ES Weekly Review and Outlook: Feb 5 - Feb 9
Planned reactions.
Image 1. “The most trusted man in America.” Walter Cronkite
Can market action be determined by an evening TV show? This is a bit of exaggeration, but don’t forget the extent to which the Fed - and increasingly the US Treasury - are the main drivers of the markets. The Fed put is alive and well.
Myself, I am not putting a lot of stake into this particular interview. It will likely be no departure from Powell’s current line of ‘do whatever it takes’ to bring inflation under control. All the same the markets have shrugged it off each time. What can he say to possibly make a dent in equity valuations? Does the Fed even care at this point? But as I have mentioned before, a more significant Fed pivot may very well be the end of QT. However as I’ve also pointed out, do not overlook the effective QE program that is the US Treasury.
Minister’s Missal
I’ve posted an in depth review of last week as this Weekend’s Trading Course, so head over there for a better understanding of the day to day action this week. I think you’ll like it.
In sum, the Fed’s relatively hawkish language, chances for a May rate cut decreasing, higher ECI, and positive jobs numbers had little negative effect on euphoria as we plowed into the 5,000 psychological level. Of course Friday’s action was unique, given the extent to which negative ticks exceeding the positive on NYSE, while all the same perhaps three companies - AMZN, META, and NVDA - carried the day to stunning all time highs.
We fell a couple of points shy of 5,000, and the close saw heavy selling pressure. In fact we turned delta negative shortly after the close as over 15k contracts unloaded into the bid.
Image 2. Order book from the intraday high into close. Note the negative delta afterhours
Reposting from my timeline as a bonus below. Note the clear footprint of buyer absorption, basically price moving sideways for over half an hour before buyers decide to initiate higher. The effort was simply not enough as buyers only managed a look above into committed sellers. Note the delta divergence in buying delta and price. Delta flips to negative as sellers initiate into dwindling demand below. Finally, a weak attempt by buyers to reclaim higher prices fail, and we sell off steeply into the close. For a full picture of the closing seller aggression consult Image 3 above.
Image 3. Analysis of the highs
The Fed Spake
Quoting from last weekend’s Outlook, “I am reserved on an early pivot and if I were to bet it would be for a hold in rates until the end of Q2.” This tracked J. Powell’s language on Wednesday. A hot employment cost index (ECI) belies an ‘inflation under control’ narrative and on the surface a strong jobs numbers don’t warrant a loosening of monetary policy.
I explained this in the last post so we were not unprepared. What might have surprised was the reaction in the markets the following day. But given the total absence of sellers below 4900 the long opportunity despite the ‘news’ was evident on Thursday. Wednesday’s sell was priced to perfection in other words.
I finish on a macro note. I thought the explosion to higher prices after FOMC was very unusual given the context. It was no coincidence that the Administration announced strikes in the Middle East (or West Asia for some of my international readers) precisely at market close. This risks a wider war than is already developing, but hey I’m not the policy maker here. It also speaks to increasing American weakness in the region despite the show of strength. I won’t go into detail but enough to say this could suggest a risk-off environment into February.
The crash in oil prices (CL) was also out of the ordinary and may have presented a unique buying opportunity. Finally, Powell is scheduled for an interview the 60 Minutes evening program this Sunday, and his messaging - if reinforcing a hawkish stance - could suggest a softer market early in the week. Of course the opposite can be true but I lean to Powell beginning to shape his legacy as the man who singlehandedly fought inflation in the context of a relatively soft landing. But how the market will take his words seriously this time is anyone’s guess.
Week Ahead
As I mentioned last week, “I think we are in a longer-term range of about 150 points either side of 4900…the market has likely priced in rate cuts sooner [and] could mean some sell in February IF the FOMC delivers yet another ‘higher for longer’… outlook,” policy regarding QT, or geopolitical event wildcards.
I have not changed my view at 5,000 yet - or until I see new market generated information (MGI).
What I look for now is the tone around 4959 or short-term (5D) VAH. This is also the approximate area of breakout. Will sellers reject the breakout with a daily close or two within prior value? In any case the sellers want to achieve this early on. A bigger prize below is medium-term value at 4916, another critical target. A rejection of the 4900s could happen below familiar level 4895 - coinciding with 5D VAL - targeting the PWL which could see a deeper sell below as late longs are trapped. We are currently in weekly balance.
Image 4. Last week, balance, and daily profiles
On the other hand, buyers want to find support at 4950. A strong bid here could see overwhelm sellers for another push at the highs to target 5013. Further up are targets, 5021, 5040, and fib retracement 5079.
Image 5. Medium-term (20D) profile
Data Watch
The bond auctions take the spotlight this week after an eventful FOMC. Remember, the Treasury is the QE dovetail to Fed QT. Major earnings are behind us, and the responsiveness of TLT over 98.25 or below 95 this week will be worth watching - as equities tend to rise and fall in tandem. Data of note:
Mon, Feb 5: PMI 10h00EST
Weds, Feb 7: 10yr bond auction 13h01EST
Thurs, Feb 8: unemployment 8h30EST; 30yr bond auction 13h01EST
This Week’s Levels and Plan
Pivot 4959. A push back into last week’s value area and close below could give an early advantage to the sellers to target 4930, with an ultimate area of support at 4888-4910. Buyers want to spend minimal time within last week’s value area, suggesting that upside price discovery is not complete. I lean somewhat short going into the week, but the remainder of the week may be decided on either side of 4930.
Possible range of 100 points with 20 point overshoot.
Levels to mark:
4579 fib extension
4540
4521
4997 PWH
4959 weekly pivot
4931 prior Wednesday high
4916 medium-term value
4889 VPOC
4868 PWL
Image 6. Current ES levels, 4H chart
a) Defense of pivot targets a break of the highs into 5013 to 5021 where sellers may be found. A daily close above could target 5040 and at an extreme, 5079.
Buyer LIS at buying tail at 4937.
b) Sellers need time below pivot to open up lower levels. A close below 4930 would be a medium-term victory, potentially giving an opening for 4910 - with 4888 at an extreme.
Seller LIS 5013.
Tip jar - content is always free, I appreciate your continued support!
Your support and comments are appreciated. I do my best to respond to everyone in a timely way. Be sure to follow me @rareverend on X (Twitter) for the latest updates!
Don’t maintain bias in the face of contradicting information! Capital preservation is key.
This is not investment advice and I am not a qualified licensed investment advisor. All information found here, including any opinions, commentaries, and suggestions, expressed or implied herein, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. While the information provided is believed to be accurate, it may include errors or inaccuracies. I will not and cannot be held liable for any actions you take as a result of anything you read here. As always, conduct your own due diligence, or consult a licensed financial advisor or broker before making any and all investment decisions. Any investments, trades, speculations, or decisions made on the basis of any information found on this site, expressed or implied herein, are committed at your own risk, financial or otherwise.