Thursday's E-Mini S&P 500 futures (Es) auction, while not horrifically bearish, certainly wasn't bullish. The session opened weak, and after a brief 10-handle bounce during the initial 15 minutes of trading continued lower toward our previously discussed 2036.25 target. As a reminder, that 2036.25 figure came from a previously untested (naked) volume point of control from March 13.
Thursday's bounce from 2036.25 was important because it told us traders (buyers) that found value at that level on March 13 still believed that level represented value. Put another way, prices were bullishly rejected from a level that was previously identified as value (in the day timeframe). Suffice it to say bulls do not want to see value migrate beneath 2036.25. Such a migration in day timeframe value would likely trigger downside continuation toward the 1975 mid- and late-January swing lows.
Moving on to Friday's Es auction, we'll want to focus on 2036.25 and 2058. As long as value remains above 2036.25 (which I believe it will during Friday's auction) two-way rotational trading toward 2058 and 2066.50 is to be expected. That said, only value migration back above 2075 pushes short-term traders back into a bullish state of mind. For the time being, and as long as Friday's value remains above 2036.25, I believe day timeframe traders should be stalking longs toward Thursday's lows, and shorts toward Wednesday's 2065 volume point of control and into 2066.50 price resistance.
In the event Thursday's lows fail and value follows price lower, all eyes would be expected to shift down toward 2022.75 and 2013.50.
1. Back in the March 4 Trader Daily, I disclosed the sale of a multi-year investment position in Microsoft (MSFT). Noted at the time was a general concern over the violation of short, intermediate and higher timeframe moving averages, along with the fact that the stock was nowhere near as cheap as it was when I initiated the position (during the fall of 2011). I am revisiting this now, because several readers asked why I became concerned with the stock breaking beneath its higher timeframe moving averages in late-January 2015, but was willing to initiate a position, and remain long throughout 2012 when price routinely bounced above and beneath the 200-day exponential moving average.
As noted on the chart above, I purchased the stock for fundamental reasons. Free cash flow yield was near 11% during the fall of 2011 (it's currently around 7.85%). The price-to-earnings ratio was around 9 (it's currently near 16.60). And EV/EBITDA had fallen under 5.5 (currently sitting near 8.25). In a nutshell, I viewed an investment in the stock as a glorified bond purchase. As long as the company didn't do anything too foolish, I expected the cash flow yield and rising dividend to offer an adequate return.
The obvious follow-up is, why sell the stock now? I bought the stock because I believed it to be a safe, cheap investment. As the stock reached a level where valuation seemed a bit stretched, I began looking for a reason to sell. That reason came in the form of a technical breakdown. Since I had no idea when the technicals would mesh with my view of the fundamentals, I held the stock until the technicals (within my investment timeframe) changed. And in my view, the technicals changed with the late-January 2015 weekly close beneath the mid-October 2014 swing low (highlighted on the chart above).
When I'm looking for investments, fundamentals always come first. However, when it comes to short-term trading, my focus is always on the technicals. I am obviously no longer interested in holding MSFT as an investment. But if I were interested in trading MSFT on a shorter timeframe, I would simply wait for the stock to begin consolidating back above its intermediate and higher timeframe moving averages. As long as the stock is trading beneath its 10-week, 30-week and 40-week EMAs, the stock is weak.
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.