Macro Wrap – Why Did SPX Futures Move Down Then Up 1% Overnight?

by Enis December 16, 2013 7:01 am • Commentary

Traders were buzzing overnight as SPX futures fell 10 points in a heartbeat at 10:08 PM EST.  Since then, futures have rallied more than 20 points, a huge move considering that the weekend news flow was quite light, with no major news this morning either.

While everyone is looking for news to explain the move, simple technical analysis is likely the real reason.  First, let’s look at the 3 day price action in Dec13 SPX Futures (note that I’m using Dec for historical continuity, not the March contract that is now most watched) to illustrate the importance of the 1772 support area:

Dec13 SPX Futures intraday chart, Courtesy of Bloomberg
Dec13 SPX Futures intraday chart, Courtesy of Bloomberg

The 1772 level was the low on Thursday and Friday on multiple occasions.  When that level broke last night, there were probably numerous sell stops lurking around 1770.  But enough for a 10 handle move?

Well, if we zoom out to see the price action since late October, we can see the even greater importance of the 1772-1773 area over that period:

Dec13 SPX Futures contract, 2 month intraday chart, Courtesy of Bloomberg
Dec13 SPX Futures contract, 2 month intraday chart, Courtesy of Bloomberg

After a huge 130 point run higher from October 9th to October 30th, the Dec SPX Futures contract topped out at 1773.25 on October 30th.  That level acted as resistance once again on November 7th, and then the break of that level led to strong buying on November 13th.  That level was support once again on November 20th and 21st, close to support on December 4th, and then support again last week, as I showed at the start.

Naturally, with so many eyeballs on this pivot point, it’s not surprising to find a number of sell stops lurking below it.  When those sell stops were hit overnight, it was a flood of sell orders that caused the quick 10 point move, at a time when few traders were around to provide liquidity.  Interestingly, the overnight low 1760.25, vs. the 50 day moving average of 1760, which had not been touched since October.  My guess is that the buy limit orders around the rising 50 day moving average absorbed the selling from all the sell stops.  With a short-term exhaustion of sellers after hitting those sell stops, overnight buyers have taken the futures up more than 20 points from the overnight lows.

Short-term traders dominate the short-term price action.  Intermediate and long-term traders, however, can be the catalyst for a bigger move, as they give a big initial order, with no plan to buy back or sell back the funds that are committed on either the buy side or the sell side.  In the case of what happened overnight, it looked like it was short-term focused traders trading places, with the sell stops hit near 1770 met with buy orders near the 50 day ma between 1760 and 1765.  That’s why we watch technicals so closely.

With the FOMC meeting on Wednesday, the 1760-1765 area in SPX cash is now crucial support.  Whether it breaks likely depends on if the intermediate to long-term traders are more aggressive on the sell side this week, regardless of what the smaller, short-term traders decide to do.