Equity Index Update
Brad Sullivan
The index markets suffered a lunchtime reversal from higher levels in action that was whippy and aggressive. Volume flows were heavy, particularly around certain price zones in each contract. After the market pushed lower from its lunchtime high prints, the selling was reminiscent of the old days (think mid 1990’s) when the markets would have big swings during expiration week. The last couple of years volatility during expiration week has been infrequent…however, when it has appeared the moves have been violent and typically on the downside. I recommend caution on any rally buying for the remainder of the week.
Yesterday’s trading action continues to show that we are in a trading range. How long we stay and the size of this range remains the proverbial X factors. However, it is worth noting that given the sharp rally over the past 8 weeks (wasn’t it just March’s expiration week when the indices printed collective lows during Wednesday’s lunch hour?) we SHOULD expect some type of sideways to downside action. In fact, that downside action has been playing out in the Russell 2000 and NDX. The Russell is essentially trading at UNCH for the month and the NDX is holding just above its flat line level for May. Both indices are severely underperforming against the SP and DJIA. If this rotation out of small and into large caps continues it should bode very well for higher ground in the world of mega-cap indices.
Here are today’s levels for the SP : On the upside…Resistance should be found between the 1510.50 and 1512.25 zone. I suspect that this zone will find many willing sellers that are looking to capitalize on yesterday’s selling from contract highs. A 30 minute close above this zone brings us back into the critical 1515 to 1518.50 zone. Only a 30 minute close above this area will turn the dial to “buy”…however, at the risk of sounding like a broken record, DO NOT CHASE ‘EM UP HERE. Wait for the trade to settle back into the 15-18.50 zone and attempt to position build for a sharp bid into the close of trading. If unable to build the position, wait for the final 30 minutes before playing the “chase” game. In this scenario we should see a continuation move higher into the close of trading. The levels would be a guessing game, but I think 1525 to 1526.50 would be worth targeting.
On the support side of the equation, 1507 to 1504 remains my CRITICAL SUPPORT ZONE. Any 30 minute close below this zone should produce a CHOPPY downward push towards 1496. Be on the lookout for violent program trading spike moves both higher and lower in this scenario. In other words…1502 new low, 1505.50 trade, 1501 new low, 1504 trade is a sequence that could play out. Accordingly, one should get the chance to build a short position on any 30 minute close below the zone, in the actual zone itself at a later time (1504-1507). HOWEVER, I would look to put on a partial position on the first 30 minute close below this zone – at levels lower than 1504-1507 – in case the above scenario does not play out. If the market moves above 1510 after creating a 30 minute close below 1504, then all bets are off. On the way to 1496 look for support points at 1501.50-1500…1498.50 and 1497.
I have included three charts today…one 5 minute SP mini chart over the last 4 sessions with comments, a NDX daily chart and the spread chart that keeps on giving of long SP-short Russell 2k.
