JAKE MERL: Welcome to Trade Ideas.
I'm Jake Merl, sitting down with Joe Perry, global head of business development at ForexAnalytix
and former FX and futures trader at SEC and Point72. Joe, it's great to have you back on the show.
JOE PERRY: Great being here, Jay.
JAKE MERL: So, at the end of last year, you made some pretty bearish calls on the S&P.
You shorted the market a few different times and basically nailed the downturn into December.
That being said, your last trade in January did get stopped out
as we've seen this massive run up higher to all-time highs.
And now, we've recently sold off again. Can you please walk us through the recent price action,
what you're looking at from a technical perspective,
and if you're currently bullish or bearish, given what's going on?
JOE PERRY: Sure. Let's walk back to the last trade where I got stopped out.
And we'll start from there. So, we went down, we made new lows, then we bounced,
I was looking to get short again. Once we got into that range where we were from November,
in through the first half of December, it was about $2550 up to $2820.
I was neutral in there because there was just a lot of slop that went on through there.
So, once we broke above that $2820 level, we got bullish, and we were looking to go up
and test those highs from back in October.
We started putting in another ascending triangle similar to that one.
And then we're looking for a break as the ascending triangle started to slow.
And indeed, we did break and moved lower to where we are now.
So, we're looking to do a trade right now in the S&Ps. But let's first take a bigger picture.
Because as a trader, you always want to know what's going on in the macro environment in order to help
give you direction and perspective as like an overall general picture while you're trading.
So, first of all, look at interest rates.
They came out a couple weeks ago, and said inflation was transitory.
So, the Fed minutes are coming up today. We'll find out exactly what they mean by transitory.
Hopefully, we'll find that out. But regardless of that, the market is concerned.
They've priced in one cut for the end of through this year.
And they are pricing another cut for next year. So, whatever happens, the Fed is going to be cautious.
And the reason they're going to be cautious is because of the trade war with China.
I don't think they're going to do anything until this gets resolved.
Because there's three outcomes that are going to come out of this.
Number one, China will say, all right, we'll get into all your demands,and then stocks will go flying up.
Number two, they'll say, no, we're not giving into any your demands,
in which case, the price pressures are going to pass through to the consumer,
and prices will rise, the data will be bad.
And in turn, the Fed will end up cutting, right, so that will ultimately push stocks higher,
because that's what happens when the Fed is cutting now.
And the other thing is, we'll kick the can down the road, just as we've been doing now,
and trying to probably want to do that going all the way
up until the election coming up in a year and a half.
But that's I think, the things that we have to look at right now.
So, Fed, neutral, and China still in this uncertainty with the trade wars.
So, that's where we are right now.
And actually, I think because that there's a lot of people sitting on the sidelines.
We're not seeing the volatility, and we're not seeing the volume like we did in the past.
So, now to get into the trade, back in October of last year, you can see that we had that ascending wedge,
which we broke down from. And as we broke down, we've put in what is called an A, B, C, D pattern
where the CD, the length of CD equals the length of A to B.
We went down and we tested the 200-Day Moving Average,
we traded around that level for a good month and a half.
And I hate using moving averages. But you have to look at them because the market looks at them.
And if the market's looking at them, and there's something happening around that level,
you have to pay attention to them.
They don't really mean anything, except it's the average price of the last 200 days. But so what?
That doesn't mean anything. But the market pays attention, maybe pension funds buy above it
or I don't know, you got to pay attention to that level, because there's price action around there.
So, as we traded lower, we went down, made those lows.
We broke out of there, we went higher, we traded actually around the 200-Day Moving Average again,
and we stalled at the triple top, we're at $2820. We broke through, we started that ascending wedge.
And as we broke lower a couple weeks ago, we put in an AB again, and then we bounced.
So, now what I'm looking for is a CD to be put into place. So, if that CD equals the length of AB,
then that comes in around $2720, which is where I'll be looking to buy to the long.
That level also is the 38.2% retracement level from the lows
back in December to the recent highs we have here.
So, to answer your question, I am going to be bullish S&Ps. However, I don't want to buy until the $2720.
JAKE MERL: So, we're currently trading around $2850.
So, you're waiting for almost a four or 5% pullback before you actually enter the trade?
JOE PERRY: Yes, correct.
JAKE MERL: So, Joe, would you be shorting this move down to $2720?
Or would you just be looking to go long once it gets there?
JOE PERRY: That's a loaded question. Because I want to buy at $2720. And ultimately, I want to be long.
So, I'd like to work a core position around that.
So, if I see a formation setting up in a shorter timeframe,
that makes me think that it's going to break lower,
then I would jump into that formation on the short side.
However, it wouldn't be for size, it would be small, and I ultimately want to be long.
So, it would definitely be harder for me to short it than to go long.
JAKE MERL: So, what other technical indicators are you looking at that's confirming your thesis?
JOE PERRY: If you look at the 240-minute chart, you can see that when we broke out of the wedge,
we moved lower, and we bounced. And we're putting in this triangle formations.
It looks like we're going to move lower out of this triangle.
And that would also target down to the $2720 level,
you could see there were a number of touches around that level.
So, it looks like a decent area of support down there.
Also, if you look at it from an Elliott Wave perspective, as we have this move higher to all-time highs,
that was clearly a Wave 3. We pulled back, we put in an ABC correction for Wave 4
and now, we're looking for a Wave 5 just to finish the formation.
And that would target us up above $3000 as well. If we break below $2700 or so,
that would discount the formation of the Elliott Wave.
So, that's why we're looking around that $2720 levels long.
JAKE MERL: So, what key levels? Are you looking at here? We know you're entering at $2720.
But would you have a stop loss in case things don't go your way? And what's your target price?
JOE PERRY: So, yes, I'm looking to get long around $2720. Target price I have is $3050.
The reason to have that level is because above those highs, there are going to be a number of stops.
Everybody has their stops there. That's where the liquidity is.
And market always moves towards the liquidity. And it's going to push through there.
And I believe that all the stops are going to get taken out.
And as soon as they get taken out, then I think that the market is going to pull back again.
So, once it gets to $3050, I'll reassess and see what happens from there.
Ultimately, I see 161% extension level coming in $3350. But I'm not ready to go there yet.
I want to see what happens once we take out all those stops above the highs.
And then I'll race us from there. And my stop loss is at $2670. There is some support going back there.
And if we get down there, we'll be down at the 50% retracement level just below that.
And if we get through there, then we have a lot more room to go.
JAKE MERL: And so, are you looking at any other words markets?
Any other asset classes, commodities, currencies? Anything else out there that's confirming your thesis?
JOE PERRY: Well, yes, because I'm looking at whatever is correlated, actually, with S&Ps.
Correlations come in and out of favor, right? And especially, around times of interest rate uncertainty.
So, now, we're uncertain about interest rates, we're neutral or are we going to cut? What's going on here.
So, there are a couple correlations now that have been going on through this whole thing.
As you look from the beginning of the year
and you can see crude and S&Ps have actually been moving together.
And you can see that crude, traded higher and now, has pulled back.
Now, as long as crude is below 64, it looks like it's going to move down to test 60.
So, if that happens, S&Ps should move lower with crude.
The other one I would look at is dollar-Swiss.
Since the beginning of the year, dollar-Swiss and S&Ps have been moving together.
Dollar-Swiss has pulled back and now, is forming a flag formation on a daily chart.
So, if you extend that flag, the target for that is below parity.
And if that happens, then stocks will move lower as well.
So, you see these other asset classes where they have these formations setting up
that looked like they're going to move lower.
And if S&Ps have been trading with them, you would expect S&Ps to move lower as well.
JAKE MERL: So, are you worried at all about the correlations going in and out
between the S&P and the Swiss Franc and the S&P and oil?
JOE PERRY: I'm not really right now, because they pretty much have been in effect
since the beginning of the year. I feel like other things like the dollar and the S&P, traditionally,
they have been negatively correlated. However, right now, they're not. They're both going higher.
And I think the dollar will continue.
JAKE MERL: So, what would you say is the biggest risk to this trade?
JOE PERRY: If we break down lower beyond the AB equals CD level of $2720.
And that may occur if China really starts putting up a larger fight
and fee numbers pass the road to the real economy, and the Fed doesn't do anything in time to save it.
So, it could go down because they did mention in December that they were worried about asset price levels.
JAKE MERL: So, Joe, what vehicle would you use to make this trade?
JOE PERRY: Well, I will use the E-Mini S&Ps to do this.
They're valued at 12, 15 a tick as opposed to the big S&Ps which are $50 a tick.
So, you could scale into this trade as it's moving lower.
If you don't think it's going to get down to $2720.
Also, there's a new instrument now called the micro E-Mini,
which is only it's 1/10 of the size of a regular E-Mini. And it's $1.25.
So, for retail traders out there who want to trade this, they could enter cheaply, all the way down,
and they could scale into this position for very cheap,
and that's a way to actually begin to trade to enter the market.
JAKE MERL: Well, Joe, that was great. Thanks so much for joining us.
JOE PERRY: Thanks, Jake.
JAKE MERL: So, Joe recommends a new trade on the S&P 500.
He likes buying a pullback to $2720 with the stop loss at $2670
and a target price of $3050 over the next three months.
That was Joe Perry of ForexAnalytix and for Real Vision, I'm Jake Merl.