The first week of April was pretty good for us. Last Monday we said we were looking for a nice bounce to get short. And we got it, with a fake breakout Friday morning, followed by a 40-point plunge for the rest of the session.
We expected a short-term market top at 1892.75 that turned out to be almost exactly on the money, and we were selling 1895 calls on the S&P 500 E-Mini futures (ES) from Tuesday (Apr. 1) on. Our members made out like bandits. So did the participants in a pilot project we are running on ES options.
So we can glory in our general goodness all weekend. But on Monday we have to go back to work. What happens then?
THE LONG-TERM BULL LIVES ON
Despite Friday’s carnage nothing much has changed. We remain short-term bears and long-term bulls.
The long-term is easy to understand. While there was a lot of wailing in the markets Friday afternoon, we are still firmly in an uptrend – almost two years and almost 600 points without a 10% correction – that is supported by the world’s biggest money machine, the Federal Reserve.
There will certainly be a retracement, probably sometime this month or next. It will probably take the market down between 10 and 20 per cent. It may even be starting now.
But we could easily lose another 160 points from this bull market, and the uptrend will still be intact. Friday was a warning shot, not a knock-out punch.
SHORT-TERM IS DIFFERENT
Short-term, we see traders starting to fret. Nobody wants to leave the party too soon; but nobody wants to get out a day late. And the closer we get to the top – we made new highs last week, remember – the more the equities market starts to twitch.
From our perspective, twitchy is good. We make as much money – and make it faster – on the way down. Our preferred trading vehicle, the S&P 500 mini futures (ES) almost always reacts first, ahead of the slow-moving stocks. And this week we have the start of the earnings season again. The news is not likely to be good, and that could be the catalyst that starts the waterfall. Don’t get wet!
ENTRY AND EXIT LEVELS
Our basic trading strategy this week will be to short the bounces in the ES and sell short-term Calls against the futures. We are looking for a bounce to 1875, or perhaps a bit higher, and we’ll start selling around that area.
The price we’ll be watching early in the week is 1865. If the ES is unable to move above that level it will likely drop to our first target around 1825-30.
We may get a bounce from that area. But if we break down, the market will almost certainly go lower – the next major support is below 1750 – and it may go quickly.
Chart caption: S&P 500 mini futures (ESM4) Friday, Apr. 4, 2014
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