Morning Thoughts November 11

The freak show that is the current volatility in the markets continued yesterday as stocks opened higher, tested the Wednesday lows and rallied back up to the open levels again.  Nutty?  Sure.  But it is also what is and as traders and investors we must make the best of it.  That is not to say we must do anything in this environment, in fact I believe sitting in cash on the sidelines is a wise choice and by the way, being in cash is an investment decision too.  Compared to the past two weeks yesterday’s trading range was on the shorter side, although a twenty handle trading range in less volatile markets would be considered wild stuff.

As far as the S&P 500 is concerned, on Wednesday it performed a major reversal that has now led the index to look susceptible of moving towards the 50 day simple moving average.  The 50 day simple moving average is currently at the 1200 level and the 38% retracement level of the move from the October lows to the October highs sits near 1210.  If and when we hit those levels we may re-evaluate a potential final push higher into year-end or at least month-end.      

A little more close up, on the 30 minute chart of the S&P 500 note the big red bar on Wednesday that pushed the market lower and through the up trending long white bar.  That changed things at least for the very near term.  Also note the bear flag that formed and could lead us to at least hit the 1215 area before then potentially moving on to 1210 and 1200.  Those are reference levels for now, and very near-term ones at that.  However, given the almost unprecedented uncertainty currently swaying through the markets we can’t see much further than our own hand, the fog is just too thick.

Since markets are currently very driven by macro factors…and by macro in this sense I am talking about the European debt problems, we must get clues off the macro charts.

The prominent EUR/USD found resistance at its 200 day simple moving average and has now also broken the 61.8% retracement level of its most recent rally off the October lows.  It does look like this will now lead to lower levels in the cross rate and that may well be mirrored by equities.  The question of course is how much lower.

The AUD/USD cross rate too found resistance recently and while it still is holding near the 50% retracement level of the October rally it sure looks like it could weaken further as well.  The AUD/USD cross rate is a good proxy to gauge risk appetite in risk assets such as equities and commodities.

All in all, while the near-term picture looks like we may slide a little lower, the bigger picture remains the same:  we are in a wide and volatile trading range that sooner or later should resolve lower.  The real push to much lower levels however may still be months away from what I see today.

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