[Click on the picture to watch Murray’s analysis of the S&P 500 futures after the big fall on Friday. This is the fifth time in over 20 years that we have seen this technical set-up and it points to a sharp fall in prices dead ahead.]
There are now a lot of ducks lined up for a short sharp fall in the S&P 500 towards 2650. I think there is the prospect that prices could eventually fall a lot lower than that, but that’s all conjecture at this point. I’m more interested in working out what the highest probability outcome is at any point and then using that to get into free carried trading positions so I can see what happens next without risking any of my initial capital.
The current technical set-up is pretty rare as far as I‘m concerned. I have been setting it out for you over the last few months, but we needed to wait until prices started heading down again before becoming too excited. I think the price action on Friday in the S&P 500 is the starting gun to the expected sell-off.
The fact that this week is the last week in the March quarter is particularly interesting because pension funds will be rebalancing their portfolios after a huge rally in equity markets over the past quarter. They will probably need to sell a lot of equities to rebalance.
Nomura’s Charlie McElligott set out a list of reasons why he thought markets could sell off in the short-term and I think they are well worth thinking about. He says that the buyback blackout window is ramping up over the next month, so many S&P 500 companies won’t be able to buy back their stock over the next month ahead of results announcements.
Also, CTAs (Commodity Trading Advisers) are 100% long and their take profit levels are getting pretty close to current prices. He reckons they will start selling below approximately 2750 which is only 2% below current prices.
There will also be more quantitative tightening over the next few weeks to the tune of about US$40 billion, and we often see some weakness in prices in the weeks after March quad witching which happened a couple of weeks ago.
The reaction of the market to the dovish FOMC meeting last week is particularly bearish. If the Fed throws the kitchen sink at the market and it still goes down, we should all sit up and take notice.
Last week I analysed the VIX (Volatility Index on the S&P 500) for you and pointed out that it looked compelling as a buy below 13.0. The VIX closed at 16.5 on Friday night which would equate to US$3,500 per VIX contract in less than a week. If we do see prices accelerating to the downside from here, VIX will spike a lot higher than 16.5.
Today, I give you a quick recap of the big picture set-up in the S&P 500 and why I think the market is at a crossroads. Next stop should be 2650 in the E-mini S&P 500 futures and from the look of things where I am sitting, I don’t think it will take long to get there.
Editor, Alpha Wave Trader