Last week’s price-action in the Index Futures was uneventful but also remarkably interesting. The market showed extreme strength in the face of weakness and extreme weakness in the face of strength. Just when it looked like the market was going to break out of its trading range it stopped abruptly and reversed. This action actually gives us a great short setup signal for the S&P. The sentiment data also tells a compelling story – the sentiment on S&P Futures remained largely unchanged for the week but sentiment on VIX Futures decreased by 8% Bulls over that same time. When we looked at historical data, it became clear that this setup offers a good risk/reward opportunity to short S&P Futures.

Here are the filters we applied to the sentiment data:

  • Two-day sentiment change in S&P = Between -2% and +2% Bulls
  • Three-day sentiment change in S&P = Between 0% and +4% Bulls
  • Four-day sentiment change in S&P = Between -2% and +2% Bulls
  • Four-day sentiment change in VIX = Less than -7% Bulls

Since 2016, there have only been three other times where we had a similar sentiment short setup – those dates were 05/28/13, 09/05/13, and 01/08/14.

ES Sentiment 2014 01 08

The Short Setup

Here’s how we’re going to trade this bearish setup:

  • Place a GTC Sell Limit order for $ES_F (Dec) at 3453.00
  • Once that order is filled:
    • Place a GTC Buy Stop Loss order for $ES_F (Dec) at 3491.00
    • Place a GTC Buy Limit order for $ES_F (Dec) at 3280.00

For this trade, we’re risking $1900 for a potential profit of $8650 per contract (>4x reward ratio). Let’s see how the market trade this upcoming week heading into an election.

S&P Sentiment

CONVICTION. EXECUTION. DISCIPLINE.

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