At Tuesday's regular session high, the E-Mini S&P 500 futures (Es) contract had rallied more than 70 handles from Monday's early morning low. That sort of upside explosion brings back visions of V-shaped bottoms and never-ending rallies. But how likely are we, really, to return to the 2013/2014 playbook, where all declines are bought and the only losers are those that either sell short or fail to buy the dip? In my view, not very likely.
Think about what occurred over the past few days. Light crude oil bounced more than 20%. Bond yields (on both the 10-year and 30-year) stopped falling. Energy stocks, as measured by the Energy Select Sector SPDR (XLE) and Market Vectors Oil Services (OIH), enjoyed a sizable bounce. The US dollar index stopped rising (allowing crude to find its footing), trading as low as its 21-day exponential moving average (EMA) for the first time since mid-December. And financial stocks, a notably weak group during the first month of 2015, recaptured their 150-day and 200-day EMAs, as measured by the Financial Select Sector SPDR (XLF).
I don't care how you spin it, that's a lot of stuff reversing course at the same time. Put another way, several popular themes stopped working, or at least hit speed bumps, at roughly the same time.
My own (index-related) view remains the same as it's been for weeks. The broad market is in balance and should continue to be traded as such. The balance range in the Es contract, despite the upside rally over the past two days, is still 1980 to 2070/2075. To be perfectly clear, I still favor fading (selling) strength toward the upper end of balance, and fading (buying) weakness toward 1980. One's trading timeframe will obviously dictate how one approaches the edges of balance, but until value shifts outside our roughly 90-handle range (above 2070/2075 or beneath 1980), I want to maintain a generally responsive approach.
Before we address Wednesday's regular session Es auction, I want to offer a quick update on the iShares 20+ Year Treasury Bond ETF (TLT). I've made no secret of the fact I've been trading TLT to the short side on a day timeframe basis. However, with Tuesday's short-term bearish break and close beneath the eight-day EMA, we might also see a slightly higher timeframe seller finally enter the auction. Every intermediate and higher timeframe moving average is still trending higher. So an open mind and unemotional outlook remain essential. Bond bears don't want to see the TLT recapture the eight-day EMA.
Moving along to Wednesday's Es auction, my baseline expectation is for buyers to remain active and in control of the auction's tone as long we're trading above 2034.50/2035.75. All trading above that area encourages buyers to press their bets toward 2045.50, 2052.25 and 2056.50. Our next major upside target remains the January 2061-2062 swing highs.
Failure to hold the line at 2034.50 doesn't reverse the market's short-term bullish trend, but it does provide sellers with an opening to auction the market back down toward 2026.25. Assuming the current advance is destined to test the upper end of composite balance (2070-2075), I wouldn't expect much business to be conducted beneath the mid-2020s.
- Apple (AAPL) has been a favorite among momentum buyers for ages, but like much of the market, it's gone nowhere for several months. If your approach revolves around buying strong stocks breaking to new highs, keep an eye on AAPL as it breaks above $120. Once the stock closes at a new high, and assuming your timeframe is relatively short in duration, I wouldn't want to see it close back beneath the eight-day EMA.
- The rally in energy stocks appears to be shining the spotlight on other beaten-down industries as well. Stocks like Peabody (BTU), Consol Energy (CNX) and United States Steel Corp (X) are all enjoying sharp rebounds. However, please keep in mind that the longer term moving averages for the vast majority of these beaten-down energy and material names are all declining. If you're trading these stocks on the long side, by all means enjoy the ride as shorts endure a painful squeeze. Just don't be too quick to adopt a genuinely bullish posture.
- With Twitter's (TWTR) most recent quarterly results due out after the close of regular session trading this Thursday, I thought I'd remind those involved in the stock that while the $40 level has been resistance over the past month, the stock also has upside resistance at $44 and the declining 150-day and 200-day EMA ($42.40-$43.50). If you feel you have an edge, exploit it. Otherwise, step aside and wait for a fatter pitch to be lobbed your way.
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.