Stocks may retest lows after falling on Countertrend Friday

Stocks and the S&P 500 did pretty much what we and everyone else thought they would do: they rallied. But the key word is “everyone.” When “everyone” thinks the same thing, the markets don’t usually oblige and they didn’t.

After opening higher and rallying a bit (see MrTopStep Trading Rules 101) the ESM14 got hit by one of the MrTopStep trading rules, Countertrend Friday.

As you can see by the chart above, the ESM14 opened higher, rallied a few handles above and made its high for the day. The problem was all the ups and downs the S&P had to go through before it actually sold off. The Pit Bull taught me a long time ago that if the S&P [CME:SPM14] closes weak on an expiration Friday, it’s usually weak the Monday afterwards. Backing that up are the Mar expiration stats for today that show the S&P has been up 13 and down 16 of the last 29 occasions.

While there has been a lot made of Turnaround Tuesday’s great record, few talk about how weak Mondays have become. Of the 12 Mondays since Dec 30, 2 have been close, 4 have closed higher and 7 have been down, some with major losses (Jan 13 -22.25, Feb 3 -43.8 handles).

The week ahead

Tuesday: Earnings from Walgreens, Consumer Confidence and US home sales for February will be announced.

Wednesday: King Digital Entertainment IPO expected to be priced between $21 and $24 a share, which would give the company a market cap of $7.6 billion. Second stage of the Federal Reserve’s contentious stress test of the US’s largest banks.

Thursday: A final reading on fourth-quarter Gross Domestic Product will be released and Microsoft’s new chief executive Satya Nadella is expected to unveil its much awaited Microsoft Office for Apple’s iPad.

The U.S. Senate may consider the legislation required to raise the federal minimum wage to $10.10 an hour from $7.25.

The Asian majors closed sharply higher and in Europe 10 of 11 markets are trading lower.There is a heavy economic calendar this week: 27 economic releases, 8 Fed governors speaking and 11 T-bill and bond auctions or announcements. Today’s economic calendar starts with the Chicago Fed National Activity Index, Jeremy Stine speaks, PMI Manufacturing Index Flash, 6-month T-bill auction, Richard Fisher speaks.

Our view

Despite Friday’s selloff the S&P 500 ended the week up 1.4 %, its best weekly gain since February and up about 1% YTD. Early last night the S&P was unchanged and at 7:00 am was up 4 handles.

Most of the sources we follow say the S&P should at least go back down and retest Friday’s lows. We lean to selling the early strength and buying weakness later. Today may start out slow but the week won’t be.

As always, keep an eye on the 10-handle rule and please use stops when trading futures and options.

• In Asia, 11 of 12 markets closed higher: Shanghai Comp. +0.91%, Hang Seng +1.91%, Nikkei +1.77%
• In Europe, 10 of 11 markets are trading trading lower: DAX -0.72%, FTSE -0.45%
• Morning headline: “S&P futures seen higher ahead of flash PMI data for March”
• S&P Fair Value: 1858.52 (futures 2.48 above at 1861.0)
• Total volume: 1.75mil ESM and 10K SPM traded
• Economic calendar: Chicago Fed National Activity Index, Jeremy Stine speaks, PMI Manufacturing Index Flash, 6 month T-bill auction, Richard Fisher speaks