Whilst as traders and people, we all tend to make New Year resolutions. The market however seems set to continue in the same vein as in 2013, with the primary focus remaining the constant debate of tapering, and as I have said before, what I call ‘tweaking’. Nowhere was this more in evidence, than on Friday last week, with the latest Non Farm Payroll numbers coming in far worse than expected at 74,000, and falling well short of the expected 196,000 – a truly dire number. Needless to say, employment data was and remains, one of the key metrics used by the FED in their recent decision to slow their bond buying program. The knee jerk reaction was to sell the US dollar, as talk once again turned to the extent and depth of any tapering in the short term. So little change there. Little change either in the constantly ‘improving’ headline unemployment number, which continues to stretch the bounds of credibility further.
Also little changed is the VIX, which closed last week testing the key level of 12 once again, a price point tested on several occasions in 2013. On each occasion the index bounced of this level, creating a strong level of price support as a result, and as shown with the yellow dotted line on the daily chart. The catalyst for Friday’s sharp move lower was the NFP data, ironic really considering the signal this is sending in terms of economic growth, but as the equity bears are learning to their cost, the bullish trends in equities, are not founded on simple economics. Indeed, from a technical perspective, if this region is breached then we can expect to see further sustained gains for equities in the short term, particularly if we move into single figures on the index.
This price region now defines the VIX for 2014, and with many principal indices now pausing or pulling back, the equity bears are once again out in force and calling the top of the market. A glance at the VIX would suggest otherwise, as indeed would an analysis of the associated volume in all the cash and futures indices. None of the major markets are showing any sign just yet of a selling climax on high volume, and we can therefore assume that the market markers are happy to take these markets much higher. As always, volume will reveal the major turning points, which the VIX will then confirm in due course.
By Anna Coulling