Trader's Daily Notebook: Don't Make Any Moves Based on Tax Talk

 | Apr 21, 2017 | 7:00 AM EDT
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QQQ

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spy

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IWM

"It will be soon, very soon. It will be sweeping, it will be significant and it will create a lot of economic growth." -- Treasury Secretary Steven Mnuchin speaking about the Trump administration's tax reform plan 

Investors love tax cuts, or at least that's the general consensus. So when Treasury Secretary Steven Mnuchin said the Trump administration's tax plan would be both sweeping and significant, it's only natural that the same folks selling their stocks 24 hours earlier would turn around and buy them all back. At higher prices, no less. The icing on the cake seemed to be when Mnuchin went on to suggest "the plan will pay for itself with growth." All the gain without any of the pain. What a deal. 

I don't want to totally dismiss Thursday's bullish drive, because it's always possible for a single session's advance to be the start of a major rally. However, anyone putting money to work based solely on speculation surrounding the current administration's tax plan might want to think things over a bit. Nothing's ever presented to Congress, and passed in its original form, in a timely manner. Traders were willing to whistle past the graveyard Trumpcare was buried in (though it's reportedly being resurrected). I don't believe they'll be so accommodating if the much-anticipated tax plan also fails to gain traction (or proves to be less sweeping and significant). 

Let's not waste any more time on politics (U.S or French) and instead move on to a few index ETF charts. 

PowerShares QQQ Trust (QQQ) -- Daily

I want to start with the PowerShares QQQ Trust (QQQ) because, believe it or not, it actually finished Thursday's session at a new closing swing high. Given that the QQQ never broke beneath its 50-day exponential moving average (EMA), I don't believe we can say the ETF did anything but consolidate its first-quarter gains. The consolidation has been sloppy and difficult to trade, so while a push above $133.50 would be a new high print, I don't see a favorable risk/reward setup. I'd pass on trading the QQQ altogether at the moment. 

SPDR S&P 500 Trust (SPY) -- Daily

For as bullish as everyone in the media appeared to be at the close of Thursday's session, the SPDR S&P 500 Trust (SPY) is still trapped in a pretty choppy mess. A close above the late-March highs (roughly $236.50) and the purple downtrend line ($237.25 to $237.50) would go a long way toward convincing me the recent test of the year-to-date (YTD) volume weighted average price (VWAP) was the extent of our near-term selling. For now, however, I'm not a believer. 

While sufficient damage has yet to be inflicted on the SPY to convince me the ETF is headed meaningfully lower (I still want to see a break of the YTD VWAP), I'm also unconvinced we're going to surge, unscathed, through this multiweek chop. Go ahead, bulls, I'm happy to be proven wrong. 

iShares Russell 2000 Index (IWM) -- Daily

The iShares Russell 2000 Index (IWM) closed Thursday's session above its YTD VWAP, all short and intermediate moving averages, and a two-month downtrend line. All bullish developments. Unfortunately, the ETF has been trapped between $133 and $138.50 for all but a couple of weeks since early December. And don't forget how well the ETF performed when it tried to break higher in mid-February. 

The bottom line is I need more convincing before I trust bulls have what it takes to sustain a new, meaningful rally in the IWM. So while it's possible Thursday's advance might be the start of something big, I believe it's equally possible the ETF is simply nearing the top of its multimonth price channel, destined to attract the same sellers who have been camped out there since early to mid-December. 

Moving on to Friday's E-Mini S&P 500 futures (Es) auction, we'll end the week with a focus on 2346.50 to 2347.75. As long as any dip into that area attracts buyers, our general direction would be expected to be higher, toward 2360.25. As price gains acceptance above 2360.25, a path toward 2368.75 and 2375 opens up. As a reminder, there's quite a bit of congestion between the low to mid-2360s. I wouldn't expect any drive through that area to be particularly smooth. 

15-Minute S&P 500 Futures Volume Profile

A failed trade from 2346.50 has the potential to turn nasty in a hurry. All trading beneath that figure exposes us to selling toward 2337.25 to 2338.50, which, as you know, would amount to a complete giveback of Thursday's gains. 

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

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