Rational Bearishness Does Not Work At Tops

Follow @MrTopStep on Twitter and please share if you find our work valuable!

Every week, MrTopStep invites traders to an “Own the Close” contest where the closest guesstimate where the SPX will settle on Friday’s 4:00 cash close.

The winners get a free week's access to the MrTopStep Chat and trading tools. Enter your guess now!

Our View

The two words that best fit the ES and NQ right now are: "irrational exuberance." 

This usually means it will get to an extreme and then reverse. This week the IIAA (Investor Intelligence Advisor) showed that the bullish percentage -- bulls divided by bulls and bears -- has reached an extreme at 78%. This means overall bullishness has reached its highest level in the past 2.5 years. All this while the "Fear & Greed" index sits at 78, which is considered to be EXTREME greed.

Need more convincing?

Market Vane's bullishness is at the highest consensus, the highest reading since January 2022 (when the S&P made its high and dropped 25%). For example: a Bullish Consensus of 65% for the S&P 500 implies that 65% of the traders are bullish and expect the S&P 500 to rise. Conversely, 35% of the traders are bearish and expect the index to decline. 

As I have always said, picking tops is the hardest trade to make, but what's going on right now really feels like the months/weeks leading up to the 2000 Tech Bubble. Am I calling for a crash? No, but when bullish numbers start showing up like this, I think there is a reason to be concerned. Our Lean

There was a lot of 'blow-off top' talking going on again late last week. I've been a cautious bull, but the more we melt up, the harder it is to stay a short-term bull. 

I don't have a magic wand. It's become a very tough trade and the extremely low volumes should be a concern. This week there are more economic reports -- 16 in all -- and 8 Fed governors speak on Thursday and Friday. It's also the last few trading sessions of February, which can be weak according to seasonality. According to the Stock Trader Almanac, the end of February has been miserable.

Trading range for today is wide is a 42 points that is an expansion from 36 yesterday

Below: 5074.75  5071-5057

Above 5092.53 5113-5141

Our Lean — Danny’s Trade

This is Danny Riley’s personal trading plan for the day.

To get this delivered daily, please consider upgrading to a paid membership.

MiM and Daily Recap

Yesterday's ES futures trading was characterized by a dynamic range of price action. The session opened at 5095, with traders initially pushing the market to a high of 5108. However, this peak was not sustained as the high of 5108 was established just 5 minutes into the cash session. A subsequent sell-off ensued, marking a morning low of 5090.50 @ 11:25.  A rally into the afternoon high of 5099.75 around noon decayed to the day’s low of 5080.75@13:35.  There was some later recovery, but the closing process did not go well for the bulls. Despite a Market-on-Close (MOC) imbalance showing $1.2 billion to buy, with a lean of 52.3% favoring purchases in stocks like TSLA, NVDA, and DHR, the futures still tended towards a downward trajectory. This suggests that the buying pressure from the MOC was insufficient to reverse the overall bearish sentiment. The Dquotes filtered in and sold into about 50% of the buy imbalance but interestingly did not sell all of it so there is not a bearish sentiment change amongst those funds.

Technical Edge

MrTopStep Levels

Some examples trade ideas using today’s MTS Levels: 

  • If the price drops below 5071.17 (1st support level):

    • This could be a signal that the market is entering a bearish phase. Consider shorting the EMINI-S&P 500 with a target of 5057.03 (2nd support level). Place a stop-loss just above 5071.17 to limit potential losses if the market reverses.

  • If the price exceeds 5113.59 (2nd resistance level):

    • This might indicate bullish momentum. Consider going long with an initial target of 5141.37 (3rd resistance level). A stop-loss could be set just below 5113.59 to protect against unexpected downturns.

To receive access to the ES and NQ, please consider upgrading to a paid membership.

Economic Calendar

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!