I hate earnings season. Especially "big tech" week. Why? Because I tend to lose money during this week. It's like a less-predictable OpEx week, full of whiplash and after-hours moves that can destroy an ES_F position easily during windows of time with naturally low liquidity. If FOMC week is the drunk Fraternity Bro, big tech earnings week is the hammered Sorority Girl: The Frat Boy silently chops around, giving no indication of what he's going to do until he violently pukes or rallies. Quite the opposite of the sorority girl, who's visibly intoxicated, swaying back and forth. Sometimes puking mid-sentence, sometimes rallying hard...but always crying no matter what, usually about stupid shit that nobody cares about. (You thought I was going somewhere else with that Frat Boy/Sorority Girl analogy, didn't you?) That's the stock market during this week. It's a dramatic emotional rollercoaster, blown way out of proportion by Wall Street's endless love of gambling. It's not enough to just give us the earnings numbers, noooo...we've got to gamify it by wagering if those numbers match our guesses. "So what, HorseFat? What does this rant mean?" For me, it means preparing for a week of very short duration trades. It means a strategy change from last week, where we confidently road winners up to incredibly obvious liquidity levels. I was bullish heading into last week (See: Last week's Market Prep blog), and the week unfolded beautifully: We got a pullback Monday morning to ride longs up to our target area of liquidity 4500-4540. The first couple days of trading played out so perfectly I really didn't trade much in the second half of the week. I used to have a boss that would constantly say "Make a plan, meet a plan." What do I do when my plan is met 2 days into the trading week? Well...not much. Be thankful and look for the next likely scenarios. And what might those scenarios be? Let's take a closer look at some of the "themes" I'll be watching this week... Market at a Crossroads
As I mentioned on Twitter last week, I think the market has now reached an important decision point. We are at a crossroads: Continue the Bull Market party or enter a cool-off period?
When I say "decision time" I'm not implying that ES_F rejects the key S/R Level and plunges to zero (sorry permabears); instead, it's entirely possible that we simply hug that S/R Line and do a whole lotta nothing for a while, ending the recent stretch of volatility that us day traders have been enjoying. If you made me pick which scenario is more likely between "Enter Bear Market" and "Boring Chop", I'd definitely say Boring Chop. Why? Because looking at the SPX, SPY, and QQQ Option activity it appears many larger players are still nicely hedged. In fact, the past week in Option's land saw more down-side strike activity than I expected given the absolute face-melter rally we had. Long story short: If everyone's expecting downside it tends to be more muted. Obviously there's exceptions, but if we were to see some serious selling this week it appears people are prepared...which could lend itself to more market chop and indecision.
Because the market is at a crossroads, and big tech earnings would be the perfect catalyst to tip it one way or the other, I'm going to let the market make up its mind before engaging.
I'm going to consider 4510-4540 a "No Trade Zone" for me this week, meaning I won't be initiating trades in this zone. We had a monster week nailing those longs to 4540, why give anything back chopping around an area of natural indecision? It's hard to analyze upside targets from here because we're sitting near the All Time High (ATH) and I don't have a volume profile to work with, so most of the remainder of this post will focus on downside scenarios. I'll save the upside crystal-ball reading for the Elliott Wavers and stick to actual data for my analysis.
Before we move on, let me point out a couple quick things about the upside (with data). The resting liquidity on the Limit Order Book has now become imbalanced, in my opinion. This isn't bullish or bearish to me, but if we continue upward, how we continue upward from here will determine if it's bullish or bearish. Lemme explain. There's a lot of contracts waiting to be sold above, right? After the run we just had, I'll be watching to see how eager the buyers are to gobble up those orders. If it's aggressive, then cut up some fat rails for Jimmy Cool and let the Bull Market rage on. If upside buying is reluctant then the market will likely chop or slowly climb putting everyone to sleep...hence my "No Trade Zone." I want to trade a market in motion, not a market at rest. Final point on upside price action: We all know a handful of big banks & 'tutes are responsible for the vast majority of spuz trading...and we are VERY near their EOY price projections for the S&P500. Yeah yeah JP Morgan raised their projection from 4600 to 4700 (whoopee!), but you have to ask yourself: How much more upside is really left before they start front running retail and selling into you as their projections near? Earnings week for big tech could be the perfect time to start doing that (if they haven't already started lol). After all, most price projections for 2021 were ~4500 and we have definitely arrived...twice. Just something to think about. It's not tradable information, but worth having in the back of your mind as you watch events unfold this week.
Ok, moving on to what I'm looking at if we pullback or get whacked by some gnarly reaction to Apple earnings...
Looking at the above chart, it should be clear to all ES_F traders that last week was an incredible rally. We absolutely launched upward away from the previous 4350 Point(s) of Control, establishing a new value area rotating around 4525. ES_F had 8 straight days of positive closes, a feat unseen on the front contract since January 2018*. I'd be lying if I said that didn't make me a little uncomfortable. Too far too fast is typically met with at least 1 violent downside day during the week after. When you couple that with earnings week and Powell's Friday comments on tapering, it's safe to say the market is in a fragile place and there's no shame in sitting out this week. I know I'll be waiting for the market to force me to trade.
If we see some selling and the buyers lose 4512, I will be looking to short under 4510 targeting 4465-68.50. The Low Volume Node (LVN) at 4465-68.50 would serve as a key decision point and a likely rebid area. If things get really aggressive, the bulls left some ugly Volume Profiles in their narcotic-fueled frenzy. 4385 could use some cleanup, but that's a long way away. (A boy can dream)
I'm continuing to see 4510 show up in my analysis as a key area. The buyers have defended it a couple times already:
I really like the short setup below that level, but I am conscious of SPY 450 being equal to 4505, and there will likely be a battle there due to the weight of Options positioning. Because of that weight, I will be using 4493.75 as my weekly pivot, even though I am bearish below 4510. I can't deny the Bulls are in control after last week. I will attempt to short below 4510, but will not get aggressive until we've crossed below the weekly pivot of 4493.75. As I said, I hate earnings week and would rather sit out or get stopped out quickly than lose money this week. Key Extensions/Levels for the Week:
In summary, I wish every week's Market Prep could be as simple as last week's. Unfortunately, that's not how this game works. We were fortunate to have large liquidity targets and obvious Options activity at the 4500 area...it's rare the big players show their cards at the table like that. I anticipate this week will be much harder trading and I'm mentally prepared to get in and out of positions quickly. I already can't wait for this week to be over.
Bullish above 4540, Bearish below 4510. Let the market make us trade. Let it scream to us where it's headed.
Cheers and Happy Trading. - Horse
*Yes, I know SPY did it back in Mar/April 2021...you nerd.