The S&P 500 Futures, China Debauchery and the ‘Bus’ Too Full

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China continues to dominate the news headlines and the algorithmic and HFT trading programs have done a great job of exploiting the price action in the S&P futures. For the second time this week the Chinese government shutdown it’s main stock index, the Shanghai Composite down two days in a row, down ‘limit’ at -7% each day. Yesterday the Chinese announced that they would be removing the circuit breaker and after the S&P futures fell sharply overnight down to 1930 there was more than a 30 handle rally back up to 1969.00 but quickly reversed when crude oil fell to a new low. The VIX never sold off as the S&P futures rallied and after the rally the ESH15 sold off all the way back down to 1932.50 around 1:30 CT. It was a wild day of ups and down and it doesn’t feel like the jump in volatility is going to subside anytime soon.

Chinese Roller Coaster

It has been a roller coaster of a week and it’s not over. Because of all the China talk and the other economic releases this week, many traders forgot about today’s employment report. Today has another busy economic schedule; the jobs number, and some that speak. George Soros chimed  in yesterday calling the markets ugly and in crisis. Soros said that China is struggling to find a new growth model and its currency devaluation is transferring problems to the rest of the world the world. Soros said he sees parallels between the 2008 credit crisis which was fueled by excessive risk-taking in the current downturn.

One of the hallmarks of MrTopStep calling the market flows has been the ability for the indexes to recover after selloffs. This was made easy by the Fed’s policy of easing and zero borrowing cost policies. During that time the Fed racked up $4.5 trillion in debt. In addition to the weakness in China, institutions have been selling stocks for several months to prepare higher rates. China  caused several letdowns in 2015 of which the S&P recovered fairly quickly after. While we understand the gravity of the problem and the overall weakness in the stock market, we cannot rule out some type of bounce. One of the things that I cannot abandon is how resilient the US stock markets and the S&P 500 has been as a whole. As money moves out of an overseas market it has to go somewhere, right now the S&P 500 is still the best place to put your money especially after big decline when everyone gets bearish. I still don’t feel overly negative or overly positive about either direction. It’s just too early in the year and there is just too much volatility.

Beware of Counter Trend Friday

As I said in the first paragraph, the S&P (ESH15:CME) just traded down to 1932.50, just one handle off the overnight globex low and traded back up to 1944.00 and is coming back down a bit. With everyone being so bearish and expecting lower prices after the markets have already sold off I am starting to think that if we see a big down open on oversize Globex volume after the jobs release we could see another big rip higher like we did yesterday. Statistically Monday the week of the January expiration is weak but Tuesday of the expiration week is the most bullish day of the week. Patterns fitting, we should see higher prices. I’II finalize by saying I spoke to a trader from one of the larger foreign banks yesterday and he said that everyone is expecting the markets to go down in China after the removal their circuit breakers, and if China opens higher we could be in for a big rally in the S&P. At the end of the day Dow Jones futures (YMH16:CBT) settled at 16149, down 379 points and down 5.0% on the week. the S&P 500 futures (ESH16:CME) settled at 1933.00 , down 53.00 handles on the day and down 5.10% year to date and the NASDAQ 100 futures (NQH16:CME) settled at 4289.25, down 157 points or  -3.15% and down 5.2% on the year.


In Asia, 8 out of 11 markets higher  (Shanghai Comp +1.97%), and in Europe 9 out of 12 markets are trading lower (DAX -0.07%). Today’s economic calendar includes the Employment Situation Wholesale Trade John Williams Speaks Baker-Hughes Rig Count Jeffrey Lacker Speaks Consumer Credit Treasury STRIPS.

PitBull Worried About Downside ‘Gaps’ #1861

Our View: While many people are comparing the start of 2016 to what happened in 2008 many people and I both agree we can’t remember a start to a year such as this. One of the things that concerns me is that the S&P was trading around $1,000.00 the last time crude oil traded $33. Not saying markets tank like that but with so many moving parts it’s becoming fairly unpredictable. If you ask me the pickup and volatility started at the end of July and has not let up and it doesn’t look like it’s going to let up anytime soon. Our view has been right on all week, buy the sharply lower opens and sell the rallies but if China does rally tonight you may find yourself chasing the S&P on the upside. Remember the January at options expiration is next week and everyone has already rolled lower.


As always, please use protective buy and sell stops when trading futures and options.   


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  • In Asia 8 out of 11 markets closed higher : Shanghai Comp +1.97%, Hang Seng +0.59%, Nikkei -0.39%
  • In Europe 9 of 12 markets are trading lower : CAC -0.34%, DAX -0.07%, FTSE +0.27% at 5:00am CT
  • Fair Value: S&P -7.82, NASDAQ -9.00 Dow -93.77
  • Total Volume: 2.9mil ESH and 10.1k SPH
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Danny Riley (2398 Posts)

Danny Riley has worked in the futures and options industry for 38 years, including the CBOT’s bond room, where he worked for several of the Market Wizards. He went on to build the largest volume desk in the S&P 500 Index Futures, serving some of the largest banks and hedge funds, the UBS program trading business, and some of the world's top individual traders. As a leader and co-creator of the MrTopStep IM-Pro Trading Room, he shares trading ideas and breaking market news live from the floor with our other professional traders and new traders eager to experience the power of collective intelligence. Join us today and get the edge only social trading can give you.

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