Stock futures rally, cause pain to short sellers

Charts, Economics, Our View, S&P 500, The Opening Print

Anyone who stayed short looking for the long-anticipated correction to happen yesterday was walloped by a “melt-up” in all major indices, with the Russell 2000 rising to its highest price since April.

The Standard & Poor’s 500 Index (^GSPC:SNP) rose 0.7 percent to 1,940.46. The Dow Jones Industrial Average (DJI:^DJI) added 98.58 points, or 0.6 percent, to 16,836.11. Both indices closed at all-time highs. The Russell 2000  jumped 2 percent. About 5.9 billion shares changed hands on U.S. exchanges, 5.8 percent below the three-month average.

ECB President Mario Draghi at Thursday’s press conference (Getty images)

After a pre-open rally, stocks fell 10 handles. Mario Draghi held a press conference at 2:30 PM Central Europe Time, an hour before the US markets opened, following which stocks rallied 17 handles through the morning. Dramatic as it was after weeks of low volatility, from both a fundamental and technical standpoint, the rally made sense.

Fundamental drivers

It was a big day for positive economic news. European Central Bank president Mario Draghi announced that he was taking the unprecedented step of setting the deposit interest rate below zero, to cause more investment in weak areas of the region’s economy. The ECB will also extend $400 billion in credit to stimulate Europe’s disinflationary economy and create jobs.

The US’s improved employment trend was confirmed again by a report that fewer Americans filed applications for unemployment benefits, the lowest number in seven years. The US economy has now recovered all of the jobs lost during the financial crisis and Great Recession.

Trendlines and Fibonacci levels

ES 06-14 (5 Min)  6_6_2014For chartists, the lines were clear and price action obeyed them. In the MrTopStep Trading Room, many traders covered shorts or took long positions in the 1921-24 area, targeting Wednesday’s high of 1927 and the early morning high of 1934. For those who use Fibonacci levels, 1938.50 was a 23.6% extension of the rally which began May 21.

The Asian markets closed modestly higher and Europe is mixed.Todays economic and earnings calendar starts with Federal Reserve Gov. Jerome Powell’s conversation on central banking at the IIF conference in London, the weekly jobs report, and Consumer Credit . It’s been a long 3 weeks of going up but how much longer can it go like this?

S&P’s 16th Record Close in 2014

Our View : The E-mini S&P 500 futures (CME:ESM14) has closed higher 13 of the last 15 or up 11 of the last 12 with the one down day being down 1 tic. It’s been an upside wipeout. We said last week the ES could get to 1940 -1950 and this morning it is up 2.5 handles at 1941.00, with 1942.00 high.

So far anything with the word sell in it has been wrong but that may change today. Despite how firm the S&P is we have to go with our “Countertrend Friday” trading rule. If the ESM14 gaps sharply higher after the 7:30 jobs number, with oversized volume, then we have to sell into it.

We may buy weakness after the futures come down but we want to get a look at the price action before deciding that.

As always please keep an eye on the 10-handle rule and please use stops when trading futures and options.

  • In Asia, 6 of 11 markets closed higher : Shanghai Comp. -0.54% , Hang Seng -0.69%, Nikkei +2.17%.
  • In Europe, 6 of 12 markets are trading higher : DAX +0.18% FTSE +0.30%
  • Morning headline: “S&P Futures Seen Higher Ahead of US Job Report ”
  • Fair Value: S&P -1.18, NASDAQ -0.56, Dow Jones -7.76
  • Total volume: 1.67M ESM and 6.9K SPM traded
  • Economic calendar: Jerome Powell Speaks, Jobs Friday and Consumer Credit
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