In tactical trading one is always looking for the unexpected, because it’s the gut-level impact from such news that moves the market if those caught wrong-footed happen to be in the majority. Unwinding a ‘crowded trade’ means that those with skin in the game stampede to the exits.
Yesterday’s surprise ‘failure’ of the ECB to aggressively press QE was just such an event. It caused a rally in the euro that sent a tidal wave of emotion rolling across the pond.
Usually a falling dollar is good news for the U.S. stock market, but the accompanying bond sell-off (-2.73%) jacked up 30-year rates and this market is spooked by any rate increase, market-driven or otherwise.
The equity sell-off broke the S&P 500 below a ledge of volume support (2082) that I’ve discussed repeatedly in these columns. I refer to it as the Volume Profile Point of Control. It’s the level of highest volume for a particular look-back period and acts like a floor or a ceiling.
Interestingly, in the Nasdaq 100 this key level is a bit lower relative to recent price action, which means the 4-letter names have a volume zone below to cushion their fall, whereas the S&P does not. A move in the NQ down to 4417 would presumably be a normal pullback to support. Moreover, there are two levels of even closer support noted on the accompanying chart with dotted blue lines.
Although the Dow dropped 250 points in just a few hours I don’t see any technical damage among market leadership and gold, the un-safe haven, barely budged. Bottom line: capital is trapped in equities and really has nowhere to go.
Early this week I suggested that the market needed some bad news in order to set up a Santa Claus rally. I think we just got it.
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