Embrace the Volatility! | Trading Game Plan

Wednesday recap:  US Equity markets recovered from very sharp losses during the hour of trading to close virtually flat on the day.

After Eurozone markets closed at 11:30 AM with 2%+ losses across the continent, US stocks had 1 more wave of selling to absorb before stabilizing for a gradual grind higher during the last 4 hours of the day.

We did get a 1% move in Major Market averages for a 3rd consecutive day, in fact we got it twice!!, as well as another successful test of critical support levels and 200 day moving averages by nearly all market indices.

Technically, major market indices all have textbook “Doji” day reversal patterns and/or “Hammer” candlestick pattern (NASDAQ) worthy of a “screenshot” on their daily charts, setting up for a likely move higher the remainder of the week.

The DJIA +/- 0.00% at 17,1402 erased a 260 point loss as the late January closing lows proved to be a good support level at least for 1 day.  Of course the evil “Death Cross” cannot  be reversed in 1 day, but we’re 2½% below both the 50 and 200 day MAs which should provide stiff resistance if a reflex rally can take us that far.

The S&P 500, +0.1% at 2086 opened below its 200 day MA and put in a serious test of the July 7 to 10 intraday lows, before rallying to close 10 handles above the 200 day.  With technology(CSCO reported after the close) and energy leading the rally off the 12:00 PM lows, the S&P has a nice green bodied “hammer” candle on the daily chart.

spy 13

The S&P 500 has now survived its 5th test of the 200 day MA in the last 6 weeks.  If I had to bet, I’d say there’s more to come with the gap between the 200 day MA at 2075.40 and the 50 day at 2095.21 down to less than 20 points. Two weeks ago that spread was 40 points and it’s very likely the S&P 500 could have its own “Death Cross” to deal with during the next few weeks.

The NASDAQ, +0.15% at 5044 successfully held a test of the benchmark 5000 level as technology stocks were one of the first sectors to show signs of life midday.  AAPL gained 1½% despite further turmoil with the Chinese Yuan and CSCO treated its new CEO to an earnings and revenue beat after the close.

The Russell 2000, -0.2% at 1209 has been a big concern the last couple weeks as it went from one of the best performing market indices to one of the worst seemingly overnight as we began the Q3.  Wednesday, after spending the first half the day below its 200 day MA and below the critical 1200 level for the first time since January, the Russell recovered to post just a fractional loss.  Frankly, it’s still a big concern.  Keep a close watch on the Russell 2000 the next few weeks.

The Latest on China:   Officials from the PBOC put their best foot forward at a rare press conference earlier today in an attempt to reassure markets that they would not let their currency volatility become disruptive.  Note they did not say they would not let the Yuan fall below a target level.  The takeaway here is that the Yuan is likely to have move devaluation, although not at the same pace as Tuesday and Wednesday.

The Yuan did start Thursday’s session lower, although by the end of the day, the decline had turned to a fractional gain.  There was likely some intervention by the PBOC to assist the Yuan late Thursday after it became apparent that the selling pressure had lessened.

Keep 2 things in mind regarding currency moves.   First, directional currency moves typically happen in baby steps over years, often many years.   It’s very likely the Yuan is moving lower for quite a while.  Second, currency intervention by sovereign Treasury Departments have never reversed a directional move, but can buffer its velocity.

The Early Line:  While Eurozone markets are  sharply higher this morning, keep in mind they close yesterday when US markets were at the lows of the session.  US equity futures are pointing toward marginal gains to start the day.

Let’s see where we are mid afternoon.

tanderson@mndpartners.com tjanderson56@gmail.com

Twitter: @TJAnderson1

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