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Danny Riley

Thursday was another ugly day for the S&P 500 futures, with another big drop and some very large institutional selling. As the April unwind takes hold, many investors that came late to the party are starting to feel that heat.

The higher the S&P went, the greater the level of capitulation. This came to a head on April 11 when the ESM (June e-mini) traded into a new all-time contract high at 1593. The public was finally convinced S&P 1600 was just a few handles away, but it wasn't to be. After taking out long-term buy stops above the old contract highs, the S&P finally succumbed to the downside. But as we have learned, just when you think you know what the S&P futures are going to do, they do the opposite. It’s all part of the shakeout process.

S&P 1536 50 DAY MA
After opening lower and selling off right away, the S&P made an early low exactly at the 50-day moving average at 1536. After a 7-handle bounce the ESM started heading south again, taking out both the 1536 50-day and the April 8 1533.25 low and settled at 1534, above the low and below the 50-day. As Bespoke Investment Group points out,  http://www.bespokeinvest.com/thinkbig/2013/4/18/sp-500-breaks-below-50-day-moving-average.html the S&P closed below its 50-day moving average for the first time this year, which may not cause any panic as the index has gone 74 sessions without ending below.  Bespoke said the index has broken below its 50-day moving average after sustained periods of at least 50 days above the mark 13 times over the past decade and goes on to say that the next day has seen an average gain of +0.25%, a +0.07% gain the next week and a gain of 2.2% over the next month.

What's next?
After a 62-handle selloff the S&P tested its major support, took it out, made a new low and is going to open well above its new low. All week the S&P has moved lower. While the price action has shifted, that does not mean the buyers are not going to try and support the markets. After such a big drop we think it’s safe to say that some of the longs have gotten out and that the “crowd” is now short. With that in mind and today being the April expiration, a bounce may be in order. If the S&P does sell off and close under 1529 today, that would surely indicate lower prices.

Our view: It is very important not to forget how much money has been put to work in the stock market this year. The bulls will not throw in the towel without a fight. Currently the S&P is short-term oversold with all sorts of buy stops above. If you read our report early this week, we said a retest of the lows was possible, and that is exactly what happened. The question today is do you sell the gap up or the first rally above, or does the S&P gap up and go higher from there? Ned Davis said yesterday that while tops see a lot of divergences and sometimes there are divergences at lows, in general, lows caused by panic and fear are more likely to see the “baby thrown out with the bathwater” as everything gets sold.

  • It’s 7:15 a.m. and the ESM is trading 1543.75, up 9.75 handles; crude is up 62 cents at 88.62; and the euro is up 58 pips at 1.3111.
  • In Asia, 9 out of 11 markets closed higher (Shanghai Comp +2.14%, Hang Seng +2.33%, Nikkei +0.73%).
  • In Europe, 12 out of 12 markets are trading higher (CAC +1.06%, DAX +0.30%).
  • Today’s headline: “Global Markets Rise; S&P Has Its Worst Week Since June”
  • Total volume: 2.3mil ESM and 10k SPM traded
  • Economic calendar: No scheduled economic releases, Federal Reserve Gov. Jeremy Stein speech on liquidity regulation at Richmond Fed Credit Markets Symposium, Charlotte, NC.
  • Fair value: S&P +5.49, NASDAQ +19.90
  • MrTopStep Closing Print Video: https://www.mr-topstep.com/index.php/multimedia/video/latest/mrtopstep-closing-print-04-18-13

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. {jathumbnailoff}
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DISCLAIMER: The information and data in the above report 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.