[Analysis] ES analysis for March 26, 2009

We are dealing with an awkward situation here. ES was appearing to break the uptrend, dropping to below 790 in afternoon trading. Yet within 30 minutes of closing, it recoup all the losses and went back to 810 level.

Let's analysis the price movement from an intraday standpoint first. When I look at a 5-minute chart, it tells me the following:

• The market is still sensitive to bad news. The poor treasury sales is enough to trigger a drop to wipe out the gains created by two days of positive news.
  
• The last minutes rally is clearly a short covering rally. The short sellers are not committed. At below 790, they rather take the profit and run.

To me, the strong drop in early afternoon indicates that the buyers do not consider stocks cheap when ES is above 800. It is hard to tell what price the market considers stocks are good value, but longing above 800 sounds not like a good strategy unless more economic data suggests otherwise.

The bears' reaction is easier to understand. GDP and Jobless claim numbers are to be announced on Thursday at 8:30 in the morning. There is no need to fight these data.

This makes Thursday's economic data and price action are extremely critical in determining which direction ES is heading.

The market has been receiving a series of good news lately. The current ES price level seems to indicate that it is expecting more good news to come. So unless the economic data is exceedingly good, ES cannot justify at current price level and will eventually drop. Remember, today's price action tells us that the buyers do not consider ES above 800 cheap.

Trading plan:

• Prepare to short after 8:30 data. Interpret the data first.
  
• Spikes that push ES close to 820 are good shorting opportunity. Either use long put or prepare to cut loss should ES breaks 830. Ideally, short at around 9:30-10:00.
• If economic data is so-so or bad, after 8:30, ES will likely drops. In which case, look for intraday rebound to short.
  

Position: None