Liquidation
No place for heroes
A classic liquidation into close as weak buyers threw in the towel. Longer-term buyers must step in here as we closed just below the 4390 LIS — or risk further selloff.
Day Review
*For newcomers: all prices are quoted in the September ES contract but are easily convertible with some quick math (SPY = [ES/10]-23 ; SPX = ES-15; these change as the expiry date approaches).*
Some bearish clues from the overnight session. Asia opened and a) tested lower to our sellside liquidity level at 4411 and a little below, however it took the European open to trade up to the prior day value area (VA); b) this is where resistance was encountered, and not by coincidence, our day pivot of 4433. Despite a strong unemployment report, there was no steep selloff as participants shrugged off the data, but c) delta remained heavy into open (delta divergent with price). Almost the entire ETH session was spent filling in poor structure from the prior day.
Image 1. Prior day RTH and ETH profiles
The RTH open was exactly at pivot. Failure to break the overnight high (ONH) was a prime ‘look above and fail’ scenario. This particularly good example will be posted in the substack and twitter (link) later. Another retest of the pivot in the opening range (OR, or first 30m) made a lower high, confirming seller presence - leading into one time framing down (OTFD) to the overnight low (ONL). It was here where buyers picked up to auction back through the day’s VA. It is no coincidence that 4411 retested in RTH as this was an important area of liquidity.
Buyers retested 4425 (our sellside target from Wednesday) from below. Following a subsequent lower high, buyer absorption, and exhaustion on tape, sellers aggressively stepped on the bid. A break of the low of day (LOD) opened to 4400, before finally hitting our daily last downside target 4390 line-in-sand (LIS). Price went as low as 4378.5; it is not by chance that this was a lower sellside liquidity target as well. Buyers did show their hand into close but they must reclaim the level of break 4411, or risk further downside (and a possible gap fill).
Image 2. Market has a memory. Prior levels of interest. Note the near touch of 4378 in RTH.
Landscape and Key Levels
Image 3. Overview, daily profiles
Tomorrow’s Missal
Buyers dropped the ball in Thursday’s session and need to pick it up quickly heading into opex tomorrow. This adds an extra layer of confusion and can make trading harder than it already is. Sellers are in control on all timeframes following the break of July lows.
Day pivot is 4411, the area of break. Further below is 4369 which can invite further structural deterioration in the market.
Buyer scenario. Buyers must quickly reclaim 4411 July low and aim to close above 4421. Ideally they close the week above the July low. Further above are 4431 and 4450. The line-in-sand (LIS) for buyers is 4369.
Seller scenario. Sellers defending 4400 look to spend time below 4390. A break of the ONL or 4369 can invite further liquidation to 4354 and 4337, with extreme at 4325. Best case scenario the sellers would be the 4302 contract gap — a total rout of the bulls.
Notes. Opex Friday. Trade carefully.
Share a coffee with the Rev with Ko-fi as a thank you for the work!
Closing Thoughts.
Despite coming within less than four percent of the all time highs on ES, I was not a newly minted bull at the highs as underlying macro factors were not supportive in my view. This is even in light of lukewarm economic data (I have more to say on this in a later note), but the main overshadows for me were geopolitics, contractions in Europe and China, persistent inflation and sticky energy prices, as well as deteriorating structural factors domestically.
While this could be a healthy correction after a nosebleed ride up from March lows, longs are not out of the thicket at this critical juncture around 4350. We did break our weekly lower targets (weekly note can be found on my Twitter). Evidence of buying must be strong here or risk further downside. I will update with my thoughts further in this weekend post. For now, refer back to my thoughts on the FOMC minutes in yesterday’s post.
Keep an eye on 4469 LVN from Image 2 above. Buyers will want this defended in ETH and into the RTH. Too much time spent at the lows can invite a further break.
Don’t maintain bias in the face of contradicting information! Capital preservation is key.
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