On May 6 2010, the Dow Jones plunged about 1000 points, or 9%, in a matter of minutes in what became known as the ‘Flash Crash’, only to recover most of the losses by the end of the day. Yesterday US 10 Year Treasury Yields plummeted by 14% from a pre-US data high of 2.17%, to a low of 1.86%, only to recover back to 2.15% by the close.
The 2010 ‘Flash Crash’ was blamed on some combination of a large mutual fund block trade quickly followed by an overwhelming flurry of selling by High Frequency Trading firms. The catalyst for Wednesday’s Bond market bungee jump was ostensibly a soft US Retail Sales Report which fell 0.3% versus -0.1% expected. This was accompanied by soft Producer Prices and a plunge in the Empire Manufacturing Survey to 6.17 from 20.25 versus an expected rise to 27.54. Whilst the data arguably justified the move down to test the 2% psychological level on 10-Yar Bonds the subsequent move lower reeks more of an out-and-out capitulation trade but which was then very quickly rejected.
At the same time the US Stock market started to crash with the Dow down 460 points at one stage before having a dramatic rally in the last two hours of trading. After the cash markets closed the Futures market got hit into the close on the weak Netfix earnings which saw the stock down over 25%. One catalyst for the recovery in both Bond Yields and stocks was a Bloomberg story saying that Fed Chair Yellen voiced confidence in expansion amid foreign risks. She was reported to have told this to a closed group of 30 people at a meeting last weekend and she is due to speak at the Boston Fed Conference tomorrow.
This morning on the economic front we have Euro-Zone Trade Balance and CPI at 10.00 am. This is followed at 1.30 pm by the US Weekly Jobless Claims. At 2.15 pm we have Industrial Production and the NAHB Housing Market Index at 3 pm. Finally at 9 pm we have the US TIC flows. This afternoon the Fed’s Plosser is due to speak on Economic Outlook and it will be interesting to see what he says after this week’s dramatic sell-off in the stock market.
December S&P 500
The S&P plunged yesterday and in the process had its worst day since May 2012. This plunge came on the back of last week’s dramatic sell-off with the major Indices all down for the year. Amazingly since the September 19 high for the Dow and S&P the market has fallen nearly 10%, thus wiping out all of this year’s gains in just three weeks. As I mentioned yesterday, once the 1865 level is broken we will get an acceleration lower but I must confess I am astounded by yesterday’s dramatic move lower to 1812 before the market again reversed back to the 1860 level before selling off on Netflix. Going forward I see the S&P trading in a 1750/1950 range and given that the VIX hit 30 yesterday before dropping back to close at 27 we are going to see huge range days like yesterday. The VIX has now trebled since it printed 10 in the summer. Despite the huge sell-off yesterday with the Dow closing down nearly 2% the McClellan Oscillator again improved to close at -120 thus making if difficult to go short especially with tomorrow’s Nominal Expiration.
Today given the huge sell-off that we had after the Cash Market closed I will be a small buyer from 1837/1843 with a wider 1828 stop. If I am taken long and subsequently stopped out I will be a more aggressive buyer from 1815/1822 with a 1808 stop. My only interest in selling the S&P is on a rally back to 1880/1900 with a 1915 stop.
Euro/USD
My long 1.2650 Euro position worked out very well yesterday but unfortunately I covered this trade too early at 1.2710 before the market spiked to a high of 1.2888 and I am now flat. The fact that the Euro closed over 1.2770 in New York is very significant. I know I keep mentioning the Daily Sentiment Index reading for the various products that I trade but again they always prove to be correct even it it takes time to happen. Today I will look to buy the Euro on any drop to 1.2750/1.2780 with a 1.2725 stop. My only interest in selling the Euro is on a rally to 1.2910/1.2950 with a 13010 stop.
US Dollar Index
The spike higher and then lower in the Dollar was the largest move of the year so far with both spikes happening after the Bond market capitulation as mentioned in the economic commentary above. I bought the Dollar at 85.20 and I was quickly stopped out of this position at 84.90 and I am now flat. Today I will again be a small buyer on any dip to 84.40/84.70 with a 83.90 stop.
December DAX
Thankfully I had no buy levels in the Dax yesterday as I reckoned if and when the market took out the 8670/8700 key support level then it would accelerate lower. After I posted yesterday morning the Dax was trading near the highs of the day at 8850 just missing my 8880 sell level before we had this dramatic 400 point fall in the market and I am still flat. As I have said over the last few months economically Germany is a mess, as indicated by the ridiculous low Bond Yields. The Dax is now down 15% from its summer highs. Today I will be a very small seller on any rally back to 8660/8700 with a tight 8730 stop. My only interest in buying the Dax is on a drop to last night’s low at 8470/8500 with a 8420 stop.
December FTSE
Yesterday was another great example of how important it is to have stops in the market as after I posted the Ftse traded down to my 6280 buy level before very quickly stopping me out of this trade for a small loss at 6245 and I am now flat. The market is very oversold and today I will agin look to buy the market on any further dip to 6140/6170 with a 6095 stop. Given how oversold the Ftse is trading I still do not want to be short at this time.
Dow Rolling Contract
Thankfully I had a tight stop in the market after the Dow traded down to my 16290 buy level before stopping me out of this position at 16220 and I am now flat. After I was stopped out the Dow incredibly fell another 350 points. However I am impressed by the strengthening of the McClellan Oscillator and the way that the market was able to rally over 300 points from its low yesterday. The Dow has a huge down gap this morning and today I will be a small buyer from 16050/16080 with a 15970 stop. I do not want to be short especially with tomorrow’s nominal expiration.
December BUND
The move up and then down in the Bund fells like a capitulation trade to me and I believe the 152.48 high made yesterday will be very difficult to break. Today I will be a seller on any rally back to 152.10/152.40 with a 152.70 stop.
Gold Rolling Contract
Gold again tried to break the key 1240/1250 resistance area but so far has failed to do so. The weakening of the US Dollar may eventually lead to Gold breaking higher and today I will raise my buy level to 1225/1232 with a 1219 stop.
Silver Rolling Contract
After I posted, Silver traded down to my 17.10 buy level. I am still long and I will raise my stop to 16.60 on this position.
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