Market Report 6/27/16

I mentioned a couple times last week that the “Brexit vote” was a “binary event”. The consensus was that the UK would vote to stay in the EU and we saw Friday what happens when a binary event goes the opposite way of the conventional wisdom.

I was personally in the consensus camp but at least I had the foresight to acknowledge that it was a binary event and a good time to reduce or eliminate risk.

The thing about binary events (like earnings or news) is that the charts and fundamentals don’t mean anything. It’s like when a company releases earnings and the important this isn’t the actual earnings – it’s the market reaction to the earnings.

So now this Brexit thing is front and center going into the week and I have no idea how it plays out – but I do know one thing. We are in for a period of range-expansion in the market.

The ATR (average true range) at the close Thursday (before the vote) was 18 S&P points and the SPX closed within 1 ATR of a new all-time high. We all know what happened then and the ATR jumped to 23 at Friday’s close – and it’s likely going to keep expanding for a bit. They will call it “volatility” on TV but it’s really just range-expansion.

The thing about price range-expansion is that it makes for a more difficult trading environment. We’ll likely see big swings both up and down this week and it certainly should be interesting. While big price movements tend to make for exciting intraday trading opportunities, it’s the opposite of what we want to see for low-risk, high-probability swing trades. Just like with individual stocks after a long-range day, it’s more difficult to gauge the price action until the daily ranges settle down and tightens up.

So what are the longer-term repercussions of the Brexit vote? The truth is that no one really knows. The one thing that I do know is that it introduces a lot more uncertainty into the market(s) and we’ve all heard the old quip “the market hates uncertainty”.

I’m going to skip discussing all the implications and ramifications because there’s already plenty of material out there to read from people that are much more qualified to comment on it than myself. My main focus is on how it affects the trading environment going forward.

One of the more interesting things is that the SPX is still in between those support and resistance zones I drew over a month ago. Check out the chart I posted a couple weeks back. I didn’t even post a chart last week because the “zones” hadn’t changed.

So I was up late the night of the Brexit vote and watching the overnight S&P Futures /ES. It was quite dramatic and I took this screenshot when they hit “limit down” at -5% This is a daily chart.

LIMIT_DOWN_DAILY_6242016

It was amazing to watch and almost surreal. I can’t recall the last time the S&P Futures were halted limit-down (I’d guess in 2008) but I wasn’t watching them at the time. That’s an extraordinary chart and just proves the old adage “risk happens fast”.

Amazingly enough half of that loss was erased by the open Friday, but after an initial rally things reversed and turned back down. After the close Friday the Futures continued down to close -4.16% for the session. In times of “turmoil” there’s a lot more going on than just the “cash open” of the SPX.

Will the /ES Futures need to retest that 1999 level?

So we have no idea where the market opens Monday, but I can assure you it’s going to be an interesting week. Instead of predicting what might happen it’s always best to just let it unfold and take it as it comes. My guess is that we are in for a period of uncertainty and range-expansion and I just hope things settle down by the end of the week.

Could the market plunge in a manner similar to last August? I wouldn’t rule it out but it seems unlikely. Check out this chart I posted a couple weeks back to make the point that “anything can happen”.

I’m not expecting anything like that but in this day and age you have to keep an open mind. The most troubling thing I see right now is the European banks as they are the big wildcard. The Italian banks were down -20% Friday and just take a look at the charts of DB, CS, HSBC etc. A good chart to follow is EUFN, the closed-end fund for euro banks. It’s not looking so hot right now and that’s where the “systemic risk” lies.

The most interesting thing is that the SPX managed to stay in that range we’ve been talking about for so long – between the support and resistance zones. Here’s the daily chart.

SPX_D_6262016

Since it’s impossible to know how things play out, it’s best to just let things settle down a bit. Maybe wait until we see the “narrowest range in 5-days”. Just like I mentioned about how it’s not a good idea to take a swing trade on a stock after a long-range day, the same thing applies here.

I’m sure there will be a ton of opportunities created by this “event” but I think it’s best to let the dust settle first.

We only had one open swing trade in PAH and I sent out a note Thursday to “go ahead and sell it” if you had enough shares to make for a decent profit.

I decided to hang onto a few shares just in case it turned out like we all expected. I also moved up the stop so instead of splitting hairs I decided to just call it a stop-out for tracking purposes. I heard from a few of you that actually did great with it as it was up well over +5% from the entry. The CWEI more than made up for it anyway. Amazingly enough CWEI continued to trade higher – up to 31 from the entry at 21.60. Even though the target was 24 I mentioned that I thought it might continue up to test the underside of the 200-day moving average and it poked it Friday.

As we get going this week I will be monitoring the charts of individual stocks and sectors and re-doing my watchlists. There are going to be a ton of “broken charts” as always when we have these type of events. The nice thing is that it offers the opportunity to observe which stocks and sectors emerge as the new leaders and which ones start to form more constructive charts after a bit of time passes.

As I mentioned last week, the first thing I look for these days on a trade is “where to place a low-risk” stop. With that in mind I won’t rule out opening some new trades at any time. But keep in mind that this week is the last week of trading for the 2nd Quarter and then we have the 3-day 4th of July Weekend after that.

So we’ll just take it as it comes and try to avoid risk and uncertainty as much as possible. The real tell I think will be seeing where the market settles out this coming Friday.

But as always, this week I’ll be doing the live shows and looking through charts and reorganizing my watchlists so I hope you can join me for that.

I’ll see you on the shows!