For months we heard how President Trump was going to make stock market volatility great again. And for months, the market ignored anything Trump said on TV or Twitter that appeared inflammatory, inappropriate or just downright false.
I was among those who expected the market to take on a more volatile tone following his win in November. And despite Wednesday's 1.75% decline in the S&P 500 Trust (SPY) , I believe I was dead wrong. Because while former FBI Director James Comey's memo may have acted as the catalyst for Wednesday's decline, the reality is the market didn't care about Trump's questionable behavior until, for whatever reason, it did.
As you can see on the chart above, Wednesday's decline in the E-Mini S&P 500 futures (Es) was ugly. No question about it. However, I believe part of what made the decline so scary for some is that a number of momentum-oriented tech stocks, many of which were highlighted in Wednesday's Trader's Daily Notebook, had been rising on a near-daily basis. And finally, regardless of the reason, demand evaporated and supply came pouring in.
In Wednesday's note, we discussed the dangers of trading and chasing momentum stocks into the stratosphere. And while I had absolutely no clue sellers were going to choose that day to finally decide to sell, the end result is all we care about. Two of Tuesday's biggest winners, New Oriental Education and Tech Group (EDU) and Momo (MOMO) , wound up being two of Wednesday's biggest losers. The lesson here is simple: Momentum cuts both ways, and risk management can never be ignored for fear of missing out on the next move higher.
Now that we have that out of the way, how concerned should we really be by the decline in the Es contract?
The contract broke beneath all short and intermediate timeframe moving averages in one fell swoop Wednesday. That's never a good sign, but it doesn't mean the bull market's over. At this point, I believe it's fair to assume dip buyers are going to keep the bulk of their powder dry until price tests the year-to-date (YTD) volume weighted average price (VWAP), or until prices stabilize back above 2385 to 2390. For as painful as Wednesday's decline may have been for some too leveraged on the long side, it's important to remember the selling wasn't severe enough to break the higher timeframe bull trend. Put another way, keep some perspective and recognize the Es is less than 2% off its all-time high close.
Given the magnitude of Wednesday's decline, and the fact that value migrated lower throughout the session, my baseline expectation for Thursday's session is broad-based stabilization, but not the sort of sustained rally bulls are probably hoping for. The very best I believe bulls can expect in the immediate term is a backtest of Wednesday's 2372.50 volume point of control (VPOC/Value). Any attempt to auction beyond that point, however, would likely attract supply from traders wishing they hadn't entered Wednesday's auction quite so loaded with long inventory.
We'll enter Thursday's auction with an initial focus on 2359.75. As long as we're trading beneath that level, sellers have the wind at their back, and an opening to auction the contract through Wednesday's 2354.75 intraday low, and on toward 2352 and 2347.25. Our next meaningful support area doesn't come into play until 2336.50 to 2338.
A push beyond 2359.75 doesn't alter the near-term bearish landscape, but it opens the door for scalpers to bid prices toward 2366.25, with 2372.50 being a more extended target. While a test of 2372.50 would erase all of Wednesday afternoon's decline and no doubt make bulls feel a bit better, I wouldn't expect meaningful gains to be made beyond that level. Any attempts to auction prices beyond the low to mid-2370s are likely to attract wave after wave of willing sellers.
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