Where to begin?
Let's start with some digression from the Weekly Market Prep "norm," if you'll allow me to speak candidly for a moment:
I don't trust anyone with strong directional views right now. To me, it screams "I'm new at this" or "I'm in the business of collecting client fees or payment for order flow."
The reason I feel that way is because of the vast amount of mixed signals I'm seeing in the market right now. I know from direct feedback that many of my readers look to this weekly write-up for directional clues and are disappointed when I don't have a strong directional bias. I wish I didn't have to disappoint you again, but I might as well get this out of the way early: I don't have a strong feel for where we are headed this week.
I'm mentioning that early to save you from having to read more if that's what you're looking for. Trust me, I'm disappointed too. But, I remain committed to sharing my thoughts and analysis based on a data-driven approach...and some weeks I can't reach a strong conclusion from the data. If you chose to continue reading, I think you'll see why.
The S&P500 closed -4.65% last week, bringing us back down near -23% YTD. The Relative Strength Index closed at 29.79 on SPX, putting price in the "oversold" territory, which we surprisingly haven't seen since February this year. As noted on the daily SPX chart above, previous periods of heavy (above average) selling have been met with rather aggressive bounces...the big question is now "Will we bounce again this week?"
Here's my dilemma: Yes, I agree we are oversold and due for a relief bounce, but is the bounce worth committing my capital?
Normally I'd say yes; however, by my count we have at least 14 Fed Speeches on deck this week as well as truly frightening geopolitical tensions around the globe...so I'm not so sure this time. Maybe I'm jaded because my last few swing trade attempts on the S&P500 have been dogshit (I either paper handed or held too long on all of them), but there's nothing concrete jumping out at me screaming "This is the time to buy!" or "This is the time to sell!"
Let's start exploring these mixed signals. I'll begin with my trust ol' SPY Model, which printed a "Pop" signal on Friday, indicating a strong possibility the market will bounce on Monday. I'm fine with that, I covered the success rate of that indicator in last week's Market Prep, and it would align with these aggressive buy delta prints on Friday:
As long as we're discussing data in favor of the bulls, let's look at the weekly Volume Profiles:
It's tough to ignore the iceberging we saw at 3780, which should act as a magnet in the event of a bounce. The heavy institutional interest there created the largest High Volume Node (HVN) outside of value on the YTD Profile. If you're bullish, don't overthink it: HVNs of that size are absolutely magnets.
The chart above also shows us a very clean volume taper at the lows on the YTD Profile, as well as what can be described as a "hard bottom" on the candlesticks. For the new folks, don't confuse the trading term "hard bottom" with an actual market bottom, it's simply a way to describe downward price action that culminates in a bullish candle with a long wick, retracing into the body of the previous candle...in plain English it's often a sign of momentum changing in the short-term.
Again referencing the chart above, I think the buyers have 2 major areas of resistance to get through now, 3750 and 3850. We saw very large resting limit orders at both of those levels for quite some time, so expecting some defense upon returning is logical. ES_F 3850 represents a large area of imbalance now with a notable Low Volume Node (LVN) where the market will be forced to make a choice--drift back into the 3900s or push back to the iceberg at 3780 (your guess is as good as mine). Regardless of what happens, I will be looking for sellers to reoffer 3850 should price return this week.
ES_F 3850 has been my overall market pivot for a while. The sellers are in control under that level. On the 1hr ES_F Range Chart above, we can see 3855 represents the bottom of an old trading range, which supports the thesis that sellers will likely defend that area.
During weeks where I have mixed feeling and mixed signals, I often try to brainstorm scenarios that could result in "easy points" (as if there's such a thing in this market). I am very interested in the trade from 3750 to 3770 this week. That long trade for 20pts may not seem like much, but depending on how you play it, it could absolutely make your entire week amidst rampant uncertainty. I like this setup for a long scalp for a couple reasons: The first and most obvious reason is the incredibly thin volume left in the wake of the selloff through that zone. These are typically ripe setups for retracement. That doesn't mean you buy now, it means you scalp it over 3750 with the thesis that price will likely rip quickly to 3770 before the icerberger (not a real word) is likely to defend 3780.
Here's another view of that setup: Delta by Price on a 1hr Chart. Upon visual inspection, it's easy to see there's a notable delta void in that area; price pushed hard and fast down through, with someone dumping ~1500 contracts into the resting liquidity at 3750. The void tells us people weren't really interested in transacting there, so the theory is they will remain uninterested should that area trade again, making for a quick but lucrative scalping opportunity. (More on the "bottomy" part later...)
To round out our discussion on the possibility of a bullish bounce, let's look at 3 more charts:
If you're a fan of Tom DeMark's system/signals, it's worth noting we printed a DeMark 9 on Friday while RSI hit oversold...that's pretty favorable for a bounce historically.
I've posted this VIX & SPX chart in the past to gauge Implied Volatility vs Historical, but what really catches my eye here is how close the Relative Volatility Index is from a "bouncing point." The red horizontal lines on the bottom aren't part of the indicator, they are my own doing, but it's safe to say we've consistently seen bounces from the S&P500 when the Relative Volatility Index reaches that lower red line...we are very close now.
Finally, if Friday's lows hold here's the bullish retracement levels I'll be targeting for any long swings. I think the buyers need to reclaim 3750 to show me they are serious before I would trust these targets. Nevertheless, what I find interesting about them is each Fib retracement level here also coincides with large previous levels of institutional engagement, e.g. icebergs. Wouldn't it be wonderful if things played out this cleanly? It would, but trading is messy and this is almost too good to be true to me, but a guy can dream.
Now it's time to look at the bear case. Starting with the Delta by Price chart I previously posted, the first thing I notice is the delta doesn't look super "bottomy" (also not a real word, but you get the point). You usually see either aggressive selling at the bottom (aka a bunch of big red delta prints) or aggressive buying. To my eye, I see a mixed bag.
I would be remiss if I didn't use this opportunity to mention how much I don't trust double bottoms. In my opinion, it's an outdated trading pattern that used to be reliable but nowadays the market seems to prefer running stoplosses rather than reversing at exact double bottoms.
We are very close to a "double bottom" on the S&P500 from the June lows, and I was actually a bit surprised we didn't test the bottom on Friday. I've posted a weekly SPX chart above, referencing the price action in the post-Dot.com bubble. Truthfully, I hate analogue charts, but I think the comparison here is worth noting. Double bottoms are hard to play these days, and I don't find them reliable. Traders were looking for a double bottom in 2001 as well, only to watch price continue to plunge...and that was with the RSI being oversold. Note, SPX is not even close to oversold on the weekly basis yet. Long story short, I would be shocked if the June lows hold now that we're this close to that level. I've been saying for weeks 3850 was my line in the sand to short to new lows and I still think that's the most probabilistic scenario.
The other reason why I'm reluctant to be a buyer here at 3711 is this market is still technically "in motion" right now:
Knowing myself, I am most successful when trading ranges. I define ranges as areas of overlapping value (with preference given to RTH volume), or a "market at rest." If we're being good students of Technical Analysis, this is technically still a market in motion, we don't have any areas of overlapping value since breaking out to the downside from the previous range. Proper risk management tells me to wait for a new range to be established and trade from that, either eyeing a breakout from the range or trading from the lows to the highs (or highs to the lows) of the range. In my opinion, the key to successful range trading is patience. You have to wait for the market to tell you where the range is. Given the 1hr ES_F Chart above, hopefully you can see why I'm reluctant to engage with the market right now on the bullish side...the trend is still blatantly downward.
Speaking of being good students of Technical Analysis, I'll offer the following as a friendly reminder: "Oversold" is not a good thesis for longs. The market can always become more oversold. [*insert irrational & solvent platitude yada yada yada*]
In conclusion, I plan to be a scalper this week, trusting nothing, taking loses quickly and booking profits religiously. There's nothing worse than smiling over a winning trade only to have some bonehead Fed Speaker destroy your position with one random quote. I have no strong directional bias for the week; I do think a bounce is likely but when or how trustworthy it will be remains to be seen. I know I've been saying 3850 for weeks, but to be precise I will be using 3867.25 as my Weekly Pivot...the bears are in control under that level. My main focus for the week will be identifying a new range in ES_F to trade from. Until then, stay safe and be careful.
Happy Trading,
Horse