Further losses in equity markets continued yesterday with European Equities down 1.5% whilst the Dow and S&P both lost 1.2%. It followed the large falls in Asia, highlighted by the 5.3% fall in the Shanghai Composite, it’s biggest one-day fall in three years. Despite rising concerns about a Chinese ‘credit crunch’ rising the Chinese Central Bank remains reluctant to intervene and said that the onus was on lenders to better manage their balance sheets and that liquidity was at a reasonable level.
However despite the fall in US Equity markets,there was an improvement in market sentiment during the session. They had opened down, at well over 2%, but trimmed their losses after Dallas Fed President Fisher suggested that markets may have overreacted to last weeks more hawkish Fed Statement. This follows a similar warning from Fed watcher Hilsenrath, of the Wall Street Journal, over the weekend.
On the Bond markets, 10 year US Treasury Yields have slipped back to 2.54% from a 22 month high of around 2.66%, eroding fundamental support for the US Dollar. Euro sentiment was also supported by the better IFO Report in Germany with the Headline Index rising to 105.9 in June from 105.7 in May with the Expectations Index rising to 102.5 from 101.6. This morning Italy is having a Bond Auction and it will be interesting to see the market reaction after the back up in yields over the last two weeks.
On the economic front we have no data of note from Europe whilst the US has a busy schedule with Durable Goods, New Home Sales, House Price Index, Richmond Fed Manufacturing Index and Consumer Confidence all being reported on today.
September S&P 500
The wild volatility for S&P trading continued yesterday as very strong rumours that a Hedge Fund missed it’s margin call led to a very sharp sell-off before comments from Dallas Fed President Fisher calmed the markets for a short time before sellers returned again. The McClellan Oscillator closed last night at a very negative -295 so I am on the look out for a decent bounce which for a change will not get sold into. The cash S&P has left a Gap at 1592 from last Friday and I would at least expect this gap to be filled. Yesterday after I posted I was quickly stopped out of my 1574 long at 1568 and, after the market dropped on the Hedge Fund news, I bought the S&P at 1559 and I covered this position at 1566 and I am now flat.
The main lessons to be taken from markets over the last month is to trade in smaller size and have a wider stop as otherwise you will keep getting stopped out in these choppy conditions and, most importantly, do not chase the market and wait for your levels to be hit.
Today, given how oversold the McClellan Oscillator is, I am hoping that the 1553 low from yesterday will hold for a while and today I will be a buyer on any dip to 1563/1568 with a 1552 stop. Given the volatility I have to use a wider stop. My only interest in selling the S&P is on a rally to 1600/1607 with a 1611 stop.
Euro/USD
The Euro looks to me like it put in a short term bottom yesterday at 1.3060. The Williams Index has started to turn up and today I will be a buyer on any dip to 1.3060/1.3090 with a 1.3050 stop. I am also a seller on any rally to 1.3180/1.3210 with a 1.3230 stop.
September DAX
The Dax worked very well yesterday as the market dropped down to my 7698 buy level with a 7660 low. I covered my long position at 7770 and I am now flat. I still like the Dax and I will use any weakness to 7680/7730 to reset my long position with a 7655 stop. I do not want to be short at this time.
September FTSE
I am very surprised at how weak the FTSE is trading as the market has now fallen from a high of 6870 last month to a low just below 5950 yesterday, an almost 15% fall which has pulled the market down for the year. It is trying to bounce off yesterday’s lows and the Williams Index has started to turn up even though we are still at the bottom of the Bollinger Band. Having taken nice points out of the FTSE on Friday the market took them back from me yesterday as I was quickly stopped out of my 6060 long position at 6020. This morning I have bought at 6010 in small size and I will leave my stop at 5950 which is just below the recent low. I also plan to be a seller on any rally to 6120/6150 with a 6170 stop.
September BUND
My lesson from the Bund yesterday was that my stops were too tight even though I had the correct call and illustrates how we need to be flexible to adapt our trading rules when conditions change. I bought the Bund at 140.40 and after I was stopped out of this position at 140.10 the market bottomed at 139.92 before having a really nice rally to 140.80 – I am still flat. Today I will use any sell-off to 140.20/140.50 to reset my long position with a 139.85 stop which is just below the low made yesterday. I do not want to be short the Bund at this time.
Silver Rolling Contract
No change to my plan as I patiently wait for Silver to rally. The Daily Sentiment Index, that I mentioned yesterday, closed a just 3% bulls last night. Given this extreme pessimism it suggests to me that an interim rally should soon develop. I am still long at 19.60 and I will leave my stop the same at 19.20. If I am stopped out of this position I will still be an aggressive buyer on any further drop to 18.80/19.15 with a 18.50 stop.
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