Trader's Daily Notebook: Let's Call It an 'Upside Crash'

 | Dec 08, 2016 | 7:00 AM EST
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Stock quotes in this article:

twtr

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bbby

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pot

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wfc

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gs

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gs

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TLT

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VXX

"Everybody has a plan until they get punched in the mouth." -- Mike Tyson 

Toward the end of Wednesday's auction, I was asked by another trader to describe the session's E-Mini S&P 500 futures price action, and the only phrase I could come up with was "upside crash." Take a look at the Globex session chart below, and consider for a moment how the price action would be described if the chart were turned upside down. 

30-Minute S&P 500 Futures Volume Profile
 

The gains weren't only in the Es. We saw gains of between 1% and 1.5% across all the major indices. In fact, both the Es and E-Mini Dow Jones futures (Ym) contract closed above their upper Bollinger band. And while such momentum generally isn't sustainable over a higher timeframe, selling short because price has advanced more than you believe is acceptable doesn't amount to a sound or logical trade plan. 

Away from the major indices, we saw spectacular gains in banks, fertilizer, semiconductors, transportation and even retailing stocks. Names like Twitter (TWTR) , Bed Bath & Beyond (BBBY) , Potash (POT) , Wells Fargo (WFC) and Goldman Sachs (GS) all exploded higher. And all closed above their upper Bollinger bands. Again, this sort of explosive momentum probably isn't sustainable over a higher timeframe. But it's also not something I'd want to be standing in front of with offers to sell short. (Wells Fargo is part of TheStreet's Action Alerts PLUS portfolio.)

Potash (POT) and Bed Bath & Beyond (BBBY) -- Weekly
 

In the case of Potash and Bed Bath & Beyond, I love the longer-term (weekly) charts. These are two names I'd be interested in buying into any dip or consolidation. For now, I'd consider using a dip-buying target zone of between a 10-day and 21-day exponential (or simple) moving average.

Turning our attention back to Wednesday's upside crash, I'm sure I wasn't the only one surprised to see the iShares 20+ Year Treasury Bond ETF (TLT) and iPath S&P 500 VIX ST Futures ETF (VXX) trading in the black, at a time when the major equity indices were also trading more than 1% higher. In the case of TLT, price actually finished close to 1% higher on the session. Truth be told, I haven't got a clue how or why equities, bonds and volatility all finished the day in the green. But they did. 

Moving on to Thursday's Es auction, I want to again remind everyone to approach the market with an open mind, a clear understanding of your timeframe and the likely risks you're accepting each and every day you sit down to trade. I continue to read an amazing number of notes from folks who are certain the current upside crash is paving the way toward an epic decline. And almost without fail, these dire prognostications are based on emotional responses to the recent price action and Nov. 8 election. 

Is it possible the market is a ticking time bomb? Sure. I suppose it is. But what if, in the case of the Es, price simply pulls back toward the 50-day simple moving average (SMA), attracts new buyers and resumes its uptrend? Based on Wednesday's 2236.75 close, a decline to the 50-day SMA (2157) would amount to a 3.5% correction. Hardly the epic decline many on social media assure us is lurking right around the corner. 

The bottom line is no one has tomorrow's newspaper. No one knows how high is too high, or where price will be in a month's time. The only thing any of us can do is understand our timeframe, analyze our risks based on where price is trading and where our stops are, and most important, tune out the noise. Have a plan and follow it. 

Day timeframe scalpers will be expected to enter Thursday's Es auction with an initial focus on 2236. An open beneath this figure runs the risk of attracting sellers, and they'll be expected to be eyeing a drop toward 2228.50. A secondary target would be 2224.25, but much beyond that would likely require a complete collapse of Wednesday's bullish momentum. 

5-Minute S&P 500 Futures Volume Profile
 

As long as price is above 2236, our baseline expectation will be for traders to chip away at 2241.25 and extended the recent gains. 

Short-term traders will want to remember where the contract closed on Wednesday. Closing above an upper Bollinger band often leads to either consolidation or short-term weakness. An important component to Thursday's auction will be trading in the direction of the session's volume weighted average price (VWAP) and opening print, as well as recognizing the lack of overhead supply should price gain acceptance above Wednesday's 2241.25 intraday high. 

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

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