Last week's big event was the European Central Bank's decision to further reduce interest rates, and to put into place a plan to begin purchasing asset-backed securities and covered bonds. That decision, however, didn't have much effect on US equities. Sure, it crushed the euro currency, sent the U.S. dollar index soaring and added additional pressure to the price of crude (which weighed on energy stocks). But as far as the major indices are concerned, very little actually changed last week.
A quick review of our four major market ETFs shows the SPDR S&P 500 (SPY), SPDR Dow Jones Industrial Average (DIA) and Powershares QQQ Trust (QQQ) all in well defined patterns of horizontal balance/consolidation. The iShares Russell 2000 (IWM), the only ETF not trading within pennies of year-to-date highs, is still in a short-and-intermediate-term uptrend.
My baseline opinion of where the market stands hasn't changed over the past week. A trading strategy that takes advantage of a market in balance remains appropriate for the SPY, DIA and QQQ. And in a nutshell, this means fading the edges of each ETF's respective balance area (the areas shaded in yellow on the chart above).
Using the SPY as an example, one would be more active on the long side toward $199.75, and more active on the short side (or simply liquidating longs) toward $201 - $201.25. This strategy will change once traders push the market out of balance. So, again referring to the SPY, a strong close above $201.25 -- $201.50 or a weak one beneath $199.75 would have us taking a more directional approach to the market.
As far as the IWM is concerned, I continue to believe traders should focus on buying the dip. Barring a close back beneath $114, I believe the path of least resistance is up toward $120 - $121.
Moving on to Monday's Es auction, we'll want to begin the session by recognizing Friday's bullish double distribution trend day. That session's bullish day-type structure reversed Thursday's bearish double distribution trend day. So, just as we entered Friday's session's with an eye toward downside extension, we'll want to take the opposite approach at Monday's open and consider the potential for upside extension.
Keeping the above in mind, my baseline expectation is that all trading above 1999.25 -- 2000.50 keeps the short-term momentum in the bulls' favor, and encourages day timeframe scalpers to buy the dip in anticipation of repeated attempts to sustain a break above 2010.
Failure to hold the line near 1999.25 reverses Friday's bullish structure and gives sellers another shot at breaking through 1991.50. Please remember, however, that only a sustained trade (defined as at least one thirty-minute bar close) beneath 1991.50 will warrant a more aggressively (short-term) bearish trading posture.
- One of Friday's most talked about reversals was in the offshore drillers. The three largest, and most widely followed players, Diamond Offshore (DO), Transocean (RIG) and Ensco (ESV), all bounced from their early session lows. Even a few of the lesser known names in the space, like Atwood Oceanics (ATW) and Rowan Companies (RDC) enjoyed a small respite from their recent beatings. I've been following the entire group closely, and while I happen to be stalking a tradable bottom in several names, it's important to recognize that on virtually every timeframe, the trend is still solidly bearish. If you're testing the waters in this group, and doing so with a trader's hat on, you'd be wise to proceed with caution and with one eye on the exit at all times.
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