Last night’s move in stocks came out of nowhere.
China and most of Asia were on holidays for the lunar new year. Japan, where markets were open, saw stocks rally more than 1% and while the ASX lagged, with no change, there was little indication as the Australian market closed that European stock prices would collapse or that the Dow would be off more than 300 points at one stage.
The fact that the selling came out of nowhere is an ominous sign according to Chris Weston, IG markets chief market strategist. In a note to clients this morning Weston said, “for those who have traded the overnight move it almost feels like something big is brewing, similar to 24 August and the quasi-flash crash capitulation move we saw.”
A capitulation in prices implies a big self off is coming. That’s something Weston sees as necessary for markets to begin to sustainably recover.
“These markets need a strong shake up and sharp downside move, followed by a wave of buying to settle things down. But until that comes there will be no clarity, absolutely no confidence and a bucket load of concern. There’s concern the volatility will feed through into real economics and central banks will be pretty much powerless to stop it,” Weston said.
But Weston goes further. He highlights that traders and investors are, to a certain extent, lost at the moment unsure what’s next or what will be a salve for their fears.
Here’s his take [our emphasis]:
It almost feels as though the markets are pushing central banks into some kind of action, but they don’t know exactly what it is they want. Deeper negative rates could have untold, dire consequences. Further balance sheet expansion through QE could only lead to more disappointment and an even deeper credibility issue, not to mention dislocations in markets. What we are seeing is a ferocious destruction of wealth and confidence, with some rather powerful bearish trends developing. Traders and investors need to adapt, if they haven’t done so already.
The question of how far the markets need to fall before they can heal, and investors and traders can feel more comfortable about buying, is a vexed one. But there is a guide in the kind of levels and triggers many traders use when they trade day in and day out.
As I wrote in my AxiTrader morning report , ask any trader “what’s one of the easiest trades in the world?” and they are likely to tell you that “after a long run (on any timeframe) markets will normally have a time or price consolidation. Often the combination sees the market drop (or rally) to the 61.8% retracement level. That’s 1700/1720 on the S&P 500.”
It’s been my trading target all year and remains so. It’s likely it would satisfy Weston’s belief that “markets need a strong shake up and sharp downside move,” as well. Perhaps then traders in the US, globally, and here on the ASX, might find the voice to shout but.
Unless of course stocks keep falling.
Here’s the chart:
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