Trader's Daily Notebook: Keeping a Short Leash

 | Jul 12, 2017 | 7:00 AM EDT
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Stock quotes in this article:

spy

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IWM

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XBI

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IBB

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XLV

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XME

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cenx

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rgld

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sxc

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stld

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OIH

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xle

Tuesday was a fine day for day timeframe scalpers, with roughly 1 million E-Mini S&P futures (Es) contracts changing hands over a 17-handle range, but those operating over a higher timeframe were left on the sidelines. At some point, the current horizontal chop will come to an end, and a more aggressive and motivated participant steps forward. Until that time, however, we'll continue to trade within a very short timeframe and avoid adopting too aggressive a directional bias.

Daily S&P 500 Futures
 

As far as the Es is concerned, we'll continue to use the 20-day or 21-day moving average (MA) along with the multiweek downtrend line as our upside trigger. A combination of the 50-day MA and the big figure (2400) will act as our downside line in the sand. Those anxious to adopt a bearish trading posture would be wise to tread lightly as long as we're trading above 2400.

Away from the Es and SPDR S&P 500 Trust (SPY) , I'd still look for reasons to be long either the Mini Russell 2000 futures (Tf) or iShares Russell 2000 Index (IWM) rather than short them. And the Nasdaq, which posted decent closing numbers Tuesday, is still my preferred index to stalk on the short side.

Away from the major indices, we continue to see quiet and controlled consolidation in biotech and healthcare, with the SPDR S&P Biotech (XBI) , iShares Nasdaq Biotechnology ETF (IBB) and Health Care Select Sector SPDR (XLV) all locked in a 12-session consolidation pattern. All these ETFs remain bullish on an intermediate timeframe, though volatility, especially in the IBB, can make them tricky to scalp during the day timeframe.

I've received several notes regarding the two-day rally in shares of the SPDR S&P Metals & Mining ETF (XME) , and while a few names in the ETF, such as Century Aluminum (CENX) , Royal Gold (RGLD) , Suncoke Energy (SXC) and Steel Dynamics (STLD) do have interesting charts, I'm struggling to see past the speed bumps that lie between current levels and $32.

SPDR S&P Metals & Mining ETF (XME) -- Daily
 

While I'm always inclined to be bullish on something trading above its 50-day and 200-day MA, in this case, I'd rather remain neutral (not bearish!) and wait for a base to form above $31 to $32. Give me such a base, and I'll turn bullish in a hurry. 

As an update for those trading the VanEck Vectors Oil Services ETF (OIH) and Energy Select Sector SPDR (XLE) , the American Petroleum Institute (API) reported a draw of over 8 million barrels in its latest report released after the closing bell Tuesday. Analysts had been expecting a drawdown in crude stocks of around 2.5 million to 3 million barrels, so this is likely to give a lift to energy stocks. At least off the open.

If you're trading the XLE, I'm inclined to avoid it completely beneath $64.35, adopt a bullish trading posture above $65, and further increase my level of conviction if it closes above the 50-day MA around $66.15.

As far as the OIH is concerned, I'd avoid it beneath $24.50, adopt a bullish trading posture above $24.95, and get ready for an upside squeeze if it closes above $26 to $26.25.

Moving on to Wednesday's Es auction, we'll begin the day pivoting off 2420.75. An open above that level that holds the opening print has a clear path toward 2427.75. Assuming Donald Trump Jr. doesn't have any additional skeletons in his email folder he's planning on releasing during the trading day, scalpers have two options. Option No. 1 is to adopt an aggressively bullish trading posture above 2427.75, with 2435.50 to 2436.50 acting as our primary target. Option No. 2, and notably less aggressive, would be to trade smaller until value begins to migrate above 2431.25.

Assuming we get a 30-minute bar close above 2427.75, my inclination would be to follow option No. 1.

15-Minute S&P 500 Futures Volume Profile
 

A bearish open or failed trade from 2420.75 encourages traders to sell the contract down toward 2413.75. Acceptance beneath that level (note that prices were bullishly rejected from beneath 2415 during Tuesday's regular session) opens the door to bearish continuation toward 2400.75 to 2401.75.

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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