQQ and TLT have a strong correlation (Mayhem has been talking about it for months), but I'd like to see TLT catch a bid before buying anything to hold. Bonds have been leading the market down for quite some time, so we simply have to be watching the bond market no matter what your trading/investing time frame is. If you're a day trader, you can use the bonds to gauge your intraday bias: If bonds are getting crushed then you should be favoring short-sided trades on the Nasdaq.
As bad as it sounds, I'm also looking for a violent wash out in breadth. Yes, breadth is very bad right now but truthfully we've seen worse. The red line on the SPX chart above represents the % of Stocks Above their 200-Day Average. It sounds counterintuitive, but when this number gets really low it's historically the best time to buy stocks. So I'd like to see a violent reversal from this indicator before looking for longs.
Ok, enough of the big picture thinking for a bit, let's finish out with some levels and thoughts for the day traders.
The 2hr ES_F Chart above shows the Volume Profiles from the last 2 weeks as well as the YTD profile on the far right. When you're looking for a bottom (on any time frame), you want to see a clean, sharp taper on the lows of a profile...if we're being critical that's not what we saw Friday. A strong low is typically put in from the sellers getting way ahead of themselves and buyers violently stepping in to say "enough is enough"...again, there's no evidence of that here.
There is however clear evidence of a new important level: 3750. I mentioned what LVNs represent earlier, and here we can see another one on a more granular time frame at 3750. After seeing the many rejections of 3730, I'll personally be flipping bullish over 3750 now, favoring long-sided trades. Until then, the sellers are comfortably in control until they approach that critical LVN between 3500-3550.
This doesn't mean I won't take any bullish trades this week; in fact, there's a nice setup I'm eyeing at 3625:
ES_F 3625 acted as support many times last week so it's safe to assume it'll now act as resistance going forward. Therefore, as a trader I'm now looking for longs above 3625 to 3650, because if buyers break that resistance we can logically assume those 25pts to the upside will come quickly. I love these setups and sometimes all it takes is one confident trade to make your entire week.
Last but not least, we have to talk about the US Dollar:
...you thought I was going to talk about Forex, huh? Nope, that's not my market. However, when DXY and ES become strongly inversely correlated it gets my attention. As you can see from the 30min ES & DXY chart above, that correlation appears to be back. I wanted to include this chart in case it helps the newer day traders avoid some pain. When ES and DXY have a strong negative correlation, you want to pay attention to when the correlation breaks. Often those are powerful clues. If the DXY is going down ES will typically go up*...if ES goes down with DXY that should be a strong bearish clue--large traders are likely overriding the algorithmic correlation and we'd be wise not to fight them.
*Note: This tip only applies intraday, not on longer timeframes. The DXY and ES are not always this strongly correlated, but when they are there's usually clues that can help us navigate the markets intraday until the correlation breaks for good. The correlation can last a long time, such as the period we saw from March 2020 to June 2021. I have no idea how long it'll last this time, but I'll definitely be watching closely.
To wrap this up, here's the levels/extensions from last week's trading range that I'll be watching to the downside this week for reactions:
3556.25
3517.25
3478.25
Whatever you do this week, be safe, trade small, and keep an eye on bonds & the US Dollar. As I said last week, oversold is not a bull thesis...yes the market is "due" for a bounce and one should not surprise us but the overall trend is down. There's no gold medal for bottom ticking the market, wait for some serious buyers to step in before joining them.
Happy Trading,
Horse