Morning Es Trading

Tuesday's Market Review

In Tuesday's opener, I opined that the Es needed to trade higher (above 1500), but this had nothing to do with me being bullish, and everything to do with my observation that the current high was of poor quality. To be clear, I like to see established support and/or resistance tested, and either accepted or rejected. The fact that the Es contract continued to test the 1498-1499 area without an upside probe (culminating in either acceptance or rejection), led me to believe that such a probe was forthcoming. I obviously would have preferred to see a violent rejection from near 1504.50, but that wasn't in the cards, as traders remain more fearful of beginning each day with too little exposure, rather than too much.

5-minute Es

Source: eSignal

View Chart »View in New Window »

As we approach Wednesday's Federal Open Market Committee (FOMC) announcement, bearish traders must continue to take stock of their current situation. The financial pain a short-seller endures while watching prices rise is taxing, but sometimes the damage that is done to said seller's psyche is far worse. Before you join the ranks of those hell-bent on fighting an established trend (for more than an intraday scalp), make sure you consider the emotional toll you'll be forced to endure should the market continue to trade against you.

Many of you probably saw (via Twitter or in the comments section below my column) that I established a March 15, 2013 150-strike put position in the SPDR S&P 500 (SPY). Setting aside my daily routine of analyzing both sides of the trading coin (for the sake of intraday scalping), I felt compelled and justified in initiating a half-sized swing position in SPY put contracts. I believe it has become disturbingly obvious that risks (in the form of earnings, event and fiscal) are being thrown by the wayside in the hope that a reinvigorated retail investor will help fuel a continued advance. It's not my intent to be a Debbie Downer, but I am skeptical of the market's ability to continue to advance at anywhere close to its current rate. My bet is a simple one: I expect the market's currently overbought condition to be corrected via price rather than time.

Sentiment indicators are very stretched, but price, which is the only metric that really matters, does not currently support my (bearish) decision. However, by entering the position via puts (rather than shorting SPY common shares or Es futures contracts) my risk is capped and well defined by the premium paid (for the options contracts). Should I see more obvious signs that the currently rock solid bid is beginning to break down, I will not hesitate to expand upon the position.

Wednesday's Es Trade

"To infinity... and beyond!" --Buzz Lightyear

This morning's focus is expected to shift away from earnings reports and back toward the economic calendar. At 8:15 a.m. EST, we will get the monthly ADP employment report. The latest GDP report is scheduled for release 15 minutes later at 8:30 a.m. EST. Then at 2:15 p.m. EST, the FOMC communiqué will hit the wires. While the majority are probably anxiously awaiting the FOMC's statement, I believe the more important data points to focus on are the GDP report (the consensus estimate is for a quarter-over-quarter change of 1%), and this Friday's NFP employment report (the consensus estimate is for 7.7% unemployment with 185,000 month-over-month change in private payrolls). My intent is not to badmouth the ADP report, but the bottom line is that folks simply don't pay all that much attention to it (unless is exceptionally out of line).

Earnings come back into focus this afternoon with reports expected from Citrix (CTXS), ConocoPhillips (COP), Facebook (FB), Fusion-io (FIO) and Qualcomm (QCOM). It's safe to assume that most traders will be particularly interested in hearing from FB.

10-minute Es

Source: eSignal

View Chart »View in New Window »

Hard-charging bulls may be disappointed to find the equity futures generally flat in overnight trading, but as long as the Es remains above 1498.25/1499.25 (especially on a closing basis), I see no reason why short-term daytraders should waste their time questioning the long-side of this market. As far as Wednesday's RTH auction is concerned, our primary area of interest will be 1498.25/1499.25. As long as any test of that area is promptly rejected, I believe buyers can shift their sights toward 1513.25/1514.50. Those looking for our next most likely battleground should aim a smidge higher, toward 1520.

Should traders find something concerning in this morning's GDP report (or this afternoon's FOMC statement) and the Es slide back down through the breakout zone, one's focus should immediately shift back down toward 1494.50 and 1491. Memo to bears: While you don't need to worry about 1476 at this particular moment, you now must concern yourselves with crashing back down through 1491. A close beneath 1498.25-1499.25 would be both concerning and indicative of a bullish overstep, but I still wouldn't bet on too many buyers hitting the eject button until we see a sustained break of 1491.

Current conversion formula: Es (March 2013 contract) value X .100227 = SPY Value:

1513.25-1514.50 = 151.67-151.79**

1509.75 = 151.32*

1504.50 = 150.79*

1498.25-1499.25***

1494.50 = 149.79*

1491 = 149.44**

1486.50 = 148.99*

1480.75-1481.75 = 148.41-148.51**

At the time of publication, Byrne was long SPY puts.