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The end of the month is always a time to reassess things as a technical trader. The monthly charts are an important part of the jigsaw of price action, so it is imperative to take stock at the end of the month and realign your view with what the charts are saying.
The E-mini S&P 500 futures had a strong close into the end of the month and confirmed a monthly buy pivot which can’t be ignored. The current state of play across the different time frames is that we have a quarterly sell pivot in place, but a daily, weekly and now monthly buy pivot as the most recent pivots in the shorter-term charts.
The quarterly charts are still pointing to the possibility of at least a balancing up correction in prices back to the middle of the recent range of around 2650 (7% below current prices). But the quarterly chart can take a long time to play out, so we must focus in on the shorter-term charts to find trading opportunities.
Now that we have a monthly buy pivot in place, we must consider the possibility that prices could continue to rally to the upside and eventually breakout above the all-time high from last year. It’s blue sky above there.
The line in the sand beneath the market is 2790–2800. If prices turn back down rapidly and sell-off below there, we should see a sharp correction towards 2650 because there are plenty of dominoes lined up below 2800.
The 200-day moving average sits at 2757. Prices have already bounced off the 200-day moving average once in the past month and we should expect to see a lot of selling come out of the woodwork if prices can’t hold above the 200-day MA.
Option gamma increases dramatically for dealers below 2800 which would add to selling pressure if prices fall below there. The simple explanation of that dynamic is that option dealers usually sell put options with strike prices below the market and as prices fall, they must sell futures to delta hedge their position. Dealers are trading volatility and aren’t interested in having a directional view of markets, so they must continually delta hedge their portfolios as prices move around so they aren’t overly exposed to short-term changes in price.
Commodity Trading Advisers (CTAs) are currently 100% long and as prices rally, they usually move their stop-losses closer to current prices to ensure that they lock in profits if prices turn back down. Expectations are that their stop-loss levels are sitting just below 2800, so that would be another thing adding to the selling pressure below there.
A weekly close below 2805 will be the confirmation of the weekly sell pivot and I need to see that occur before I will get too excited about the possibility of a good correction now that the monthly buy pivot is in place.
PMI (Purchasing Managers Index) data out of China on Sunday confirmed that factory activity was starting to pick back up again, so the stimulus by China’s government may be gaining traction. I’d expect the ASX 200 to cheer that news in the short-term, so it appears for now that the rally isn’t dead yet.
Editor, Alpha Wave Trader