President Trump's highly anticipated tax plan was finally unveiled Wednesday, and the market barely budged. While equity futures did weaken during the session's final 45 minutes of trading (more on this below), I don't believe there's any evidence to suggest the selling was a first wave. Nor do I believe the selling was related to anything released in the tax proposal.
As we discussed in Wednesday's Trader's Daily Notebook, our baseline expectation was for increased participation on the part of both responsive buyers and sellers. Sellers were expected to return to the auction above 2390, while buyers were, and still are, expected to play an increased role as price is auctioned back into the low 2370s. The E-Mini S&P 500 futures (Es) obviously never came close to testing the low 2370s during Wednesday's regular session, but price momentum showed fairly obvious signs of slowing above 2390 (see chart below). And while selling above 2390 as anything but comfortable, I believe it's fair to say those who did were pleased with the outcome.
The late-day decline aside, I don't believe there's sufficient evidence to suggest bears are back in control. As you review the chart above, note the three areas highlighted in yellow. Each area represents a time during Wednesday's auction where price either broke, or nearly broke, the session's developing volume weighted average price (VWAP). Conveniently enough, these tests of VWAP coincided with price also breaking beneath Tuesday's intraday high.
In my view, if genuinely motivated sellers were lurking in the shadows, the first break of VWAP would have attracted significantly greater interest from aggressive sellers when price initially snapped back to retest VWAP and the prior session's intraday high. This lack of interest was one indication that, while rotation was still likely, a more meaningful day timeframe decline probably wasn't in the cards.
As you review the chart above, you can see price did eventually break back toward regular-session lows. However, I believe the decline was largely the result of reduced demand among short-term traders as it became increasingly clear initiative price momentum was on the decline (above 2390). In keeping with what we discussed in Wednesday's note, I continue to expect sellers to remain active above 2390, but notably less so as price dips toward the low 2370s. Put another way, sellers appear willing to sell into strength, but not in the hole, as prices are declining.
Moving on to Thursday's Es auction, it seems logical to anticipate another day of rotation, but this time perhaps the rotation will take us toward 2371 rather than 2400. Given the number of high-profile tech companies scheduled to report after Thursday's regular session, it wouldn't come as a surprise to find many traders sitting on their hands. As a reminder, the most-watched names slated to report after Thursday's close are Amazon (AMZN) , Alphabet (GOOGL) , Bidu (BIDU) , Expedia (EXPE) , Intel (INTC) , KLA-Tencor (KLAC) , Microsoft (MSFT) , Starbucks (SBUX) and Skyworks (SWKS) . Suffice it to say it'll be a busy evening. (Alphabet and Starbucks are part of TheStreet's Action Alerts PLUS portfolio.)
We'll enter Thursday's Es auction with a focus on 2383.50. An open beneath that level that fails to immediately trade higher would be expected to fade toward 2377 and 2371. Some attempt by buyers to stabilize prices toward 2377 is to be expected, but if it's a more logical area to buy a dip you're stalking, consider focusing your attention on 2371 (the approximate location of Monday's value).
As the Es trades back above 2383.50, the potential exists for day timeframe scalpers to bid the contract back toward 2389.75. Once again, however, we'll be on the lookout for increased participation among responsive sellers as traders try to auction price beyond 2390, and on toward 2397.50.
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