Trader's Daily Notebook: Rally Rattles Bears' Cage

 | Feb 10, 2017 | 7:00 AM EST
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Traders finally managed to sustain a break above the big figure (2300) on the E-Mini S&P 500 futures (Es) during Thursday's regular session, but as you can imagine, the rally only served to further anger bears.

While it's impossible to know whether sufficient demand exists to sustain prices above 2300 over a higher timeframe, the fact remains we lack any sort of price-based evidence suggesting we should be adopting a bearish posture. For some, the lack of bearish price action has become borderline intolerable. But the market doesn't exist to please its participants. It exists to facilitate trade. And for now, the trend of that trade is bullish. 

Daily S&P 500 Futures Volume Profile

After Thursday's review of the VanEck Vectors Gold Miners ETF (GDX) , several traders asked whether a brief discussion of gold futures (Gc) and U.S. dollar index futures (Dx) wouldn't also be appropriate. So with that in mind, let's take a look at daily charts of both gold and dollar futures. 

Daily Gold Futures
Daily U.S. Dollar Index Futures

Basing one's trading decision solely on the price movement of another instrument can be incredibly risky. However, anyone who's traded Gc or Dx futures is likely aware that the two markets often (though not always) move in opposite directions. As you review the two charts above, note the sideways consolidation that occurred during the final days of 2016. Both instruments traded in a horizontal pattern. Gold futures chopped around at multimonth lows, while dollar futures did the same at multimonth highs. In both cases, this horizontal consolidation resulted in a shift in the short and intermediate timeframe trend. 

The Dx contract closed above its 21-day exponential moving average (EMA) on Thursday for the first time since Jan. 5. And while recapturing that shorter timeframe reference point is a bullish development, we mustn't ignore where price is trading in relation to its year-to-date (YTD) volume weighted average price (VWAP) and 50-day simple moving average (SMA). I believe the higher timeframe trend in dollar futures remains bullish.

Based on this, my inclination is to stalk the Dx contract or PowerShares U.S. Dollar Index ETF (UUP) for a long. A close above the YTD VWAP and 50-day SMA, accompanied by the relative strength index (RSI) trading back above the 50 center-line, would be a logical entry trigger. 

If we're stalking a long play in the dollar, shouldn't we be bearish on gold futures? Yes and no. 

I'm really not sure if gold futures are going to consolidate above $1,180, or fall back down toward the mid-December lows. What I do know, however, is I don't want to adopt an outright bearish opinion of that market until price is back under the YTD VWAP. And as far as longs are concerned, I don't see a bullish entry I like with price trading between $1,235 and $1,250. For that matter, I'd be pretty nervous entering a long position above $1,220 until I see price close two or three weekly bars above that level. 

The bottom line is while the dollar and gold often trade inverse of each other, I'm currently more inclined to look bullishly on the Dx contract than bearishly on the Gc contract. 

Moving on to Friday's Es auction, we'll end the week with a focus on 2299.50 to 2301.75. As long as dip buyers respond to prices advertised within that roughly two-handle zone, our baseline expectation will be for continued attempts to push past 2307.75, and on to new contract highs. 

Because no legacy supply issues exist above 2307.75, scaling into a short (at new contract highs) based solely on your opinion that prices are too high may not be the wisest course of action. Those hell-bent on catching a top in this market would be wise to wait for price to turn lower, perhaps back beneath the big figure, before stepping in with offers to sell short. 

5-Minute S&P 500 Futures Volume Profile

A failed trade from 2299.50 would be expected to trigger additional selling, likely toward 2294.25. At this point, value migration beneath 2294.25 would be considered bearish, and likely an indication that a near-term decline toward the 2272.25 YTD VWAP is in order. 

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at or posted to my Twitter feed @ByrneRWS 


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