Happy Labor Day! I sincerely hope everyone has had an excellent long weekend, it's time again to dive into the charts!
This Week's Theme: Neutrality.
I love it when the charts align and all signs point to a clear direction for the week ahead; unfortunately, that's not the case this week. I'm seeing a lot of neutral readings right now, but let's dig into the charts so you can see what I'm seeing.
On a daily timeframe, the S&P500 (shown as SPX above) is still currently in an uptrend (as defined by being above the key Daily Moving Averages & the outlines Supply/Demand Zone). The recent exhaustion signal on the chart above gave me the confidence to lean into some long positions, only one of which I still have on. When I look across the indices now all I'm seeing is neutrality:
My Trusty Ol' SPY Model has price right between two large areas of Support and Resistance...again, very neutral.
When I plot the Ichimoku Cloud on the Daily SPX Chart above, we see price barely holding on the the top of the cloud. I personally consider this reading neutral as well considering price historically tends to move quite violently through the clouds. Any lower from where we are now brings volatility back and we're in for more whiplash.
We have a very similar situation on the Nasdaq (no surprise). Buyers have been rejected at the top of the Ichimoku Cloud three times now, which sets up well for a pullback to 15150, my current NQ Pivot. Above the cloud and Big Tech would likely continue its 2023 Stampede to new highs. In the meantime, things are looking neutral here with a slight nod to the Bears.
Small Caps (RTY) are currently about as neutral as it possibly gets, sitting right at Support/Resistance in the middle of the Ichimoku Cloud. No surprise here, but I prefer shorts on RTY this week.
Finally, The Dow also looks very neutral, setting up just like the Nasdaq with buyers getting rejected repeatedly at the top of the Ichimoku Cloud.
If we do pullback this week, the good news is we've got some supportive Daily Moving Averages (DMAs) lurking just below to help support price. We'll zoom in more later, but I'm personally looking for a retest of the 50DMA (Green) this week considering we blasted through it recently without even sniffing a retest. The 20DMA (Blue) is underrated in my opinion; ES Futures tends to produce very clean bounces off the 20DMA, which currently sits at ~4460 right now. If I'm fortunate enough to catch a short through the 50DMA this week I plan to hold a little longer than normal to see a bounce off the 20DMA. Why? Because ES 4460 is very close to the bottom of a previous trading range:
When we zoom in a little to 1hr Candles we can see the confluence between the 20DMA and the bottom of that old range better. However, I'm more interested in playing this current "mini" range the market established over the past few sessions. Before I even get to defining the Weekly Pivot, I can say with certainty I'll be taking longs above 4531.25 and shorts below 4511.75. Breakouts from these little trading ranges are my absolute favorite trades, which is why I take the time to outline these rectangles. Sometimes I think traders struggle to trade clean Trend Days because they lose sight of the slightly larger picture (e.g. 1hr Candles rather than 5min Candles).
Speaking of Weekly Pivot, I'll be using 4514.25 this week. This level marks the +0.25 Fib Retracement from Last Week's Range (all 0.25 increments shown above). I like this Weekly Pivot because it aligns fairly close with the 4511.75 level that marks the bottom of this new mini range we're in. That confluence gives me confidence to lean into short trades intraday under those levels, which will put the pressure on the buyers to defend the 50 and 20DMAs.
In terms of targets, these are the 2 I'm looking at this week. I think if buyers can stay strong above the Weekly Pivot, we've got a good chance of seeing that ridiculous futures gap filled up near ES 4600; if the bears show up in a serious way, I'll be looking for price to stall near 4400 or this possible new Support/Resistance line (shown above in blue).
Now that I have my Weekly Pivot defined, let's talk about some other factors to consider in terms of sentiment and directionality.
Breadth (as defined by % of Stocks Above their 20 & 200DMAs, shown above) also remains very neutral. The red line on the chart above is telling us that roughly half of stocks are above their 200DMA...it really doesn't get more neutral than that.
From a rotational perspective, ES just put in a nice +4.05% rotation, which is slightly above average. Again, while things look very neutral I can see the case for giving the edge to the sellers this week, looking for another rotation back down from here. Admittedly, trading rotations based on percentages is very difficult; I simply consider it good info to have in the back of my mind rather than a trigger for trade entries.
Another factor giving me a little anxiety is the US Dollar. The DXY has returned to a pivotal (pun intended) spot here at 104.275. In my opinion, the DXY recently re-entered an uptrend (over the 50 & 200DMA), but things could get pretty wild over this 104.275 Pivot. Why do I care as an S&P500 trader? Because of the strong inverse correlation between the two indices. When the US Dollar is rising, it's very difficult for the S&P500 to catch a bid. Worth keeping an eye on the dollar this week.
While the VIX has been a turd of an indicator this year, I'd be remiss not to point out the somewhat odd disconnection between the VVIX and VIX we saw late last week. Tytpically, the VIX (yellow) and Volatility of VIX (VVIX, shown in orange) move together. At the end of last week, the VVIX took off to the upside while the VIX continued getting crushed.
Why does this matter? Well in fairness, it might not matter. The VIX has been a poor gauge of volatility recently, but I feel compelled to point out this dislocation because it has preceded some gnarly selloffs in the past. Take a look at the June 9, 2022 selloff, which gave us almost -10% in 3 trading days after the VVIX jumped while the VIX went down. There are no guarantees in the stock market and it doesn't always lead to a selloff, but it's reasonable to enter this week with some extra caution given the neutral momentum readings coupled with this VIX/VVIX phenomenon.
Whatever you do this week, be careful and have fun. Even though I say "have fun" a lot, I truly mean it. If you've reached a point where trading is no longer fun, it's always best to take a break and comeback recharged. If trading starts to feel like a chore it can impact our decision making and hurt our performance. There's no shame in backing away to recalibrate, I do this quite often now. I used to think I was just being "weak" but I've learned I trade best when I'm excited about the markets and following my process.
Happy Trading,
Horse