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I hope everyone is having a great weekend so far! Some light snow finally started here in Michigan, so my family and I spent the weekend rushing to get last minute yardwork done and watching movies. I love the Fall season and I wish it would last a little longer this year! Before I jump into talking markets, I just want to say thanks to everyone for all of the great feedback about the website. Thanks to your support, I'm finally able to bring someone on to help with the design and functionality. I'll be honest with you: I'm a trader, not a web designer. I initially thought about doing a Substack for this blog because it's easy, but I went this route because I want this place to be so much more than a blog. For $5/month on Substack you only get a blog...but here we can post videos, interviews, educational articles, and so much more. Thanks for your patience as I continue to explore ways to provide you more value.
Ok, I'll shut up now...let's talk markets!
Let's review the main takeaways from last week's Market Prep Blog:
1. I went into the week favoring a pullback on the S&P500...
...that worked out well.
2. Despite the Russell 2000's recent breakout, I was playing for a pullback:
...we got one, but not as much as I had hoped for (more on that later). Overall, I had a solid week of trading, mostly sticking to range breakout trades (e.g. Wednesday & Friday on ES_F). I stuck to my plan a did trade like a "spineless wuss" (lol), being very selective with my trades due to the numerous "FedTalks" and inflation data drops. If last week wasn't fun enough for you, I've got great news: It's OpEx Week again!
If you're new to trading, Options Expiration (OpEx) Week means we're in for some volatility. For me, this means smaller position sizes with wider stoplosses.
If you've been following me on Twitter for a while, it's no secret that I strongly favor the short side Tuesday-Thursday during OpEx weeks, and if you look at the chart above you'll see why. I've drawn a shaded gray box around the OpEx weeks post-Covid Crash, and put a screenshot of some basic data that I track on the right-hand side. What the data table doesn't show is the overall range during OpEx week (peak high to low), but needless to say it's typically quite wide. Long story short: The market swings during OpEx week thanks to the incredible weight that dealer positioning has on the stock market. Take a look at any FinTwit chart regarding the increase in flows into the Options market over the past couple years and you'll see why. We are still in the grips of "Options Mania," and as long as that's the case I see no reason to adjust my trading strategy this week: Expect. Volatility.
I'm also expecting volume. If you remember from last week's Market Prep, I was looking for an increase in Relative Volume prior to OpEx week as a potential clue that we've hit a turning point and might be headed back down...I did not see that:
Speaking of charts from last week:
The bullish saves on Wednesday and Friday were important, in my opinion. As I mentioned last week, I will be looking to short a break from that green channel on ES_F, and the buyers stepped in heavy to absorb that dip to 4625.25 on Wednesday (see Relative Volume chart above)...that was a BIG clue for me to be looking for a bullish range break, which we eventually saw on Friday. If we see more downside action this week, you better believe I'll be watching this channel again for looking for a breakout below it.
Ok, let's get more granular now and talk about the specific levels that will be on my charts this week.
Unless you've been living under a rock, you'll notice that 4680 has established itself as a critical Decision Point for ES_F. We've had a lot of interaction with this level. 4660 is also establishing itself as a meaningful level and I will now look to it to provide support in the event of a pullback. It's hard to see, but in the upper right on the chart above you'll notice a little volume shelf that the ES_F Bulls have built for themselves at 4708. I will be using that shelf as the door to further upside insanity. If we break that, I wouldn't want to be short.
Same chart, different view: Friday's move did cause a cute little breakout for ES_F above that short-term resistance level. You'll also notice the bearish volume shelf at 4690 at the top of last week's Value Area. That's the next big milestone for ES_F Bulls in my opinion: If they get through that it could be a quick trip up to 4708, where I'll be watching for another breakout long. Here's another chart to support my thesis:
From a long-term Delta by Price perspective, the sellers went bananas at 4690-4695. If they are unable to defend that area then I'd expect things to blow up in their face (as usual).
While we're on the Delta chart (and since it's OpEx week), we should also take a moment to look below. I'm calling this zone from 4635-4650 "The Bear Cave" because it's primarily been met with relatively aggressive selling, absorbed nicely by the Bulls. However, it's now worth considering what happens if this area is tested again. If that happens I would anticipate this is where the real selling will start; remember, there's still a very thin volume area down to 4620...things could escalate quickly if we get back into the Bear Cave again. Just a theory and I could be wrong, but I've mapped it on my chart just in case.
Since we're on the topic of downside volatility, I should probably mention to keep an eye out for the 20 Daily Moving Average (20DMA) if things get weird. ES_F has left all meaningful MA's in the dust on this recent rally, but the 20DMA is currently sitting ~4600 and I would expect a reaction from price if we get near it this week (e.g. good place to take a core short off or good place for scalp long entries).
Ok, so what's my plan in a nutshell for ES_F? Since it's OpEx week, and I'm anticipating above-average volatility, I will be using a "Do Not Trade" Zone again from 4666-4680. 4680 is essentially acting as the Pivot for the week, but I do not want to get chopped up inside that 14pt range down to 4666.
I have no directional bias this week. As we discussed, OpEx tends to bring downside price action midweek, and it's not uncommon to see an absolutely insane move on Friday afternoon. I also plan to be flat all index Options positions before EOD Friday (Monday's post-OpEx are historically unpredictable and wild...no thanks.)
Targets for the Week Include:
Upside: 4707
4747.25
4788.75
4809.25 (if things get real wild) Downside:
4625
4584.25
4563.75
Quick Note about the Russell 2000 (RTY):
My overall views of RTY have not changed: We are still in a breakout from a long term perspective. To me, the breakout is still valid above 2310. BUT...I'm now watching the 2408 area like a hawk because if sellers push through that now I still think a quick trip to 2365 is likely. I was playing it short last week and wanted more from the trade but alas RTY is a stubborn POS and cares for no one's feelings. I now have a line at 2408 my chart and will be pivoting around that area as it has built out some classic bearish volume wedges.
Good luck this week, my friends. Trade well, trade safe, and thank you for being here. -Horse