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Markets – Macro – Stocks – Charts – Alerts

Madness

MadnessOver the past few years central banks have strived to make markets a rather predictable affair. It seems only fitting that a central bank brought the illusion of serenity to an end and, in so doing, again validates our trading process of scaling out and using stops.

We got a great long entry yesterday based on a keen view of the technicals. Overnight we saw a large bounce into our target zone and that provided for a nice +40 $ES handle scale-out. BUT then who could see this coming:

CHF

An over 25% drop in the $USD/CHF exchange rate exceeding years of price range in literally minutes on completely unpredicted and unpredictable SNB action.

The impact? Massive damage in FX & hedge fund land, accounts blown up with presumably margin calls and algos ripping through stops and a sudden $ES 40 handle drop:

ES 5 min

In short: Madness.

Or maybe not. Maybe the Swiss did this knowing that the ECB will introduce big QE next week and didn’t want to defend the peg. Maybe rational after all. We shall see.

However action like this will rattle at confidence and this can’t be good. News like this is the type that can make people wonder how much exposure they want to have to equities. The day is far from over and we can’t be sure of its implications yet, but margin calls can spill over to unintended selling of other asset allocations to meet margin requirements. Central bankers want a stable environment and this event has rattled the cage. Generally they will want to calm everybody down.

Bottomline: It could be a long and difficult few days ahead.

In the last couple of weeks we have seen crashes in oil, copper, and now a major currency event. And despite all this equities have not made new lows:

NYA D

One may ask: If bears can’t make this sucker drop will all this going on what will it take? It seems today provides the perfect backdrop to make it happen. And if they can’t what then is the alternative?

The answer may be signaled by the $RUT. Not having gone anywhere since late 2013 it has traded in a large range in 2014. In the process it has build a potentially massive bull flag:

Rut

This week’s lows (so far) have bounced again off of the ascending trend line and before this morning’s currency blow-up futures were solidly pointing north.

Today’s main risk is coming from margin call selling on the one hand and central bankers wanting to prevent systemic consequences on the other. Overnight action now sets markets up for day 10 of red out of the past 12 days. Markets are still waiting for their 3rd up day of the year. My main strategy: Don’t get hurt, stay disciplined on stops and trade opportunistically. Mella and I will outline support/entry levels on stream, but positioning and bias remains long for now.

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Categorised in: Daily Market Brief, Market Analysis

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