Can the Markets Muster Up A Rally?

Headlines send overnight futures into tailspin

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Our View

I was told by a well-known CME margin department manager that they have had people working 24-7 either in the office or remotely and that several clearing firms have been liquidating accounts and talking about raising margins. From what I remember, when that happens it's usually a low.

Yes, the ES did rally late, but out of nowhere it dropped 20 points in the final minutes of the session and then the markets got pummeled in the overnight session on more geopolitical headlines. 

I don't think there is much to say other than the risk of a wider war in the Middle East is on the doorstep while China is flying jets into Taiwan airspace. I just hung up with the PitBull and I said this is bad, you know what he said? One of these days we are going to wake up to something really bad. And then he said the Fed has dug itself a hole it can't get out of. 

Not that it’s a concern today, but for those that need a refresher on limit-up, limit-down, and circuit breakers: 

CME Group U.S. Equity futures have 7% price limits overnight and remain open for trading at that limit. If markets reach 7% up or down during the overnight session, they remain open but can only trade up to those price limits. Further, Dynamic Circuit Breakers will be in effect with a width of 3.5%. If a contract market moves beyond +/- 3.5% within an hour during the overnight session, trading will be paused for two minutes.

Our Lean

Things are very unstable and the amount of headlines are overwhelming the indices. This isn't just about the war, it's also about inflation, all the Fed's BS, and the US debt. 

As I write this, the ES is down over 7% in the first 14 sessions of April and down 5 in a row. Yes, we got the rip we were looking for yesterday, but the bond auction laid waste to the ES and NQ and the rally faded.

I think this has been a long time coming and while my lean may not be perfect lately, I put out so many warnings in the last 2+ months it all seems to be coming to roost now. The first thing I will say is be careful. When I lost the $10 million in the Flash Crash it took about 20 minutes from the time the order was filled. These are not our father's markets or charts and they are not ours either. 

Our Lean: Just as soon as the markets rally, everyone starts thinking the ES 'made a low' and then it falls apart. The bounces have been anemic so far, but we’re oversold. Our Lean — if the ES gaps lower there will be buyers off the open and after 5 down days in a row, look for a big rip, then sell half and hold the other half. Or just be patient and sell the 30 to 40-point rallies. That has worked the best. Remember, it’s the April options expiration too. 

MrTopStep Levels:

MiM and Daily Recap 

ES Recap

The ES traded down to 5063.25 and rallied up to 5084.25 on Globex and traded 5073.75 on Thursday's regular session open. After the open, the ES traded 5077.25, dropped down to 5050.75 at 9:40, rallied up to 5066.00, pulled back to 5058.75 at 10:00, and then made a series of 9 small drops and popped up to 5095.25 at 11:30. After the high, the ES pulled back to the 5080.00 level, rallied back up to a lower high at 5087.75 at 12:10. It was that print that was a turning point and coincided with the start of the $360 billion Treasury auctions and the ES sold off all the way down to 5041.75, a 53.5 point drop and just above the put wall at 5040.00. 

After the drop, the ES rallied back up to 5056.50 at 1:40 and then made a higher low at 5042.25, sold off down to a new low at 4038.50 at 2:40 and then did a sideways-to-up grind and traded 5057.50 and traded 5056.50 as the 3:50 cash imbalance showed $1.4 billion to buy, pulled back to 5045.75, traded 5048.25 on the 4:00 cash close. After 4:00, the ES sold off 19 points down to 5043.25, rallied back up to 5062.25 at 4:20, and traded 5048 on the 5:00 futures close, down 14.25 points or -0.28%, the NQ settled at 17,529.00 or -0.73% on the day. 

In the end, every rally is a dead-cat bounce until further notice. In terms of the ES's overall tone, it seems to be deteriorating. In terms of the ES's overall trade, volume was lower: 241k traded on Globex and 1.407 million traded on the day session for a total of 1.648 million contracts traded.  

Technical Edge  

  • NYSE Breadth: 54% Upside Volume 

  • Nasdaq Breadth: 61% Upside Volume

  • Advance/Decline: 48% Advance 

  • VIX: ~18.50

Guest Post — SpotGamma

SpotGamma is one the the shining stars of the options markets. If you have never heard of them or already know of them and have never signed up for their options flow products or the SG Academy, I fully suggest you check them out and add them to your trader’s toolbox.

Here’s a snippet from them: 

Concluding with the flows, the S&P 500 took a turn at being the more straightforward in terms of directional signaling. As one observation which should immediately jump out at us here, calls (orange) and puts (blue) were coordinated all day, meaning they are moving in the same direction. This adds more credibility for a continuation signal.

Option flows were collectively bullish until 11:20 am EST, and their reversal was clear within only 10 minutes of that, with a signal that reconfirmed itself continually until option flows neutralized at about 2pm EST.

Economic Calendar

For a more complete Economic Calendar see:

Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.
Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!