After spending more than two months chopping and churning within a 90-handle zone, I suspect most participants were hoping for a more exciting breakout in the E-Mini S&P 500 futures (Es). And by exciting, I am referring to a breakout accompanied by a significant expansion in trade volume. The only problem is strong volume hasn't accompanied upside breaks from balance (consolidation) for years. Waiting for volume to return during upside drives has not been a winning strategy.
Would stronger volume give participants a bit more confidence that the rally had staying power? Perhaps. But I'd argue it's easier, and probably more reliable, to simply monitor the migration of value and the direction of a couple short-term moving averages. And while the Es contract may currently be a bit extended on a short timeframe, the upwards progression of value and the fact that we continue to close over short-term moving averages tell me the path of least resistance is higher.
The bottom line is it's impossible to know how far the current imbalanced (trending) auction will extend. It could stall out today near 2100. Or it may continue to 2200, 2300 and beyond. What we do know is that our odds of success will improve greatly if we focus more of our time trading in the direction of value, and less of it searching for reasons why the current rally may finally be the one that marks some sort of enduring top.
Moving on to Wednesday's regular session auction, my baseline expectation is that all trading above 2091.50 will keep momentum buyers actively pressing their bets toward 2098.25 and new life-of-contract highs.
Those searching for intraday price objectives as the contract probes new life-of-contract highs should consider referring to 1.5x and/or 2x the initial balance range. As a reminder, the initial balance refers to the regular season's first hour's trading range. So two potential upside targets would be 1.5x and 2x that first hour's trading range. Suffice it to say this is nothing more than a guidepost for day timeframe traders searching for an upside objective, as the contract probes uncharted levels.
Failure to hold the line near 2091.50 shouldn't be expected to trigger much of a sell-off, but it would have the potential to correct as low as 2083.25. At least initially, my inclination would be to step back on the bid toward that level. Anyone wanting to position themselves for a more meaningful slide (back down toward 2066 or 2040) should consider first waiting for a close beneath 2083.25.
1. One of Wednesday's most talked-about headlines is likely to be Warren Buffett's decision to eliminate his long position in Exxon Mobil (XOM) and ConocoPhillips (COP). Other energy-related moves revealed in Buffett's 13F filing were a modest reduction in his National Oilwell Varco (NOV) holding, and a roughly 20% increase in his Suncor Energy (SU) investment. Read what you will into Buffett's decision regarding XOM. But do remember the Oracle of Omaha is not known for making short-term, emotionally driven investment decisions.
2. How sharp has the drop in the iShares 20+ Year Treasury Bond ETF (TLT) been since the beginning of the month? Unadjusted for dividends, the TLT has only closed beneath its lower Bollinger band twice since November 2013. And the second time was at the close of equity trading on Tuesday Feb. 17. Downside support would be expected to come in near the rising 150-day and 200-day exponential moving averages. But to be frank, I'd be a bit scared to be pressing a short bond bet at these levels into Wednesday's 2 p.m. release of the FOMC Minutes. A bounce above $127.50 would seem sufficient to trigger upside continuation toward $130.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at email@example.com or posted to my twitter feed @ByrneRWS.