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Danny Riley

By the time Friday morning’s April expiration trade started, most positions had already been rolled. With the S&P down 62 handles from its high at 1593 the previous Thursday, April 11, to last Thursday’s 1531 low, it was not the options expiration that was driving the S&P higher during Friday's trade, it was new buying forcing the shorts to cover. 


The bounce

The low at 1531 was a retest of the old 1533.25 unemployment low. As you may recall, the March jobs number came in way lower than expected, forcing customers to sell at sharply lower prices in Globex before the 8:30 open. After the sharply lower open the S&P went straight up. That low led to the new contract highs at 1593. The recent selloff did four things: 1) It brought out the sellers; 2) during the selloff the S&P retested and took out its 1536 50-day moving average and 3) took out the old 1533.25 low and printed into a new low at 1531 and 4) then closed well above all 3 levels on Friday’s close.


The price action

The recent price action of the S&P played a major role in last week's decline. If you were trying to pick bottoms, what you found was every time the ESM short-covered, it sold off again. Within that is the premium levels between the S&P cash and the S&P future. When the S&P is going up, the premium levels expand. When the S&P is going down, the premium levels contract.  During last week's selloff, the premium levels for the most part stayed at contracted levels even during the short covering rallies. That is why after every 3- to 5-handle bounce the ESM would sell off into new lows. After buy programs all year, sell programs became the flavor of last week’s S&P index trade.


Bump in the road

It’s very important to understand that while the indices may have had their worst weekly drops of the year, the Dow is still up 11%, the S&P up 9% and the Nasdaq and Russell up 6.18% and 7.44% on the year. With the markets up so much in the first quarter, the question becomes, was the selling / profit-taking part of something larger? Or is the S&P back to doing what it’s done all year -- sell off, back and fill and make a new high? For now the jury is still out. In ordinary times one would think that there is potential for a wider selloff with all the increased volume and down days, but with the Fed printing presses running 24-7 it all goes back to one thing -- don't fight the Fed. 


Our view: Flip a coin. The rule is if the S&P closes well on an expiration it usually carries through on Monday, or at least part of the day. According to the MrTopStop yearly stats there have been 13 total Mondays this year with 5 up and 7 down and 1 unched with an average net change of of +6.2 handles and an average loss of 13.7 handles. We lean to selling the early rally and then buying weakness. As always, keep an eye on the 10-handle rule and please use stops. 


  • It’s 7:15 a.m. and the ESM is trading 1554.50, up 7 handles; crude is up 69 cents at 88.96; and the euro is down 14 pips at 1.3052.
  • In Asia, 9 out of 11 markets closed higher (Shanghai Comp -0.11%, Hang Seng + 0.14%, Nikkei +1.89%).
  • In Europe, 12 out of 12 markets are trading higher or unched (CAC +0.52%, DAX +0.74%).
  • Today’s headline: “S&P Futures Follow Global Market Rally” 
  • Total volume: 1.86mil ESM and 6k SPM traded
  • Economic calendar: Chicago Fed national activity index, existing home sales and earnings from Caterpillar, Halliburton, Hasbro, Netflix, Texas Instruments
  • Fair value: S&P +4.70, NASDAQ +11.54

MrTopStep Closing Print Video: https://mr-topstep.com/index.php/multimedia/video/latest/mrtopstep-closing-print-04-19-13 


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. 


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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.