Trader's Daily Notebook: Love Affair With the Fed Is Still Going Strong

 | Jul 13, 2017 | 7:00 AM EDT
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I can't remember who first uttered the phrase that traders love to love the Fed, but it certainly described Wednesday's price action to a tee.

During the Globex session, a couple of hours before Fed Chair Janet Yellen's testimony, I pulled a quote on the E-Mini S&P 500 futures (Es) and found it basing smack-dab on top of our 2427.75 area of interest. My assumption at the time was an open near current levels would put option No. 1, discussed in Wednesday's Trader's Daily Notebook, into play. But as you can see on the chart below, the moment Yellen's remarks hit the tape, the auction exploded to the upside and we were testing 2435.50 to 2436.50 (our primary upside target for the day) as the regular session got under way.

5-Minute Intraday S&P 500 Futures

If you weren't long ahead of Yellen's remarks, you likely missed out on the pre-market ramp. However, as long as you didn't fade the open, which you shouldn't have since price never traded even a single tick beneath the opening print, you shouldn't have gotten hurt. If anything, the frustration of seeing the Es gap 10 handles higher should have been the only pain you had to endure.

Over a higher timeframe, it's easy to see the Es is once again above its shorter timeframe moving averages (MA) and pushing away from the 50-day MA. As a short-term trader, I don't want to ignore the fact that we've been rotating between 2400 and the mid-2440s since the end of May. So while the Es is trading above the 20-day and 50-day MA, and that is bullish, I don't want to be in too great a hurry to assume the nearly seven-week consolidation period has come to an end.

Daily S&P 500 Futures Volume Profile

With earnings season set to begin and price above all short and intermediate timeframe MAs, my inclination is to tread lightly with day timeframe shorts, only considering short sales when price is beneath both the opening print and volume weighted average price (VWAP). And even then, day timeframe shorts should probably be closed as price dips toward the 20-day or 21-day MA.

Traders wanting to stick with the prevailing trend should maintain a bullish posture, buying dips toward the 20-day MA until the contract is closing back beneath that figure. Price acceptance (or simply a 30-minute bar close) above the mid-2440s could quickly morph into a bullish drift toward 2450 and new contract highs. Put another way, don't be a hero with day timeframe short sales as traders embrace prices above the mid-2440.

Moving on to Thursday's Es auction, we'll begin the day using 2438.50 as our direction pivot. As long as we're holding above that figure, traders will be expected to buy dips and press their bets toward 2443.75. Price acceptance above 2443.75, while likely to attract waves of responsive sellers, would be expected to drift toward 2450. In a nutshell, if you're looking for the market to give back a bit of Wednesday's gains, you'll want to be careful being short as value migrates above 2443.75.

5-Minute S&P 500 Futures Volume Profile

Rejection from the mid-2440s doesn't necessarily lead to a meaningful decline. Bearish rotation toward 2438.50 and 2435 would be our primary expectation, with any continued selling beneath 2435 shining a light on 2428. Those approaching the Es from a timeframe measured in anything greater than minutes or hours may want to stalk reasons to buy a dip toward 2428.

Don't expect recent buyers to throw up their hands in frustration without a complete collapse and close under 2420.

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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