ES Weekly Review and Outlook: Jan 29 - Feb 2
FOMC week. We're not ready for cuts.
Image 1. Debt monetization eg selling the farm. G. Wood
We finally saw the footprints of some sizable sellers last week, suggesting that we might be near some sort of top. This doesn’t mean that heavyweights like AAPL, AMZN, and NVDA don’t have some more room to run. Maybe even TSLA can show some bounce back.
But the interim balance in the markets is the anticipation of the messaging (or action) from the Fed this week, with a much anticipated FOMC on Wednesday. Well aren’t they all? Not necessarily, as investors may finally get some clarity on rate cuts. In the meantime the Fed is likely to continue pursuing a reduction in its balance sheet, and despite the still high federal funds rate (FFR) the US economy seems to be surprisingly resilient. Yes, layoffs in the tech sector continue to mount and may not see some sort of bottom for another year. Home prices are also very sticky but much of this us due to constrained supply.
Record treasury issuances seem to be the norm now, not at all surprising in an election year. Perhaps antagonizing the Fed’s job. But what’s a few bucks between friends, right.
Minister’s Missal
Last week’s Weekly Outlook suggested a potential buyer target of 4935 if the buyers were able to maintain above pivot and show a close above 4890. Interestingly enough, Tuesday achieved that close and this led to a subsequent push into 4935 - and a subsequent Wednesday close just above this key level cemented interest in prices above 4900. The high of the week was indeed three ticks shy of 4935.
Lucky, perhaps - but it did follow my buyer scenario almost to the point.
I hope you are finding value in this publication, and find it helpful and educational for your own trading. Remember that trading is a process and not blind faith. No one knows where the market will end up ultimately, but we can make pretty good inferences, like I did with 4935 last week.
My thesis for most of last week was one of balance, and this was the case albeit in a double distribution. I find this somewhat unusual, seeming to suggest that business around the 4900 mark may not be complete. This may especially be the case ahead of the main event this week, Wednesday’s FOMC.
FOMC
Much of market sentiment now rests on the commitment of the Fed to pivot in the near term, possibly as early as March. 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. Part of this is due to the relative strength of the US economy, sticky inflation (yes PCE has come down but energy prices are gaining momentum. And housing weighed as 15% of PCE doesn’t reflect reality well for the majority of Americans), and the Fed essentially monetizing debt. So inflation hasn’t ‘come down’, and the pressure from energy prices down the pipeline aren’t showing up yet. And the Treasury is acting like an effective QE program with massive fiscal support.
I am OK to be wrong. I do not think it would be prudent of Powell to cut rates here. Let’s see how far his ‘data-dependent’ narrative holds up.
Image 5. ES short-term (5D) profile as a double distribution balance
I mention oil once again in context of potentially resilient inflation and rates. In the last weekly outlook I noted oil as a ‘data point’ to watch, specifically regarding Yemen. This acquired prescient qualities by Friday, with a Yemeni missile intercepting an oil tanker. The ship reportedly sank. Indeed oil (CL) hit up to the 78 mark, from a recent low of 70. I was stressing this as a key support level in my feed. As geopolitical events become more volatile, expect this to translate into the price as well. I was also bullish on XOM and this went from lows around 96 to over 102 this week.
Week Ahead
Back to ES. I think we are in a longer-term range of about 150 points either side of 4900 - or as long as the hesitation on a pivot sorts itself out. The market has likely priced in rate cuts sooner, or so I tend to believe. This could mean some sell in February IF the FOMC delivers yet another ‘higher for longer’ or ambiguous outlook. If rate cuts are sooner than I expect then the possibility of overshoot to 5080-5100 could very much be on the table (just not necessarily this week). Conversely, a hawkish Fed could make 4700s ‘great again’.
Realistically I am in favor of about a 90 to 100 point range in the week ahead, barring a tail event. A rejection of downside and a close above 4930 can likely see a further push above 4950. Then a retest of 4930 from above can result in a further imbalance to the upside - a symmetrical outcome might lead us to test as high as 4980, with possible overshoot to major psychological number 5000. A breakout failing to sustain momentum over 4950 could see a traverse of the prior week’s range to the downside.
Sellers defending the prior high or an early ‘look above and fail scenario’ then need to see a close below 4900. This could then set up a break of the prior week’s low thus a break of weekly OTFU. Sellers below 4860 can then attempt to resolve poor structure underneath. Further to the downside, 4837, or the previous balance high, to 4813 is probably an area for patient buyers to step in for a potential trip back to 4900.
Data Watch
Already mentioned FOMC, other data to watch:
Tues, Jan 30: JOLTS, consumer confidence 10h00EST
Weds, Jan 31: Non farm employment 8h15EST; FOMC Statement 2h00EST; FOMC conference 2h30EST
Thurs, Feb 1: Manufacturing PMI 10h00EST
Fri, Jan 26: unemployment, NFP, earning 8h30EST; consumer confidence 10h00EST
Expectations this week are for a range of 95 points with potential for a 20 point overshoot.
And earnings:
Tues, Jan 30: AMD, MSFT, GOOG, SBUX
Weds, Jan 31: BA, MA
Thurs, Feb 1: QCOM, AAPL, AMZN, META
If anything, Merck (MRK) guidance will be interesting on Friday relative to geopolitical events and international trade.
This Week’s Levels and Plan
Pivot 4926. This represent the previous week’s mini balance VAH as well as an area of consistent later selling activity. I lean to the potential of testing down into the 4880s earlier in the week as I do not anticipate a break of balance ahead of FOMC. However - in the case of a ‘look above and fail’ scenario early on this could lead to sufficient momentum to break the PWL.
Levels to mark:
4500
4980
4955
4935 PWH
4926 weekly pivot
4895 buying tail
4873 PWL
4837 prior balance high
4813 prior balance POC
Image 6. Current ES levels and volume profile
a) A close above 4930 can see action into a likely area of sellers at 4955. With acceptance above, 4980 and 5000 open up as targets. Buyer LIS is 4885.
b) Sellers seek to defend the highs once again (including a ‘look above and fail’) but need to show results below 4900. Time below 4900 targets PWL 4873. That break of weekly OTUF can lead to 4860 and ultimate target at 4837, the prior balance high.
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