MrTopStep Best of 2012: BLACK FRIDAY’S S&P 500 FUTURES SHORT SQUEEZE

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By Danny Riley

When the S&P (GSPC) futures were going down after the election, I never thought they were going to crash. Yes, fear had entered the markets because of the fiscal cliff, but did you really think the government was going to sit idly by and watch the stock market crash? I didn't. I knew there was something behind the magic curtain called QE3 Plus, the PPT and the year-end Santa Claus rally.

I am not afraid to admit that I have been off my game. I said many times that 1350 would be critical and it was. One of MrTopStep’s trading rules is “it takes days and weeks to knock the markets down and only one to bring them back,” and that’s exactly what happened. The ESZ bottomed at the 1340 level and rallied 44 handles from Monday to Tuesday. After weeks of seeing the SPZ going down, the quick turnaround caught the bears completely off guard. When the S&P starts going back up the big funds that sold on the way down don't get out right away. They get all twisted up; they want to be long but they are forced to sell the S&P for a hedge against long stock positions. They no longer need the S&P futures hedge, and on Friday when the SPZ rallied above 1400 it actually acted like a collar forcing the funds to cover / take off their hedge.

Best week in 5 months:Last Friday capped off a 5-day rally that saw the S&P futures rally over 66 handles. The Dow (DJI) closed above 13,000 for the first time since Nov. 6. All 3 major averages had their best week in 5 months. On the week the Dow closed up 3.3%, the S&P rose 3.6% and the NASDAQ (IXIC) closed up a whopping 4%, while the VIX (VIX) fell close to 15.

Pretty amazing. After a week that saw a well-known hedge fund being accused of insider trading, a giant accounting scandal, a boost in German business confidence and the International Monetary Fund relaxing its debt-cutting target for Greece and such a big leg up, one has to wonder what's next. As you can see by the closes below, the S&P has had a nice selloff and now a big rally. 1420 and 1430 were critical support levels on the way down and now they are critical resistance.

SINCE OBAMA’S RE-ELECTION
Wednesday Nov 7 SPZ -36.1
Thursday Nov 8 SPZ -13.8
Friday Nov 9 SPZ +.40

Monday Nov 12 SPZ +2.5
Tuesday Nov 13 SPZ -7.30
Wednesday Nov 14 SPZ -17.9
Thursday Nov 15 SPZ -1.7
Friday Nov 16 SPZ +8.5 (1340.30 low)

Monday Nov 19 SPZ +22.7
Tuesday Nov 20 SPZ +3.8
Wednesday Nov 21 SPZ +2.0
Thursday Nov 22 SPZ CLOSED
Friday Nov 23 SPZ +17.0

After being down 5 out of 7 days after President Obama’s re-election and losing 73.9 handles, the S&P has made a big turnaround. Since putting in its 1340.30 low on Friday, Nov. 16, the S&P has been up 5 days in a row for a total of 66.6 handles.

Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.

Our view:
If you look at the congressional calendar (not including the weekends), they have a total of 15 days to resolve the fiscal cliff before Congress breaks for the year. The ECB said it expects to reach a deal with Greece on funding but said it won't include any haircuts. Let’s face it, the S&P has gone a long way in 5 trading days and there is still a ton of uncertainty floating around in the markets. Our view is that the S&P can bounce a bit today but will be under pressure. We also do not think the S&P can just keep going up the way it has, that we will need to see some back and filling before we go back up at year end. We lean to selling the bounce today. As always, keep an eye on the 10-handle rule and please use stops.

Today’s data:

  • It’s 7:00 a.m. and the SPZ is down 6.3 handles at 1399, crude is down 43 cents at 87.85 and the EC is trading 1.2966, down 22.

  • In Asia 7 out of 11 markets closed modestly higher (Shanghai Comp. -0.49%, DAX -0.24%)

  • In Europe 8 out of 12 markets are trading lower (CAC -0.85%, DAX -0.33%)

  • Today’s headline: “S&P 500 Futures Slide as Talks on the Budget and Greece Continue”

  • Economic calendar: Today: Monday: Chicago Fed National Activity Index, Dallas Fed Mfg Survey. Tuesday: Dallas Federal Reserve Bank Pres. Richard Fisher speaks, Atlanta Federal Reserve Bank Pres. Dennis Lockhart speaks, durable goods orders, Federal Reserve Chairman Ben Bernanke speaks, Redbook, S&P Case-Shiller HPI, consumer confidence, FHFA house prices, Richmond Fed Mfg. Index. Wednesday: Bank Reserve Settlement, Cleveland Federal Reserve Bank Sandra Pianalto speaks, MBA purchase applications, new home sales, API, Federal Reserve Gov. Daniel Tarullo speaks, 2 yr note auction, Beige Book.

  • Globex volume: LOW 910k ESZ and 5.3k SPZ trade

  • Fair value: S&P -7.50, NASDAQ -10.75

MrTopStep Closing Print Video: http://www.mrtopstep.com/videos/?id=34716
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DISCLAIMER: The information and data in the following report(s) were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities. MrTopStep, its officers, directors and its contributors may, in the normal course of business, have position(s) which may or may not agree with the opinions expressed in this report.

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