What does Monday's S&P high really tell us?

The March S&P 500 E-mini (ESH4) vaulted to a new record high on Monday marking a 10th new high without a three-session pause. The settlement on Monday, above the Jan. 15, 1841.5 closing high was encouraging for the bullish contingent, but included technical developments that seriously detract from the otherwise bullish close.

First, the 10.75 point reverse from the session high was not insignificant and could sponsor some encouragement in the bearish camp.  Additionally, aggregate open interest declined by 25K, the most in a bullish session since Dec. 6.  Incidentally, three sessions following the Dec 6, 21-point advance, the contract erased those gains in a 1.3% session fall as part of a 2.8% five-day decline.

Tuesday’s price action was also somewhat indecisive with a small open to close range of 1.5 points.  As I was writing this note, I found myself answering questions as to whether Tuesday’s price action was a ‘doji evening star’.  The short answer to that is ‘close enough to warrant attention’.  The settlement did manage to hold above a steeply sloped bullish trend line dating from Feb. 5, but a settlement today at/above 1851.40 would be required to hold the same.

There is room for further technical deterioration today. If ESH4 settles at/below 1844.5, it will have formed a two session bullish engulfing, which could further encourage bearish participants.

Consensus at this stage may center on a rosy, ‘two headed coin’ type of view where the recent deterioration in economic data leaves some wondering if the Fed will continue to taper its purchase program, a decision they said would be data-dependent.  Certainly even greater levels of accommodation which would accompany a pause in the tapering of securities purchases would be seen, at least temporarily, as bullish for stocks.  Conversely, or on the other head of the coin, some would expect that economic acceleration at this stage, following on the heels of the weaker economic data of the last two months would not be addressed by the Fed with stingier levels of accommodation.  Such would allow for bullish equity considerations of increased earnings in the face of an accommodative Fed.

In sum; technical developments since the new record high in S&P suggests a heightened risk for additional volatility in the form of another strong bearish reverse.  A settlement at/below 1844.5 would help to confirm the bearish implication of the ‘doji’ like formation on Tuesday and would create a bearish engulfing.  The 1841.5 level stands out as a fulcrum on settlement basis and continuing to hold above this level creates energy to advance anew, while a settle below will likely find the bearish contingency becoming emboldened.

About the Author

Martin McGuire, managing director at TJM Institutional Services

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