Happy Sunday, friends! You made it through the worst of futures contract roll and options expiration, congrats!
That's right...unfortunately this week will be a bit of a "good news/bad news" situation. The good news is the expectedly tumultuous OpEx week is behind us; however we can safely assume more volatility is in store this week with the Fed's Interest Rate Decision on Wednesday.
"But Horse it's already priced in..."
Yeah, well they've all technically been priced in this year...that hasn't stopped the market from having violent reactions to the news on the day of and the day after. Therefore, I see no reason to expect things to be different this week.
If this FOMC week is to play out like the recent ones, we can expect the following high-level projection for the S&P500:
Monday: Nothing too interesting, possible low-volume grind up
Tuesday: "Hmm it looks like someone knows something about tomorrow..."
Wednesday: Market sits in a holding pattern prior to 2PM EST, then goes absolutely bananas as hedges roll off/put on
Thursday: Market attempts to retrace whatever madness happened on Wednesday afternoon
Friday: (Horse plays golf)
Assuming the general assessment above is somewhat accurate, as a trader there's 2 primary actionable elements that we can use to make a trading plan:
Where is the most likely place for a "holding pattern"?
If we are to "go bananas," what prices would we want to join the market for the ride?
During this week's Market Prep, my objective is to answer those 2 questions. Let's dig in!
Question 1: Where's the most likely place for the market to consolidate in a holding pattern?
To answer this question, let's start by zooming out to a Daily ES_F chart. From a support/resistance perspective, the market is barely holding on to trendline support. If we are to continue to hold this support line we're very likely to drift back towards areas of high volume, which is overhead. "Going bananas" would involve likely ripping back through the "volume vacuum" that ES_F has created, likely retesting 4100...but I'm getting ahead of myself.
In the spirit of proper due diligence, we can't just use volume for this analysis, we also need to take time into consideration. If I were forced to guess, based on recent trading activity, I think the most likely place for the market to sit in a "holding pattern" would be near 3950.
(We'll get back to the 3977 Pivot later...)
If you listened to our past Midweek Updates/Monthly Recap Videos, I mentioned the mid-3800s was my personal "line in the sand" for bullish trades, meaning I would be very interested in shorting the market to new lows under that level. As volatile as last week was, the bulls managed to hold 3850, keeping ES_F from falling outside of the YTD Value Area. That's important to me because if the market doesn't want to go down anymore, then where does it want to go? The obvious answer would be back to an area where we've seen a lot more interest, e.g. 3950. In fact, if you look at the YTD Volume Profile on the far right, you can see the blatant bubble of volume clustered around 3950. Coincidentally (or not), a push back to that area would put price back near the trendline on the chart above.
In summary, based on this disparity between current price and the most obvious area of interest, I am looking for long trades back up to 3950.
Question 2: If ES_F is going to "go bananas" this week, where would I want to join in the party?
For me, the most obvious answer to that question is above 3977. We experienced several rejections of 3975 last week so I would not plan on another rejection should that level be tested again. In addition, if we trade above 3977 I would be on high watch for cleaning up the poor structure between 4065-4110 left in the wake of the CPI bloodbath. To put it plainly, 3977 is my "go bananas" level on the long side. On the short side, my level remains the same: Under 3850 and I'm only interested in shorts. Here's another view:
The 1hr Range Chart above shows 3855 as the bottom of this range, but I often like to wait a few points for price to clear these levels because (in my opinion) "stop runs" are a very real phenomenon and I have no interested in falling victim to that by entering an aggressively short trade right at 3855 just to get stopped out immediately. Patience often pays.
If the buyers can clear 3977, then it's impossible to ignore the amazing confluence overhead between the 20, 50, and 100 Daily Moving Averages (DMAs). It's rare to see them all hanging out like that together (how cute), so when it happens it gets my attention for upside targets.
*Note: If you follow my work closely I just want to make sure you noticed some of these range levels have recently changed due to contract roll + new volume.
If the market decides to hold the lows in the 3850 range, then naturally we should be assessing where likely retracements would stall. In this case, 4000 represents a nearly perfect 50% retrace, and the 20DMA will likely represent a nearly perfect 61.8% retrace. Just wanted to throw that in here for you Fibonacci Alfredo fans.
While we're discussing the bull case, it's worth noting the 4hr RSI/Price divergence is back...again. In my experience, this is not easily tradable information but nevertheless it's background data that we should keep in mind as part of good situational awareness.
Also worth noting on the chart above: If we indeed continue to hold that daily trendline on the chart above, where would the most obvious place price would be headed? That's right, the High Volume Node (HVN) at 3950.
One final chart:
I've posted my trusty ol' SPY Model a thousand times in the past, but I still do rely on it and tend not to ignore it. On Friday we printed a pretty reliable signal, indicating that a "pop" in price the following trading day is likely. While I can't get into the innerworkings of this signal, you can count the green circles on the chart above when it's worked vs. the red circles when it's failed...decent results. However, the failure rate isn't entirely my focus here: What's interesting to note is what happens after it fails--it typically results in A LOT more downside in the near future. So while I'm looking for longs back to 3950 at a minimum, if I don't see that Monday then I will inevitably have a pretty strong bearish bias. In coding/systematic trading, sometimes a failed signal is still incredibly powerful information and entirely tradable.
I hope you've enjoyed this week's Market Prep, as you can see I'm keeping things pretty simple again due to the Fed's Interest Rate decision on Wednesday. ES_F 3977 is the most important level to me and I'll once again be treading lightly as the bears are still in control of this market.
Happy Trading,
Horse