Updated: Nov 9, 2022
Well hopefully the Stock Market bulls are breathing a collective sigh of relief because the Phillies did not win the World Series, preventing a catastrophic market crash! (I'm joking, but if you're not familiar with the history between the Phillies and major financial market crashes, it's really interesting.) I hope everyone had a great weekend, it's time to dive into the charts and prepare for the week ahead.
The S&P500 bulls lost some key levels this week between the 100 Daily Moving Average (DMA), the 50DMA, and that critical daily trendline the market has been flirting with for several months now. Last week I described my directional bias as "Neutral" after being "Cautiously Bullish" during the two prior weeks. This week? Neutral again, with a slight edge for the bears. We're not quite at a level where I'd be flat out bearish, but I think you'll see in the charts why I think the bears have regained the upper-hand and it's their "ball to drop" this week. Unfortunately, I expect another volatile week with the 2022 Elections on deck and the return of the dreaded "Fed Speakers"; therefore, I'm back to trading small size which is confirmed by my simple Position Size Indicator:
The daily SPX chart above shows we're back under the 50DMA and 50 RSI. For me, this warrants caution...again.
During last week's Market Prep, I was watching the Ichimoku Cloud to see if buyers could rip through it, giving some steam to the rally off the lows...unfortunately despite the aggressive buying*, the bulls couldn't get it done which leaves us with a very important area of confluence that will be a theme during this week's Market Prep: ES_F 3820.
*About that "Aggressive Buying": Here's a 30min ES Chart with the Numbers Bar Calculated Indicator on the bottom, showing buyers have undoubtedly been the aggressors from a delta perspective, meaning they have eagerly crossed the Bid-Ask spread with size several times since the yearly lows. The concern here is they've not really been rewarded for it so far. Obviously that could all change this week, but until then I am growing more skeptical.
Ok, back to that important 3820 level...
This 1hr ES Range Chart is ugly...and not just because of all my obnoxious lines/indicators. The S&P500 rejected the upper range from 3854-3905 with authority, blowing through the 50DMA, which bulls were not able to retest (much to my disappointment). Now price is battling a new trendline (the purple line above), which I'll be watching closely this week as I trade. Note the location of the 50DMA: It's sitting in an important Low Volume Node (LVN) near 3820, which we can see better on this chart:
The 2hr ES Chart above shows the weekly Volume Profiles plus the Year to Date Profile. We now have a noticeable LVN near 3820, where the market will be forced to make a decision. In an effort to keep things simple, I'll be using 3820 as my Weekly Pivot this week, favoring longs above and shorts below. I mentioned earlier that we're not currently trading at a price where I'd be all-out bearish, but should ES return to 3725 I will only be interested in shorts below that level as I think it could bring new yearly lows into play. Still not convinced that 3820 is super important? Here's yet another view showing why this is a serious level of confluence:
During last week's Midweek Update Video I explained why I was looking for buyers to step in around 3725: If all of that aggressive buying was purchased to open, we can reasonably conclude that those buyers would want to defend their positions...they did. However, I wouldn't count on that defense again. As you can see from the multiple "wicky" candlesticks there, it was quite the battle and buyers were forced to step in several times. In my experience, the more a critical level gets tested the weaker it gets. I'd definitely put a horizontal line on your charts at 3725 in case we see it again this week. On the Delta by Price Chart above (Oct. 1 - Present) we can see the noticeable lack of aggressive engagement at 3820...the delta dries up there. Again, that level will force a decision from the market.
Here's another view using Volume Profiles:
When possible, I try to call out "easy money" trades during these Market Preps when I see them. Despite the bearish picture the charts are painting, I think there's a solid long scalp opportunity here from +3805 to that key pivot at 3820. Yes it's only 15pts, but I'll take what I can get in this market. I like this scalp setup mainly because I can't stand "Double Top" patterns and I think if ES approaches 3805 again it's far more likely to pop through to 3820 versus the alternative which would be to reject 3805 again. As if you haven't seen enough bearish charts, here's one more for good measure:
This indicator from nextSignals also flipped bearish again this week. Obviously I don't have a crystal ball and anything could happen with the Elections & general headline risk this week, but I'm simply trying to share what I'm seeing in the markets using tangible evidence, and things don't look as good as they did a few weeks ago. One thing I really didn't like was Friday's close. I posted a few comments about it in the Discord after I saw the price action, but let me take this opportunity to elaborate on what I was seeing:
FunFact: Did you know you're basically a Forex trader now? Unless you've been living under a rock, it should be clear the US Dollar is strongly in control of equity index movement. When the inverse correlation is as strong as it is right now, the DXY and ES charts almost look like a mirror image of each other +90% of the time. Naturally, I look for instances when this correlation breaks because it can often provide clues as a trader. We saw some notable bearish divergence on ES/DXY on Friday, where ES should have gone up but it didn't. During the close, we also saw ES get way ahead of itself as DXY essentially flattened out. This was most likely forced buying on ES or SPX, which is never a great thing to see.
The clues weren't just in the S&P500 either, the Nasdaq had an "uncomfortable" close on Friday as well, completely ignoring bonds...which has not resolved well during this bear market. The last Friday close were we saw this happen resulted in a sharp pullback for NQ (as highlighted on the NDX vs TLT 5min Chart above). This isn't a "OMG the world is ending!" scenario be any means, I simply pointed it out in the Traderade Discord because it's reason for concern on Monday, especially considering NQ has lost support:
The hedging I did last week worked out well and I plan to stay hedged through the elections. Please remember everything I'm sharing here is presented from a Technical Analysis perspective, but the bigger picture (macro) still matters and things can change very quickly, especially if the market has a dramatic reaction to the election results, geopolitical tensions, or if this week's Fed Speakers use language that could be interpreted as indicating a future Fed pivot. In my opinion, the charts point a gloomy picture heading into this week, but we need to stay alert and on our toes...things can and will change quickly during this period of heightened volatility. Whatever you do, do it carefully! Happy Trading, Horse