Risk-Off to Continue or Time for Consolidation?

This article was written by David Dixon of Viper Wealth Creation.

Bumpy start

The volatile start to the new year is almost certainly a taster for what is to come throughout 2016. The move lower in equity valuations followed by a recovery of sorts only to be pushed lower again as measured by price movements in the S&P 500, suggest that the market has moved from a long standing bullish upward channel to the bottom of a lower more cautious but still upward corridor.

The market last week started in the middle of a range of 2000/2100 but soon fell to challenge the support line before a relief rally to 2020 was snuffed out and we fell into the new playing field which I believe to be 1900/2000 (1894-1993 to be more precise) in the short term.

The blame for the volatile conditions has been laid at the door of the Chinese stock market

The blame for the volatile conditions has been laid at the door of the Chinese stock market which twice last week fell limit down 7 % within minutes and trading ceased for the day. The authorities over there have sensibly removed the limit down cut off in a market that has regularly seen swings of more than 7% in the past. This seems to have calmed things for now and released pent up selling pressure. However for some time now the established equity markets like those on Wall Street have been stuggling to move to new highs, as had become the norm since March 2009. This could be the start of a bear market with further lows but I suspect is more likely a strong correction.

Using the S&P as a barometer the levels I suspect to be of major importance to the downside are 1900 , 1820 , 1740 and 1630. If the market does fall further then 1630 is where the doomsayers will tell us that we are entering a bear market as this will mark a 20% decline from the beginning of the year. Some will do this at 1700 as 20% below the peak reached last year.

Bear market?

The usual suspects for safe haven plays were very much in force last week. The yen has strengthened considerably and gold saw a bullish bias for the first time since Q3 last year.

The USD/JPY like the S&P 500 has fallen from the upper levels of one range to the bottom of a lower new consolidation band if the equity fall has abated for now. The old wide band support at or near 119 has given way to an approximate range of 117/119 which has held this morning after an attack on support was repelled around 116.75. The pair is sitting on a long term rising channel bottom which I expect to hold however if 117 does give way then 116 looks very important and below here 114 and then 110 would be the next targets. If the equity markets do fall into a bear market then 110 is likely to become a reality very quickly.

This could be the start of a bear market with further lows but I suspect is more likely a strong correction.

Gold started 2016 close to USD 1060 and has popped higher to above USD 1100 which if held will push on to further highs of 1145, 1175 and even 1200 in the short term. It seems too early to say if we have seen the cyclical bottom for the shiny metal but as a play when even the greenback is not strengthening on a broad basis it looks like there may be some mileage for gold bulls to go for.

The EUR/USD was pushed lower last week to 1.0720 before recovering above 1.0900 after the NFP release in the US last Friday. I expect the range of roughly 1.0800/1.1000 to continue for now with any push higher to be met with selling as negative interest rates in the eurozone take effect- why hold euros long term?

Dollar holds steady

The greenback overall did not do much but maintain its level between 98 and 99.50 against a basket of major currencies, however within the basket the yen strengthened considerably, the euro hardly changed and the Aussie and pound were pummelled. This is of note because the NFP headline figure was much stronger than forecast and yet the almighty USD hardly budged. The problem was that hourly earnings did not appreciate much even though more jobs were filled and the effect of inflation moving forward looks subdued. This of course goes to the heart of Fed actions meaning the pressure for further rate hikes looks slight and lessens reasons to buy more bucks.

This year is shaping up to be a year for trading rather than long term position holding

The pound seems to have no friends- it has fallen from 180 to 170 against the yen, is lower again to the USD and has even fallen against the euro which I think is significant with EUR/GBP above 0.7450. If 0.7600 is pierced 0.7750 is in sight with 0.8000 not far behind. However with the cable at levels not seen since mid-2010, some respite for sterling may come soon, if not 1.43 needs to hold or 1.3500 could be at hand. Look to short on rebounds against JPY.

So to try to sum up, be prepared for the possibility of more Volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, or stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Trad In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, or stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Trad Read this Term throughout 2016 but there will also be some periods of calm and I think this week could be one where we see consolidation of albeit lower equity prices and a corresponding calmer effect on the likes of the JPY for safe haven bolt holes. This year is shaping up to be a year for trading rather than long term position holding so be very careful with position sizing and risk/reward.

David Dixon is the Chief Dealer and Analyst at Viper Wealth Creation. David has over 20 years experience trading on behalf of NatWest where the focus was primarily in the spot, forward and derivatives markets. Since retiring from the professional arena David has become an integral part of the Viper Wealth Creation team.

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