Bulls suffered a setback Tuesday, no question about it. But unless you entered the session with an overweight position in energy, biotech and/or mining stocks, you probably weathered the decline relatively well.
Based on our ongoing correlation to crude oil, equity traders have reason to worry if the commodity can't find a bottom over the next day or two (preferably from above $35). But Tuesday's price action alone should not have you bailing on all your positions. We still lack sufficient evidence to bet too aggressively on the idea that the current advance has run its course. The bottom line is that while the E-Mini S&P 500 futures (Es) contract did close beneath its five-day exponential moving average (EMA) for only the second time since Feb. 12, it's still above all other short and intermediate time-frame moving averages.
Before we get to Wednesday's regular-session Es trade plan, let's take a moment to review what happened in the oil patch on Tuesday.
We spent some time in Tuesday's Trader Daily discussing the heavily shorted energy stocks that had recently spiked anywhere from 50% to as high as 300%. My view was that day time-frame traders were actively stalking tradable highs in these sorts of names. And based on Tuesday's results, I believe it's fair to say we found our tradable high.
Names like Ultra Petroleum (UPL), Basic Energy (BAS), Chesapeake Energy (CHK), Tidewater (TDW) and Murphy Oil (MUR) all declined between 15% and 33%. And it really doesn't matter that the aforementioned stocks are still well in the black on a five-day rolling basis. Those sort of declines will make any trader gag if they're caught leaning the wrong way.
Like many of you, I am actively trading these names during the day time frame. But as I said in Tuesday's Trader Daily, don't be flippant in regard to your risk. While the recent upside spike has unquestionably been related to squeezing the shorts, who's to say a more committed buyer won't materialize if and when crude oil stabilizes and trades higher. If you're going to trade the day's most active names, remember to maintain your short time frame and not allow a speculative position to be quietly pushed into the investment account once it becomes an uncomfortable loser. Maintain your discipline.
Moving on to Wednesday's Es auction, we'll look to begin the session with an initial focus on 1974 to 1975. As long as value doesn't plummet beneath that area, I don't believe we should rule out dip buyers stepping back in and auctioning price back toward 1985.75 and 1991.50.
A sustained trade beneath the mid-1970s isn't out of the question. And while a price vacuum (where selling would be expected to accelerate) begins to open up beneath 1975, I'd expect dip buyers to re-enter the auction toward 1965 to1966.25. The bottom line is a session close beneath 1974 to 1975 gives the bears an advantage over the short term, and likely begins to shine a light on levels closer to 1965, 1953 and 1920.
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