How is consensus regarding this pullback now, Dow futures back over 13000, out of the woods? My powers of foresight are limited when it comes to technicals, but I’m yet to be convinced that consolidation/volatility is back in the cupboard – for a few reasons.
Firstly, over the last few years we’ve heard some pretty wishy washy explanations for why a market is up or down for the day, with my favourites being the token “concerns over Europe”, “renewed economic worries” and the like being wheeled out when commentators have no good explanation. Today was kind of like that – we had quite poor Jobless Claims numbers in the US, and the only thing commentators could think of to explain the rally was “we’re getting another report from China tonight”. Was it actually due to a technical bounce? Volume was light, was it a vacuum-like uncoiling of the spring as short term negative sentiment got overdone? Not to invalidate the comeback we’ve seen, and typical strength of the market below 13000, but it was just strange to see the awkward explanations being wheeled out for the last two days.
Secondly, we’ve now bounced back to levels on the Dow and Nasdaq that could prove to be resistance where it was once support. 13000 and 3060 respectively are both the 50% retracement levels from swing low/high of this recent move, which is also where the Dow particularly might have particular trouble. For the S&P that level is 1390 I think, although it has already passed 1383 which could have been more difficult. Do we still have a few more hurdles to go before the bottom can be called and the consolidation at an end?
Thirdly, those are the strongest indices of the strongest market we can find — if the far weaker Italian, Spanish, French and UK markets decline for their own reasons, will the US not reluctantly follow? There are far better technical guys on the thread but as far as I can see — The daily Dax chart looks a bit ill. The FTSE chart surely worse, where I have 5782 marked as being quite problematic from three different perspectives. The CAC similar, where I have looked to add a small Short ETF to balance out longs, I think there’s a fair bit of resistance ahead of it and possible uncertainty as we approach their election. The Italian MIB, horrible. The Euro Stoxx 50, looks a short on the Daily and Weekly as far as I can tell? The Hang Seng looks like it could get ugly if it convincingly breaks 19800. The Nikkei looks strong relative to the rest, but is also indicating that it has work to do before its rally is back on. Copper is also close to entering bearish territory on the daily chart.
That’s most world indices asides from the States looking quite far from being in “rally resume mode”, just from my (quite basic) browse of the daily charts, which might suggest there could at the very least be more choppiness, volatility or downside before I can get that excited by the last two days of action – would love to hear what anyone else thinks!
As for what would really get me interested in exposing myself (ahem) to more risk or buying into the bounce we’ve seen – more compelling economic momentum to help remind Mr Market that things aren’t so bad! We have Consumer Confidence tomorrow which could be interesting, and Empire State Manufacturing on Monday. Hopefully by the time cyclical economic momentum returns, we can go back to February levels of exposure at decent prices. Unless I’m mistaken and we’ve already missed the bottom and FTSE 6000 is already in motion!
Anyhow, that’s why I’m not getting too excited by the last couple of days, or at least for the time being why I think the December-March run can’t be resumed just yet! Caution, cash, risk management, side-stepping this move, you know the drill!
Note: I’ve moved my stop to breakeven and assuming I’m not taken out at breakeven I will monitor ATR, price action and my indicators before deciding my next stop movement. Dow daily average true range (ATR) is 120 and rising, so a 2xATR trailing stop would need to be min 240 points away from price to allow the trade to breath. The difficulty with trading Dow daily is if one trails by 2xATR then one always gives a lot back quite a lot. Even a £2pp bet trailing by 2xATR will give back £480 before being taken out. And don’t forget the bots! 75% of the trading on the NYSE is done by bots. If one bot dumps a large volume of stock and the price falls they may all start dumping. The fiscal cliff could make the flash crash look like a gnats knacker