The S&P [SNP:^GSPC] fell 23.68 points or -1.3% on Friday. The Dow Jones [DJI:^DJI] closed down 160 points or 1%, the Nasdaq Composite [CME:NQM14] fell the hardest of the major indices, down 110 points or a whopping -2.6% and now down 1.2% on the year. The Dow is now down 1% and the S&P is up +0.90% in 2014.
We all know the algos go nuts on jobs Friday and last Friday was no exception to the rule. The U.S. jobs report is one of the news algorithms’ favorite economic reports. After the non-farm payroll number came in lower than expected, the S&P ticked down and then ripped to another all-time new contract high at 1892.25. It then reversed quickly and went into a tailspin.
The Asian markets closed mostly lower and Europe is trading mixed. This week’s economic calendar includes 17 separate economic releases, 19 T-bill or T-bond announcement or auctions, the FOMC minutes and six Fed governors speaking. Today’s economic calendar is light: Gallup U.S. consumer spending measures and consumer credit.
Countertrend Friday / Bus Too Full
Long before there was a Bespoke, MrTopStep had a trading rule called Countertrend Friday. This trading rule goes all the way back to the 1980s, before program trading made up 70% of the volume. The rule stems from our other rule, “bus too full,” but Countertrend Friday is specific to the Friday Jobs report but can work on non-Job Fridays, too. Prior to electronic trading the bonds opened at 7:20 and the number came out at 7:30 A full hour later the S&P would open at 8:30 and it was a local’s favorite day for fading a higher open., After going up all week the S&P [CME:SPM14] would gap higher, make its high print on the open and if it worked right, go down all morning. As electronic trading took over all the volume, the rule changed to sell the open or the first 2- 3 handle rally above the opening range.
New Rule #1: The 5-Day Rule
MrTopStep is introducing a new trading rule. The first one is called the 5-Day Rule. Over the last two years of tracking up and down days we have concluded that the S&P doesn’t see many 5-day declines, let alone 6-day declines. This actually works on the upside too. The chart below is a great example of the 5-Day Rule and what can happen after the S&P has gone up or down sharply.
New rule #2: The Tick-Above-Tick-Below Rule
This rule doesn’t just apply to the big S&P and the E-mini S&P. It applies to all futures contracts. The public tends to be preoccupied with what we call the “big figures,” round numbers that represent psychological, not practical, price levels. They look good in headlines or on book covers, like S&P 2000 or Dow 36,000. In gold it would be 1,300.00 or 1,400.00. In the bonds it would be 132.00 and in the S&P right now it is 1900.00. Beginners or novice traders tend to use these figures as areas to avoid buying and selling (as they should) but sometimes it’s best to take a tick or two discretion above or below a “big figure.”
Example: Joe G is long the S&P and thinks it’s going to 1900.00. Joe is being patient and and has a profitable trade going on. The ES approaches 1900.00 offer, trades 1900.00 quickly and drops, leaving Joe G unable to get filled. Had Joe G offered in front of the big figure at 1899.75 he would have been filled. This works both ways: If you are bidding below the market at 1875.00, we suggest the bid go up 1 tick to 1875.25. By giving up a tick at the start, you have a better chance of getting filled and not missing the trade.
This morning the Asian markets closed mostly lower and in Europe 11 out of 12 markets are down. This week’s economic calendar includes 17 separate economic releases, 19 T-bill or T-bond announcement or auctions, the FOMC minutes and six Fed governors speaking. Today’s economic calendar is light: Gallup U.S. consumer spending measures and consumer credit.
Revenge of the Algos
The ESM got whacked and whacked good last Friday. After being down 5 in a row and up 5 in a row the S&P got punch-drunk and dropped nearly 40 handles from its high to its low. We knew going into it that the headline algos would go ballistic and they did. Once in motion and after running buy stops up to 1892.00 in Globex it was “Lights out, London!” for the S&P.
Mondays have not been a very good day for the S&P this year and have seen some of the largest drops of the year. Of the 13 Mondays in 2014, 7 have been down and some with big losses, 2 were closed and 4 have been up. Monday Jan. 6 -14.5 handles, Monday Jan. 13 -22.6 handles, Monday Jan. 20 closed, Monday Jan. 27 -6.4 handles, Monday Feb. 3 -43.8 handles, Monday Feb. 10 +1.2 handles, Monday Feb. 17 closed, Monday Feb. 14 +11.6 handles, Monday Mar. 3 -14.5 handes, Monday Mar. 10 -0.90 handles, Mar. 17 +17.6 handles, Mar. 24 -7.6 handles, Mar.31 +14.2. Ideally, we think the S&P can trade lower today but we also think there will be a bounce or two.
Sign up for the April 12th 2014 webinar featuring Jeffrey Hirsch from the Stock Traders Almanac and Danny Riley from MrTopStep End of the Best 6 Months for Stocks
04/12/2014 11:00 CT
End of the Best 6 Months for Stocks — An open discussion on where stocks are now and where they are going
- Midterm Election Year History & Tendencies
- End of the Best Six Months Strategy
- Sell in May but Don’t Go Away
- Q2/2014 Outlook
- Summer Shorts
- Sector and Commodity Seasonal Set-Ups
Bonus! A chance to win a copy of the 2014 Stock Traders Almanac (A $50 value)
As always, keep an eye on the 10 handle rule and please use stops when trading futures and options.
- In Asia, 7 of 11 markets closed lower: Shanghai Comp. +0.74%, Hang Seng -0.59%, Nikkei -1.69%
- In Europe, 11 of 12 markets are trading lower: DAX -1.26%, FTSE -0.66%
- Morning headline: “S&P futures seen lower as Russians move into East Ukraine”
- S&P Fair Value:1857.89(futures 5.14 below at 1852.75 as of 6:40AM CT)
- Total volume: 2.49 M ESM and 6.6 K SPM traded
- Economic calendar: Gallup U.S. consumer spending measures and consumer credit.
- E-mini S&P 5001849.50+4.50 - +0.24%
- Crude102.77+0.21 - +0.20%
- Shanghai Composite0.00N/A - N/A
- Hang Seng22843.17+246.199 - +1.09%
- Nikkei 22514299.69-307.189 - -2.10%
- DAX9518.38+27.59 - +0.29%
- FTSE 1006639.71+49.02 - +0.74%