Monday's price action was hideous. I don't think anyone would argue otherwise. But has anything really changed?
From a short and intermediate timeframe perspective, we need to stop and recognize that the E-Mini S&P 500 futures (Es) contract, along with the S&P 500 cash and SPDR S&P 500 trust ETF (SPY), are beneath their eight-day and 21-day exponential moving averages (EMA), and 50-day simple moving average (SMA). That fact, along with the Relative Strength Index closing beneath the 50-center line, makes me a bit nervous. However, I would still rather tread cautiously as a patient dip buyer than an aggressive (in-the-hole) short seller.
My view continues to be that early-week selling is likely to stabilize and resolve itself higher into Friday's employment report. That said, any long-sided attempts during sell-offs like we saw on Monday are likely to end in pain (trust me, I took some lumps too). So either keep stops tight if trading intraday, or remain on the sidelines until we see price recapture the key short and intermediate timeframe moving averages. There will be a time to aggressively chase stocks on the short side (shorting in the hole on weakness), but that time is absolutely not while the major averages are all still in primary bull trends.
Before we get to Tuesday's Es trade plan, I want to review the February light crude oil futures contract.
We don't see this sort of bearish carnage very often. And I think most traders should simply look at the chart above and walk away. That said, short-term scalpers anxious to roll the dice should remain on alert for any hint of downside excess (candlesticks that have long lower shadows) and a close above the eight-day EMA. Keep an eye on the dollar index, as any weakness there might be the catalysts to send oil back up toward the mid-$50s.
It should come as no surprise that Tuesday's primary test in the Es contract will come as sellers auction price beneath Monday's 2009.50 intraday low. I would be highly suspicious of any upside drive at Tuesday open if we don't first trade beneath Monday's low to test for additional supply. This all amounts to a very simple message: Be wary of any early session strength if we haven't first broken, and rebounded from, levels beneath Monday's low.
A sustained break (30-minute bar close) of 2009.50 during Tuesday's session keeps the bearish momentum in full swing and shifts our focus down toward 2001.75 and 1992. On the flip side, a break and bullish rejection of 2009.50 would immediately have me looking for an upside drive toward 2020.75.
Those looking for the current correction to come to an end should remain firmly planted on the sidelines until, at a bare minimum, the Es is holding back above 2031.50.
- Since I began discussing the Market Vectors Gold Miners ETF (GDX) and Junior Gold Miners (GDXJ) in Monday's Trader Daily, I thought it appropriate to bring to your attention the fact that the 21-day Relative Strength Index has now moved above the 50-center-line in both ETFs. The current uptrends in both the GDX and GDXJ are still fragile, but I believe this is a good area for dip buyers to focus some of their attention.
- Another stock discussed in Monday's report that held up relatively well during yesterday's market rout is Amicus Therapeutics (FOLD). While I traded the stock during the day, I opted not to remain exposed, due to the markets' generally bearish tone. That said, I will continue to keep this stock at the top of my watch list as long as it continues to close above $7.5.
- For those interested in currencies, I think it's about time to start watching how the 6e Euro futures contract trades around the $1.19 to $1.20 level. For stock traders, the $1.19 - $1.20 area on the 6e Euro contract would translate into approximately $117 - $118 on the CurrencyShares Euro ETF (FXE).
Now, while I wouldn't recommend rushing into either the 6e or FXE, I do believe it's worth making a mental note of Monday's long-legged doji candlestick pattern. That doji pattern, as many of you already know, is indicative of a market unsure of where it wants to go. Add into the mix how oversold both the 14-day and 21-day RSI are, and I think we have a market ripe for an upside squeeze.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at firstname.lastname@example.org or posted to my twitter feed @ByrneRWS.