S&P futures had a wild turnaround today after falling precipitously prior to start of New York trading. In the NY afternoon the S&P was up 4%, adding a second huge rally to this week. It has been a very wild week as we have had historic moves back and forth.

Markets will continue to remain volatile, but it was positive for the index that it managed to stage a rally today.

The Wild Week and a Half in S&P500:

1. Last Thursday – Europe Woes Escalate, US Double Dip Feared on Data - We can see the extreme volatility of the last week and a half. Last Thursday the markets plunged on account of the worsening debt crisis in Euro-zone with Italian and Spanish yields climbing to uncomfortable unsustainable levels. we also had very weak manufacturing and services data from the US and that triggered concerns that the US may be headed for a double dip recession and combining those two factors together markets were on edge and we saw very sharp sell-off throughout Thursday’s session.

2. July NFP Data Adds Volatility But Markets Stabilize, S&P Downgrades US After Close – Friday we had the July nonfarm payroll report that showed a better-than-expected lease with private sector jobs climbing by 145,000 it also showed revised figures for both May and June which brought up those months very weak readings. We closed Friday with markets stabilizing somewhat, but little did we know that in the afternoon S&P would downgrade the US debt from AAA.

3. Markets Plunge in Reaction to S&P – When the markets opened on Monday it was their first reaction to the S&P downgrade of US debt and we plunged 6.66%, hitting a low near 1076.50. During the day we found out that Trichet would go ahead and buy Italian and Spanish bonds.

4. FOMC Sparks Sharp 4.7% Rally – On Tuesday, and markets rebounded on anticipation of the Fed speech in which some hope for stimulus help bring the spine back into investor sentiment. In the New York afternoon we had the FOMC announcement in which the Fed said that they are going to keep rates at their ultra-lows near 0% until the middle of 2013. After initial volatility, the FOMC announcement helped spark a rally in which we the S&P500 rally close to 5%.

See  Fundamental Update: Fed Pre-Commits on Low Rates Through Mid-2013, No Other Moves Taken

5. France in the Crosshairs a French Banks Sell Off –  Yesterday on Wednesday we had markets selling off yet again on the back of worries that the French credit rating might be downgraded. We had sharp sell-off throughout Europe and that spread to US equities which plunged heading into the day’s close.

See Fundamental Update: Concerns over French Credit Rating Hit European Bank Shares and EUR/USD

6. Jobless Claims, Earnings Help Spark Another Strong RallyAfter overnight futures had sold off at the pre-NY open, we had a sharp reversal of sentiment following the release of a better-than-expected jobless claims report as well as better corporate earnings. We rallied 4% in the index as of 4 PM ET, adding another strong swing upward to the week.

From Bloomberg: “Stock-futures erased losses as a report showed that claims for unemployment insurance payments in the U.S. unexpectedly fell last week to a four-month low. First-time applications for jobless benefits decreased 7,000 in the week ended Aug. 6 to 395,000, the fewest since early April, the Labor Department said. Economists forecast 405,000 claims, according to the median estimate in a Bloomberg News survey.

Benchmark indexes were also lifted by improved corporate earnings. Since July 11, about 76 percent of S&P 500 companies that have released quarterly results beat projections, according to data compiled by Bloomberg. Earnings per share have increased 17 percent, while sales rose 13 percent.”

Such Volatility Could Be a Sign of  and Tops and Bottoms

Such periods of increased volatility happens when emotions are at their highest and the market is being controlled by either extreme fear or greed. During these times we see these very strong moves back and forth – a rally of 4%, followed by a 6% drop of 6% and then a 4% rally, all in quick succession. this case because of the uncertainty and fear in the global markets we continue to have such strong volatility.

The thing to keep in mind is this type of volatility, when the market is being driven by emotions for instance, where we can see the formation of peaks and bottoms.

Can We Have a Bottoming Tail Forming in S&P 500 Weekly Chart:

It’s obviously too early to tell yet but if we step back from the intra-day noise and look at a weekly chart we may be seeing a bottoming tail.

  • In this chart we see a head and shoulders pattern set up throughout the first half of this year.
  • We cracked it last week slicing through our 55 EMA (red) and closing just above our 200 EMA (gray).
  • This week we saw the index plunge from 1167 to 1076 – around 91 points – before finding a bottom and rejecting the full downswing, bringing us to 1183 around the close of today session.
  • The shorter and medium-term moving averages have stopped their assent and have turned downward, however the longer term moving averages the 100EMA (in cyan blue) and 200EMA  are still moving upward and currently act as resistance.

We are therefore at a crossroads for this index, will we be able to hold our rally? or do we bounce down off the 200 EMA and follow through with further weakness.

So far, we can say that the bulls have managed to reassert their control, and we are therefore at a critical battleground. We still have Friday’s trading to play out, and we will obviously have to reassess how this candlestick looks following that new price action.

However, If we close the week with this type of candle – a “bottoming tail” – it should be a sign that amid the volatility of the last week-and-a-half we can be forming a bottom, which would be a bullish signal.

However, if market sentiment dips, and we see a spate of selling heading into the weekend then we know that the bears have reasserted themselves and we have to think of a more bearish-leaning scenario.

It’s already been a wild week and tomorrow the key data in the US will be retail sales for July, so we’ll see how the market responds to that report as well as any news we get out of Europe.

 

Nick Nasad
Chief Market Analyst
FXTimes

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.

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