S&P 500 waiting to rally if and when Congress acts

By Danny Riley Concerns over a prolonged government shutdown and a negative report on private job sector growth helped push the S&P 500 futures down sharply on Globex yesterday. The futures opened sharply lower at 8:30 Central and went into a 3-handle chop, holding above Tuesday's 1675.25 Globex low. After a few failed rally attempts the ESZ (E-mini S&P) broke down through the 1675.00 level, hitting sell stops down to a new daily low at 1673.25. The Asian markets closed mostly higher and Europe is trading modestly higher. This morning's economic calendar includes six different economic reports and four fed governors speaking. When the S&P 500 gaps down sharply, prepare to buy One of our key trading rules is the Fade Trade. It resembles “Counter-Trend Friday,” but the fade trade applies to days when the S&P futures gaps up or down sharply—in this case, down. You prepare to buy on the assumption that those short-sellers will have buy stops which the algos will find and hit. We believe two things happen. The first is most of the selling was done before the 8:30 open, but when the ESZ started going down after the open the second wave of selling came in. The algos pushed the S&P down through the sell stops to the low of the day. By that point, all the selling had been used up. Trading is all about timing, and yesterday when the ESZ started breaking down I thought it was too early in the day to start buying. The call was exact but my execution and timing were off. When that happens your whole game plan gets thrown off and that is exactly how it went. This morning crude oil sold off below $104 a barrel and European stocks bounced after China's services sector expanded. As the U.S. deadlock continues, the dollar is trading at an eight-month low. Despite all the negatives, stocks seem to be drawing some support from the idea that the central bank may have to keep its bond buying program going well past the end of 2013. Our view A budget deal seems closer, but the talks (or lack of talks) have prolonged the deadlock. At today's White House press briefing a reporter asked press secretary Jay Carney, “How does it help you get a deal if you're calling Republicans extortionists and terrorists?” Sen. Harry Reid offered Speaker John Boehner a temporary funding extension—at levels the House Republicans demanded—while a bipartisan commission discusses details. He has made similar offers 18 times and Boehner rejected it again, suggesting that he thinks it's to his political advantage to shut down rather than let government workers keep working while Congress negotiates. One WWII veteran disagreed: during a photo-op at the (closed to the public) World War II memorial, Boehner was told by a veteran, who trespassed onto the memorial site, to “go back and do your %&#*$ job.” The ongoing fight doesn't serve either party or the public. While the markets remain weak, the risk is to the upside. That said, there is a lot of wear and tear going on. As of this morning the S&P has closed lower 8 out of the last 10 sessions. Our view is to buy the early weakness and sell the rallies. I remain hesitant about the sell side because I fear the an announcement of a deal will cause a big push back up. There are a lot of buy stops building up above 1688 up to 1695. I think there is a good possibility we see that today. As always, keep an eye on the 10-handle rule and please use stops when trading futures and options.