I've been waiting and waiting for a signal to hold a short over the past week, but the upward consolidation has been persistent for the past eight trading days. Instead of revealing a high odds inflection point at which to enter the market short, futures gapped lower at the Globex open on Sunday, leaving the prudent shorts behind. You would have needed to be a bit aggressive to be short ahead of this drop. In any case, the market is positioning itself to gap significantly lower as the stock market opens this morning. First target to the downside for the ES will be the previous highs at around 1525 (ESM13 June Contract). Look for support to come in anywhere between 1515 and 1525. I will consider long entries in this range. If the ES sees a bounce before that happens I will look to enter short following a move back up above 1550.
Several factors influenced weakness that began on Friday. First there was concern and anticipation over how finance ministers of the 17 members of the Eurozone would negotiate a bailout deal for the island of Cyprus. Second was the US consumer price index, which jumped higher and rekindled some concerns about inflation. Third, US consumer sentiment took a surprise plunge to 71.8 vs about 79 during the last two weeks of February. The expectations component of the report fell 8.5 points to 61.7 which is the lowest reading since the debt ceiling debacle and US ratings cut in the third quarter of 2011.
By the end of trading on Friday, there was no bailout deal in place for Cypress.
By the time Futures markets opened on Sunday, it was risk-off in reaction to an unprecedented decision by Eurozone leaders to make Cypriot bank depositors responsible for part of the bailout of the Island of Cyprus. You can find an interesting take on the situation in the article Cyprus: the world’s biggest “poker game.”
A Cypriot bank holiday today will limit the immediate reaction. The deposit levy (the tax on depositors) - set at 9.9 percent on bank deposits exceeding 100,000 euros and 6.7 percent on anything below that - will be imposed on Tuesday, if voted through in parliament.
So, we may see a bit of a subdued reaction or consolidation following the first hour or so of trading today. If the ES does manage to see a bounce later, it will likely be a good shorting opportunity. If we see consolidation later today, I will probably favor selling the upper part of the consolidation range for some day trades. Other than that I will consider long entries where-ever the ES finds support in the 1515-1525 range. We'll see how this plays out into Tuesday and then into Wednesday with the FOMC announcement and Chairman Bernanke's press conference.
Levels to watch now on the ES (M13 June Contract):
Resistance above at: 1542-1543, 1548-1550, 1553-1554
Support below at: 1524-1525, 1519-1520, 1514-1515
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