One of my long term readers decided to yank my chain a little yesterday by facetiously asking what this week’s expected move (EM) should have been for the SPX. Looking at the outlier moves we’ve seen lately it’s easy to assume that EM is a silly antiquated concept that should at best be ignored. Well I’m not at all sorry to say – you would be horribly wrong.

Not that I fault the guy. Unless you follow this stuff closely – as I do – it’s easy to be fooled by opening gaps that push the tape toward the extremes. What happened on Monday morning was a drop that dropped us almost exactly to the lower boundary of this week’s EM.

That was then followed by a quick ramp that now has us parked slightly parked above the weekly EM. Is it unreasonable to assume continuation higher and a close outside this week’s EM? Of course not – but let’s remind ourselves that EM is a ‘best guess forward estimate’ resulting from the pricing of options by millions of market participants.

If you think you are smarter than all of them then have at it and let me know how things pan out on a long term basis. As a matter of fact, what we are seeing right now is not the ‘new normal’ – nothing in 2020 really is or will be. The ‘normal’ state of affairs is shown in the left side of our chart which shows us months and months of closes inside or right at the weekly EM.

Here’s the NDX pinned right at this week’s EM. Sure it could be breached this week, which then would cause option premiums to reflect that and expand EM for the following week. It’s not a crystal ball, it’s a best guess estimate and it’s more often right than wrong.

Don’t use a small sample set to jump to conclusions. Run the stats and look at the numbers. We did and we base our trading on it for a reason.

The Russell 2000 snapped through its weekly EM but has fallen back and now sits right on its upper threshold. Clearly the past few months have been several standard deviations from what anyone would consider a normal state of affairs.

So instead of dismissing EM try to take it as a reflection of the market’s expectation, similar to the VIX. Continued breaches of EM should lead you to change your trading approach, especially if you a) employ stop losses or b) trade options.

More market perspectives and a few promising looking entries below the fold:

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My Bollinger panels (one of the few lagging indicators I still grant myself) show us a nice retest fo the 100-day SMA right after the September roll over. This officially puts ES 2900 on the map as daily support.

More importantly the medium/long term panels seem to be in sync as the 100-week SMA is also ascending into 2900 now. The monthly shows us > an important Net-Line Buy Level at 3030.75.

My perspective at this point is that ES 2900 needs to hold over the summer and going into early fall. If it does we are good to go, if we breach below then we may see a deep retracement that may take us back toward ES 2600.

The Dollar fortunately has bounced a little and based on the current formation 96.5 needs to hold or we risk a slide into 94.5 or lower. The Fed loves a weaker Dollar but in some ways is stuck between a rock and a hard place.

Entertain further Dollar weakness would most likely raise the specter of calls for the Dollar to be replaced as the world’s reserve currency. We are far from there yet but do not underestimate this possibility. There are literally tens of trillions of Dollars held outside the US and losing 10% or more in the value of your Dollar denominated assets ain’t a joke.

Of course that’s all mental masturbation and I don’t work for the Federal Reserve. From a pure trading perspective I’m taking out an entry here with a stop < 96.2. Let’s see if she has legs.

Bonds – I expected continuation toward 180 and all I got was a silly t-shirt. Well then again, nothing moves in a straight line, especially in this market right now.

I have to admit that this isn’t the easiest market to trade right now but given the current formation I will risk a small entry here with an ISL near 174’04. If it fails then I’ll will try try again near 173, which in fact looks a lot more promising.

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