Gold, Crude, Europe and S&P All Taking a Hit

Our View, S&P 500, Stocks

ES 12-14 (15 Min)  10_8_2014

It’s not just the S&P taking a hit right now. Crude oil is trading under 88.00 and gold is trading just above $1,200. As the mutual funds and investment firms continue to unload stocks, all the markets are starting to feel the pinch.

Europe leading the S&P lower

Yesterday the Dow fell 273 points, or 1.6%, its fourth largest drop of the year and largest drop since July. The S&P 500 (^GSPC:SNP) lost 29.73 points or 1.5% and the Nasdaq Comp fell 69.60 points or 1.6%. The Russell 2000 dropped -1.7% while the Dow Jones Transports fell 2.5%. The S&P has been going down ever since it made its new high during the September Quadruple Witching. While the U.S. economy has remained firm, European shares have been leading the way lower. Weak German manufacturing output is raising fears that Europe’s largest economy maybe signaling more weakness to come. Recently the IMF cut its global growth outlook, citing weakness in the eurozone. The IMF lowered its forecasts from 3.4% to 3.3% in 2014 and 3.8%, down from 4%, in 2015. European shares fell to their lowest level in months with the European Stoxx 600 falling 1.5% to its lowest level since Aug. 15. Despite the overall weakness, the S&P is still up +4.7% but down -1.9% in October.

Alcoa and the Fed minutes

Today traders will get a look at the Federal Reserve’s minutes from its September meeting, which may shed light on the central bank’s timeline for raising interest rates. And Alcoa (AA) kicks off the third quarter earnings season. While both are important and on traders’ minds, no single factor is going to be the straw that broke the stock market camel’s back.

For example, one hedge fund chief strategist cited the 120-day moving average, which is dropping, as a reason for worry. It might be, but a moving average is a lagging indicator; it tells you what has happened, not what will happen. The strategist added, “We are already getting quite a number of warnings, some of them pretty significant, it is skittish, it’s nervous, I’m nervous, I think investors will be raising cash levels here.”

Nervousness is not a trading strategy

We don’t disagree that there’s probably going to be more selling and we’ve called for 1880 in the S&P futures (ESZ14:CME), especially since this week we are likely to see the PitBull’s Thursday/Friday low before expiration week next week. But our reason for expecting more selling is that the trend is down, not nervousness. Sure, we’re aware of the tension on the CME trading floor and in the MrTopStep Trading Room— we see it more directly than the mainstream media. But feeling nervous is not a trading strategy.

If you “do the work” as we urged yesterday, you can see by the chart that the descent from the high of 2014.50 has been quite orderly, going from one support-resistance line to the next and digesting in between. It has also proceeded along clear Fibonacci levels. Yesterday’s big drop went from 38.2% to 76.4%, with hesitations at 50% and 68.1%. It was a straightforward shorting opportunity whether you share the nervousness or not.

We expect much of today will be sideways to modestly up, which is what the S&P typically does after a big down day. Expect a mix of short-sellers taking profits and longs getting out so they can buy again at lower prices— everyone is likely to want cold, hard cash with the dollar surging and oil and gold dropping.

No one can predict for certain what the market is going to do. But we just want to remind you that you can plan what you are going to do: keep calm, follow the trend, use stops, and let others do the freaking out while you stick to trading.

In Asia, 7 out of 10 markets closed lower, and in Europe 11 out of 12 markets are trading lower.Today’s economic calendar includes the MBA purchase applications, Chicago Fed President Charles Evans speech on the economy, in Plymouth, Wis., EIA petroleum status report, 10-year note auction, FOMC minutes and earnings from Alcoa (NYSE: AA), Costco (NASDAQ: COST), Monsanto (NYSE: MON), and RPM International (NYSE: RPM).

S&P down 6 of the last 7

Our view: It’s been over 5 full weeks of this choppy downside trade and I am starting to think the S&P could start to turn back up. I don’t want to be early—  that’s why I am looking at buying some cheap Nov S&P calls.  With the S&P cash study showing Friday as being up 20 and down 10 of the last 30 and next Monday being up 23 of the last 30 and the ESZ14 down 6 of the last 7, I think something has to give. Can the ESZ14 take out the 1918.75 low? Sure it can. Can the ESZ14 trade back down to the 1885-1890 old low? Sure it can, but with the ESZ14 down so many days my gut feeling is we start to bounce at some point. Our view is to start looking for some type of bounce, sell the early rallies and buy weakness. A bounce is nearing!

S&P DOWN 6 of LAST 7 Sessions

As always, please use protective buy and sell stops when trading futures and options.

  • In Asia 7 of out of 10 markets closed lower: Shanghai Comp +0.80, Hang Seng -0.68, Nikkei -1.19%
  • In Europe 11 of 12 markets are trading lower: DAX -0.25%, FTSE -0.45%,  MICEX -1.32%
  • Fair value: S&P -6.94 , Nasdaq -8.95, DOW -81.87
  • Total volume: 2.15Mil ESZ and  9.5k SPZ traded
  • Economic schedule: MBA purchase applications, Chicago Fed President Charles Evans speech on the economy in Plymouth, Wis., EIA petroleum status report, 10-year note auction, FOMC minutes and earnings from Alcoa, Costco, Monsanto and RPM International.
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