Out of the Storm

Weekly Report - 19/02/2018

Stock Markets in the Green


Short term panic has receded. Buyers returning to equity markets driving world stock indices higher. All major indices and most minor ones are in positive territory with some rising sharply.

Stock market indices

The panic experienced over the last two weeks is behind us. Panics (drops in price levels of over 2 full percentage points) are unusual events that can provide outstanding profit opportunities. They are not for everyone however. One has to know how to ride these events like surfing an ocean wave. For those of us not versed in the arts of wave riding, (or have not been following our signals to ride them) rest easily, the waves have resided and market movements have returned to their usual orders of magnitude. This means that volatility has returned to its long term average of .1 to .5% per day, not 1 to 6 full percentage points per day, and volumes have returned to their usual averages. Nothing in the actual world produced this panic. There were no fundamental events, like a particularly negative economic report, outbreak of war or disturbing utterance form the Whitehouse. The reason was simple fear. When markets reach all-time highs, traders become nervous because they consider taking profit but hesitate because of greed, which forces most traders to fantasize about endless profits. The fear has subsided, for now. The reasons for that fear however are still extent. Equity markets have been setting “records” regularly for years. These records however are not characterized by running bulls, rather they are like butterflies brushing up against and gently nudging the old “record”.

The S&P 500 fell 10.21% in 8 days and gained back 5.66% in the last 7. It has retraced just slightly more than the .5 Fibonacci retracement level. Look for sustained prices above 2733 for the index to return to its pre-panic level of 2874. Sustained prices at or slightly above this level indicate strength and likelihood of continued advancement. This kind of volatility is unusual, but when you look at the chart it is hardly incomprehensible. The mode is recovery.


Week ahead

The 8th week of 2018 is a light one for traders. Canada, America and The Peoples Republic of China are closed on Monday with China opening back for business only on Thursday. There are no economic events of any significance due out this week. And therefore such a week affords us the great and rare luxury of contemplation. What is happening with our trading accounts? Are we making simple, avoidable, repetitious mistakes? Are there new areas of interest to consider? These are not the type of matters we engage with during the daily hubbub of market trading. They are usually saved for the weekends. Having the luxury of more time affords the opportunity of wider and deeper contemplation. Our feeling is that the foreign currencies are going to make strong moves this week, precisely due to the otherwise slowness of the week. The EURUSD has been rising for 8 weeks now and shows no sign of reversing. Despite strong growth in the US economy and the impending interest rate increase expected by the FED in March, US dollar strength is lacking. There are many reasons for this and so any one of the series is credible enough. The charts tell the story best. Currently at 1.2386 we are looking for a break above 1.2526 to indicate further weakening against the EUR and a drive to 1.3121 as the next resistance level likely to sustain the pair’s price. If however the trend reverses, look for support at 1.2108. Should price break below this level for a day or three, it will likely continue down to the 1.1689 level. The currency markets could well be where the action is this week.


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