Short-term stock rallies often start with ‘back and fill’

E-mini S&P 500, Our View, The Opening Print

ES 09-14 8-5-2014As a MrTopStep reader, you don’t want to have to guess why the S&P 500 (CME:SPU14) futures rallied. I know that TheStreet.com and MotleyFool.com and a few others may give you this or that reason, but more than likely the writers don’t trade.

Certainly, none have the been on the trading floor of the CBOT or the CME for over 35 years. Many of those who write and speak (and get treated) as authorities are really salespeople. They have some product to sell and they wrap a bunch of content around it to make the story look plausible.

It’s called content marketing, when companies pay people to write stories for them. Why are they not smart enough to do it themselves? After all, they are the source, right?

Go to the source

No, the sources are the big hedge funds and investment firms that buy and sell. The source is an algorithmic trading company that buys and sells millions of share or a program trading desk or a floor trading desk that does thousands of options every day. The source is a retail trader that has his stops run every day.

The source is the guy who made the trade, not the guy who saw it on a screen or heard about it afterwards and wrote about it.

That is why at MrTopStep we bring real traders to the table, not some options service showing hypothetical trades and bragging in hindsight about hypothetical profits. Real traders make the news, they participate in it with their trades. Good or bad, they are there tick for tick. This is not a spectator sport for them; it’s real money they trade with.

So why ask some writer to talk about something he has never traded? Especially when the article ends up saying little more than, “It could go up, or it could go down.” I can flip through the Wall Street Journal and get all the stats I want—S&P down the most since January, etc. That’s great, but does it mean we should buy or sell?

You have to put a feeling with it, so the reader can say, Hey, I actually learned something, or better yet, hey, I profited from that information. Otherwise, you’re just writing to entertain, or maybe to sound smart on TV. As traders, we’d rather be profitable than sound smart.

Higher highs

It’s hard to figure out what comes first: a higher high or back and filling. After the markets have sold off and the crowd is short and there is a clear shift in sentiment, we start looking for certain patterns in the price action. One of them is a simple “higher high.” We think yesterday’s higher high in the E-mini S&P futures (CME:ESU14) set up the back and fill that led to the push above 1933 , taking out all the buy stops.

Back and fill

One characteristic of the bull market in the S&P 500 has been the index’s ability to sell off and bounce. Within that price action is something MrTopStep calls “back and fill” or “back and filling.” This occurs after a low is made and the S&P is deciding if it’s going to hold or sell off again. It is back and filling when it holds a low and trades sideways. It has been trading sideways between 1915 and 1930 for two days now.

If the ES starts to short cover then you know that the S&P was back and filling before it went back up.

This sideways action suggests that the S&P will go back up in the short run. Everyone is negative and short, which is reason enough to be contrarian.

And this week we expect to see the PitBull’s Thursday / Friday low the week before the August expiration and then the expiration week itself. No one can say for sure what the S&P is going to do, but if recent history repeats itself it will go back up. Since 2013, the shorts have fueled the S&P higher after every selloff.

In Asia 7 out of 11 markets closed lower and in Europe 9 out of 12 markets are are trading modestly higher. Today’s economic and earnings schedule starts with the Gallup US ECI, Redbook, PMI Services Index, factory orders, ISM non-mfg index and earnings from CVS (NYSE: CVS), Walt Disney (NYSE: DIS), Emerson Electric (NYSE: EMR), and MGM Resorts (NYSE: MGM).

False start?

Our view: I don’t want to jump the gun ( I actually do) but I think there is a good possibility the worst is over for now. There is no doubt that the public talked the markets down last week, but it feels like the dark skies are starting to turn a little less dark. The S&P has a tendency to get everyone thinking lower, then turn the other way.

Today is Turnaround Tuesday and I think there are still shorts to squeeze and buy stops to run. If the S&P can hold today I think it can easily trade 1950. It may take a little pullback and some back and fill, but the thing that the S&P does best is screw everyone, and that would mean going back up.

The selloff last week was not a freefall, but a controlled, stepwise drop from one established support level to the next. And it stopped at the 100-day moving average, which any technical trader would have been aware of. Before another round of early August weakness, the market should continue its technically sound behavior and move up to find a better price from which to sell off again.
We may see an example of the old trader’s song, “Take out the buy stops, take out the sell stops.”

Video: Picking Up Where we Left Off

Video: Rich Canlione, MrTopStep Closing Print 08-04-2014

As always, please use protective buy and sell stops when trading futures and options.

  • In Asia 7 of 11 markets closed lower: Shanghai Comp. -0.15%, Hang Seng +0.20%, Nikkei -1.00%.
  • In Europe 9 of 12 markets are trading higher: DAX +0.49%, FTSE +0.36%, MICEX -1.27%
  • Fair value: S&P -5.50, NASDAQ -6.21, DOW -65.63
  • Total volume: 1.6M ESU and 3.4K SPU traded
  • Economic and earnings calendar: Gallup US ECI, Redbook, PMI Services Index, factory orders, ISM non-mfg index and earnings from CVS (NYSE: CVS), Walt Disney (NYSE: DIS), Emerson Electric (NYSE: EMR), and MGM Resorts (NYSE: MGM).
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