The bears growled on Friday, and have continued to growl in early trading with all the principal US markets firmly lower on Globex, and duly wiping out the summer grind higher in two sessions. As always, markets fall a great deal faster than they rise. However, note the volume of Friday – only marginally higher than the volume on Thursday, and almost half that of the second day of Brexit. Given the dramatic price action, which also triggered the volatility indicator as we moved outside the average true range, two things are clear. First, the big operators and insiders are not participating. Second, if this is the case, then clearly the move is intended as a signal to the FED, not to increase rates in September ahead of the Presidential election. In this vein, the reaction for the Japanese yen would reinforce this view, with a muted response on Friday, and only a relatively limited reaction overnight and into the morning session, with modest buying across the complex.
As far as the technical picture is concerned for the YM emini, early trading has breached potential support at the 17,900 region with a deeper area now in sight at 17,750 on the daily chart. This is a relatively well developed area, and also coincides with two high volume nodes on the volume point of control. The first at 17,780 and the second at 17,680 with further support then awaiting in the 17,560 area which may be tested in due course. Today’s price action and associated volume will be key, and it will be no surprise to see the big operators move in to buy the panic selling in due course, and reverse higher and back to test the congestion region once more. Much will depend on next week’s decision, but given the Fed Funds Futures are now increasingly signalling a no decision, this should provide the impetus for a recovery and resumption of the longer term bullish trend.
A glance at the weekly chart merely serves to reinforce where we are in the cycle. Yes a dramatic move on Friday, but look at the potential support in place below. Strong would be an understatement, with the accumulation and distribution indicator clearly denoting the potential support area. And once again, note the volumes on the weekly chart – average – and hardly indicative of a selling climax!
From a fundamental perspective, the catalyst for Friday’s move lower were comments from two FED members, namely Tarullo and Rosengren who both reiterated the FED mantra about interest rates. However, a closer look at what they actually said should have been enough to suggest Friday’s reaction was just that, a knee jerk reaction. For Tarullo it was the reference to the PCE (Personal Consumption Expenditure) index which the FED would like to see moving towards 2%. Even a cursory glance at the index shows that the numbers are way below, with July coming in at Zero. The August number is not released until the end of this month, and no doubt the FED will have this data at their upcoming meeting. So unless there has been a dramatic increase in August, or the FED decide to ignore one their key metrics for any interest rate decision, the likelihood of an interest rate rise in September, and certainly ahead of the US presidential election seem slim.
Finally, Friday’s move was certainly great for intra day traders, for whom the indices have been a great challenge these past summer months.
By Anna Coulling
Charts from NinjaTrader and indicators from Quantum Trading