The S&P 500 closed out last week with some confusing and ambiguous signals. That's not unusual during the days ahead of the Fed's FOMC announcement, which is scheduled for Wednesday. However, after a profitable week of intraday trades, the strength of Friday's bounce in equities took us by surprise. We were expecting a bounce to start where it did, around that price level and that time of day, but we didn't expect it to be so big. After the close, we spent several hours sifting through charts, until we came up with what we think was the reason for the bounce. That answer may help foretell what will happen in stocks next week.
Let's first take a look at how the S&P ended the week of July 22-25, and then we'll examine some clues that showed up on Thursday and Friday and that might help make sense of the picture.
Looking at the S&P in isolation, all we can say is that the big bounce on Friday either represented the S&P going up in a correction, or it didn't. Without more price bars on the chart to give more information, that isn't much help, we know. However, an important development in another market last week might offer some clues about where stocks will go from here.
We have mentioned previously that the path of the U.S. Dollar could have a massive effect on other markets, including equities. Our expectation is that the Dollar will complete a wave ii correction around the current price level and will embark on a powerful upward wave iii. (However, as traders, we also are watching the Dollar's reaction to support levels that would tell us that our scenario might be wrong). Last week, the Dollar reached important support at the 76.4% retrace level and the channel boundary - an area that should produce some kind of bounce and perhaps an actual reversal.
In fact, the Dollar moved into the support area late on Thursday, after making what looked like a completed ending-diagonal move. From that point, it essentially drifted sideways. In other words, support for the Dollar held at a level that represented extreme Dollar-bearish sentiment. Therefore it made sense that, while the Dollar was keeping currency traders on the edge of their seats, stocks moved to reflect a similar local extreme in sentiment... in the opposite direction! That would leave the S&P sitting near a local high, which is consistent with our idea that Friday's upward move in stocks is probably corrective.
If our primary scenario is coming to pass, then the Dollar is poised to spring up out of the support area, just as stocks are poised to fall away from resistance. However, it is quite possible, even likely, that the market won't make any decisive moves ahead of Wednesday's FOMC statement.
Our daytrading members made a lot of successful trades in ES last week, and by our estimate, the trades we pointed out should have netted a trader a little more than 50 points on the week. That's $2,500 with a single ES contract. Even if some of our members didn't catch all the trades, there was plenty of money to be made with even a fraction of them. However, we are always trying to improve our game, and that's why we spent much of Friday evening untangling where we went wrong earlier that day.
On Monday, we started out looking for support around 1686.50. Price poked a little bit through that level, but not enough to stop us out. We took profits at 1692 for 5.5 ES points. Some then shorted the resistance, closing out when price started to look as though it might find support at 1689.50. The day offered about 8 ES points for someone taking "slow" trades like those, and more for those who scalped the faster moves.
On Tuesday, our timing system suggested the opening minutes would be an inflection point, and we knew there should be support around 1688. Shorting from the opening and closing at support yielded 4.5 ES points. Shorting the first retrace was a wash for most of us, but trading up from the breakout to the next resistance produced 2 ES points. Shorting the 1x1 measured move at 1691.25 and exiting at the close gave an additional 3.25 ES points for a total of 9.75 ES points on slow trades.
Wednesday morning had us looking for a chance to jump on a strong down-move soon after opening bell. We entered short upon the breakdown of 1688.75 and exited at 1684.75. After that, we looked for an opportunity to catch a continuation trade from one of the retrace/resistance levels. The higher one worked near 1687.50 (some got on board later, at a lower level), and we rode the trade down to 1678.25, where we expected to see at least some bounce. We also knew that our timing system put a potential turn around 1:40 p.m. (The actual low for the day was at 1:37 p.m.) From that point, the easy trades for the day were over, but we had already made about 13 ES points on fairly slow trades.
We expected a bounce from around the 1674 level on Thursday morning, but price didn't reach that low during regular trading hours. Some of us were long from before the open, but others of us didn't manage to get on that trade. However, there was a short opportunity at 1682.25 that many of us took, and we exited around 11:40 a.m. while watching for a bounce. The bounce occurred as expected, taking us back up to 1682. A few of us took a higher-risk chance on a quick short trade around 2:15 p.m., when the micro pattern looked complete in ES and also on the Dow Jones e-mini (symbol YM). However, even without that last trade, there were still about 14 fairly easy ES points to be made on the day.
As we described above, Friday delivered something we didn't expect. Although we were caught the morning short trade from around 1681 to 1671.50, we then were looking for a retrace to try shorting again. We then were surprised that the late-morning bounce continued through the rest of the day and into the close, but that very bounce may have given us an edge we can use next week.
Are you ready to move beyond bias and trade these volatile markets with confidence and objectivity? Do you want to learn how to trade multiple markets with a toolkit that has something for every market condition? At TOTM, we offer a subscription that's tailored to the needs of swing traders and another subscription that gives intraday traders a real edge in ES and other highly-traded futures contracts. Find the service that matches your trading style, and try it out for a month. Just watch how your perspective on the markets changes during that time.