S&P 500 Futures Option Update

Depending on how you were positioned going into the day–yesterday was either LOTS of fun…or definitely NOT fun at all!

You gotta love Stops and Targets’ Top Spotters.  The unanimous top spotter alerts on August 8th were a clear warning for what was coming.

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S&P 500 Futures - Hourly Bars
S&P 500 Futures – Hourly Bars

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Using the hourly bar chart above as a guide, let’s recap what happened after the Spotter Alerts and why…

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In my last post I pointed out several important levels, each of which came into play.

* On August 8th we got unanimous index and index futures spotter signals.

* On the 9th there was an initial dip followed by a run back up to close the gap at 2471.25 near the close.  That dip was a trap for bears shorting ‘in the hole’ (under the previous day’s close) on the open.  The pros obliged by running those short positions back through the opening gap at 2471.25, thereby ensuring that all bears who entered on 8/9 were at loss at the market close in order to shake them off before the big move lower kicked off.

* The real move down started in the overnight session just after the gap fill at 2471.25.

* By the time the market opened yesterday, the overnight bear train had already left the station and any bears who wanted to join the fun would have had to short way in the hole.  Those bears would have still been licking wounds incurred the day before on the squeeze into the close.  My assumption is that most bears missed the selloff yesterday.

* After the gap fill, ES was pushed lower by the pros (who were short) and took out the support band I pointed out down to 2445 and then moved under the tentative spotter channel bottom rail to the final trendline breakout target at 2437 with a small overshoot.

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Today, I have added a new line to the chart at 2439.  That line represents the minimum pullback target for ES to establish a potential higher pivot low in the intermediate timeframe.  Now that objective has been reached, there isn’t much incentive for the pros to go lower today–so we could get a bounce right here to again take out late bears who missed the buy-to-cover targets.  I have also adjusted the spotter channel slightly, after a small downside breach, to set the upper rail for later.

The resistance targets to the upside are the same ones I pointed out on the trip down: 2445, 2451.50, and 2457.  Those would be the places where bears shorted a breakdown of support yesterday and there should be buy-to-cover trailing stops lurking just above (along with dip-buying bulls who are underwater and might also be itching to sell to break even).

Now, there still could be unfinished business to the downside today–but if we don’t get another selloff today then we could get lower lows next week for reasons I will explain below.  If I am right, there probably aren’t a lot of bears from yesterday (especially above 2457) and there are some bulls who might be ready to sell if they break even, so the pro’s limited upside payoff for forced buyers could minimize the power of the bounce.  We will just have to see how that goes as the day proceeds.

FYI: initial targets for confirmed spotters are usually the bottom of the price channel envelopes, as explained below.  We obviously have the short-term and now intermediate minimums met.  (For those interested, the current long-term minimum pullback line is way down at 2342.25)

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Note: The following rant is meant for hard-core analysis geeks.  For those who just want the bottom line for today, you might want to skip this part and jump to the end!

<analysis rant/>

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ES 21-Day Range Envelope - Daily Bar
ES 21-Day Range Envelope – Daily Bar

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Tip: the pros don’t use moving averages (and neither should you) for algorithmic trading.  Those are lagging indicators and very imprecise.  Structural pivots, however, are places where major momentum reversals occurred and the price is precise to the penny and exactly the same for all players.  That is what the pros use and is the basis of how Stops and Targets works.

There are lots of new readers here who might not understand fully how Stops and Targets calculates the stop/reverse lines for each timeframe.  The core logic is built around detecting structural pivot lows and highs for weekly (short-term), monthly (intermediate), and quarterly (long-term) timeframes.  Those are the dominant cycles that drive the broad market and primarily are caused by options, earnings, and annual budgeting activity.

Many people have a hard time envisioning how those lines are derived, so I have prepared a visual aid on the chart above.  The green and red lines define a trading envelope for the intermediate timeframe.  Simply stated, the lines represent the highest high (red) and lowest low (green) of price for the preceding month of trading.

Take a look at the chart above and notice how you see higher highs and higher lows in a bullish trend since the election last November.  Price tends to hug the upper band as the market advances, which constantly pushes the upper band higher.  On the other side–look at how the lower band is pulled up as time goes by.  It is not until or unless price retreats back to penetrate that lower band that a new higher pivot low can be formed, which is the basis for Stops and Targets’ stop/reverse line algorithm.  You will also notice that in a strongly trending bull market a touch of that lower band after a pullback from the top band is a buy.

…and guess what today’s low did?  Yep, you got it…it poked through the lower band of a bullish trending market.  So logically, we should see a bounce here to move away from the band.  If it breaks under and begins to push the bottom band lower while pulling down on the top–well, that’s the start of the opposite (a bearish trend) of what I explained above.  Hopefully that visual helps when you are looking at the Stop/Reverse lines in Stops and Targets.

One last point.  A structural pivot low is only confirmed when there is one month of higher lows to the left of the pivot and then one month of higher lows to the right of the pivot.  Stops and Targets will move the stop/reverse line only on a confirmation, which is why the intermediate stop/reverse line for ES is currently located at 2315.50 because that was the last confirmed higher pivot low in the current trend.  Price has advanced quite a bit since that last higher pivot low on 3/27/17, so this current pullback has been overdue (in my opinion).  The reason I show the price channel on the chart above is to explain how I ‘cheat a little’ in my analysis and try to anticipate where the market has to go (at a minimum) to create a potential new pivot.  I do this for all three timeframes in my analysis here.

Yeah, I know…after reading that now your head probably hurts a little.  Bear with me, there is one more layer on the onion to peel back for the current analysis…

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ES-Weekly Bars
ES-Weekly Bars

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The chart above is a zoomed in look at the weekly bars with a structural pivot channel superimposed.  This time the structural pivots are set to count four weekly bar pivots.  Take a close look at what happens every single time that the previous higher low has been breached.  Yep…perfect stop sweep/reversal buy signals almost every time.  So, naturally, I am interested to know what the minimum pullback target would be to build the next higher 4-bar pivot in the sequence.  For that to happen this week, we would need a minimum pullback to 2410.25.  That’s quite a ways down from here, not saying it can’t happen before the current weekly bar close today (extremely unlikely)–but it would be a LOT easier for the pros to create a minimum pullback next week, if they are so inclined–because starting Monday the lowest low of the last four weekly bars will rise to whatever this week’s low happens to end up (currently 2430.25 as I type).  So, if I were pulling the levers and wanted to create a new higher structural pivot low I think I might wait to do it next week (or later) when the task is much simpler.

The weekly chart above perfectly illustrates the higher high/higher low trending paradigm that has been in play since the 2009 bottom.  This chart is our ‘roadmap’.  The paradigm will continue until we finally see a move below the last 4-bar higher pivot low that is unable to reverse back above that low.  At that point the market will begin building lower lows and lower highs and the paradigm will change from bullish to bearish.  The current hard deck for the paradigm in place since 2009 is at 2315.50

</analysis rant>

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So, Cliff’s note version of the current setup is this…

The minimum pullback target for the intermediate timeframe was met on a poke under 2439.  Let’s use the current day’s low of 2430.25 as an intraday bull/bear line going forward.  Price action is bullish above but would revert back to bearish below.  Upside resistance targets are shown on the hourly bar chart at the top of this page.

…my .02

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