Trader's Daily Notebook: It's Too Early to Put on the Bear Suit

 | Apr 13, 2017 | 7:00 AM EDT
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Wednesday's decline in the SPDR S&P 500 Trust (SPY) and PowerShares QQQ Trust (QQQ) wasn't atrocious at between 0.4% and 0.44%, but small-caps gave up all their gains from Tuesday and essentially finished at session lows. In Wednesday's Trader's Daily Notebook, we discussed the idea of not placing much importance (or faith) on Tuesday's bullish outcome in the iShares Russell 2000 ETF (IWM) , and that guesstimate appears to have been well-timed. 

While we're discussing the IWM, let's remember we're primarily concerned with how traders react to a trade above $138 to $139, or beneath $133. So while Wednesday's decline may have been fantastic for those who faded Tuesday's rally (or got short at Wednesday's open), I believe it's still a bit too early to slide fully into our bear suits. And as a reminder, that 200-day simple moving average (SMA) is moving higher in a hurry, and sits a mere 3.25% beneath our $133 channel floor. 

On Monday, the Financial Times ran a story in which Jeffrey Gundlach "warned that appetite for the so-called reflation trade will evaporate further as expectations for an acceleration in U.S. economic growth and inflation are tempered." Whether or not you agree with Gundlach, or even care about his opinion, really doesn't matter. All that matters is price action. And Wednesday's price action across much of the basic materials sector, previously loved for its connection to the reflation theme, was horrid. 

The steel and aluminum industries were crushed Wednesday, both declining roughly 4.6%. Individual steel companies, such as U.S. Steel (X) , AK Steel (AKS) , Arcelor Mittal (MT) and Gerdau SA (GGB) , all declined between 5% and 10% on the day. The two most actively traded stocks in the aluminum industry, Alcoa (AA) and Century Aluminum (CENX) , were hit for nearly 10% and 7%, respectively. 

Charted as an industry, neither steel nor aluminum is beneath their 200-day SMAs. But a few more days like Wednesday's and they'll be there in a hurry. For now, I'm still only interested in buying a dip in these sectors. But only after the current declines stall and price begins to show strength above short and intermediate timeframe moving averages.

Moving to Thursday's E-Mini S&P 500 futures (Es) auction, let's take a quick look at the contract's daily chart. Note that while the contract is still trading above the 50-day exponential moving average (EMA) and year-to-date (YTD) volume weighted average price (VWAP), Wednesday's close was its lowest since March 27. 

Daily S&P 500 Futures Volume Profile

Given how consistently the Es has been bouncing from the 50-day EMA these past few days, I believe dip buyers should be concerned with the potential for the contract to slice straight through the YTD VWAP should the 50-day EMA give way. If this were to occur, the next logical stopping point would be the 200-day SMA, which sits more than 100 handles lower at 2220. 

We'll end the week (remember, markets are closed on Friday) with a focus on 2339.50. Since we got the two-way rotation between 2347 and 2339 we discussed in Wednesday's Trader's Daily, we'll end the week looking for a break lower. 

All trading beneath 2339.50 encourages sellers to target 2333.25. Acceptance beneath 2333.25 has very little to support price before we test levels near 2323.75 and 2318. 

5-Minute S&P 500 Futures Volume Profile

As long as we're holding above 2339.50, buyers have a chance to auction the contract back toward 2347.50 and 2353.25. For now, my baseline expectation is for any spike into the low 2350s to be quickly faded.

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at or posted to my Twitter feed @ByrneRWS

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