Smash ES Plan | December 19, 2022

Another b-shape-ish profile after Friday's session. Will that imbalance to the downside get cleaned up immediately or is more short-covering ahead?

Recap & Plan

Friday’s ON session consolidated within the main distribution of Thursday’s b-shape profile during Asia session. Buyers failed to test Smashlevel 3940, meaning sellers maintained their control below. We broke down from Thursday’s main distribution when the Europe session opened, meaning we cleaned up the unfinished business from Thursday’s profile. The last downside target for the session was 3875, where we also had MA50 as confluence. We did get a decent reaction from that 3875 level prior to RTH open. I published some pre-market notes on Twitter an hour before RTH and the most important note was about that key-level 3913 level, prior 4 week balance low. Buyers needed to regain that level or sellers maintain control. In case of a break and hold below 3875, sellers wanted to see a VIX above 24, was another note. A double distribution left a pretty visual fill section, that was highlighted.

RTH opened with a true gap down, meaning completely outside of prior day’s range. The gap was filled immediately during A-period (First 30 min of RTH), and note the technical fills of the overnight structure (fill section). 3913 was tested (3912.50), but buyers failed to find acceptance within prior day’s range (and 4 week balance), meaning sellers reloaded and defended the level that needed to be defended. We were in a firm downtrend intraday and sellers broke 3875, meaning we were trading below that last intraday downside target. The biggest difference with Friday’s session compared to Thursday’s was that VIX were not confirming the weakness on Friday. ES kept making lower lows (below 3875), while VIX made lower highs and actually turned negative (VIX HOD: 23.83). That was a clue to be cautious chasing shorts. Unsurprisingly, a poor low was formed, meaning sellers getting too short and the initial reaction is always away from that area. The closing short-covering rally was, in that sense, contextually logical and that reversal tested the upper end of the lower distribution from the ON session and we closed the session above 3875.

We end up with another b-shape-ish profile, meaning we have unfinished business at the lows to carry forward. As mentioned, Thursday's unfinished business was cleared quite quickly and what will be observed now is whether Friday's unfinished business will be cleaned up immediately or if more short-covering is ahead. My short-term level of interest (Smashlevel) is 3895, where that short-covering rally on Friday found sellers. Break and hold above 3895, without having cleaned up the non-excess low, have potential for more short-covering in search for stronger sellers at higher prices. 3940-3930 is an interesting reload area for sellers. We have the 20% correction level 3847 and an unfilled gap at 3825.75 of interest, if sellers follow through to the downside.

Two additional VIX levels to observe for tomorrow: 23.76 and 21.48. Use the levels as confirmation of strength/weakness. Should we break and hold above 3930, you want a see a VIX < 21.48 for confirmation of strength. Should we break and hold below 3825, you want a see a VIX > 23.76 for confirmation of weakness. In any case, one should be careful with chasing outside of the yellow levels. A non-cooperating VIX may suggest reversals (trade setups).

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