Markets Are Headed For Crucial Week
Traders are clearly bent on testing the resolve of those who sold commodities off last week, setting this week up to become pivotal for all markets.
Last week’s nearly 9% pullback in the CRB Index was impressive, especially when key components, like silver and oil are considered individually. Yet, if you step away from the drama, the pullback falls within the realm of an intermediate term correction in what may still be a long running bull market.
Chart Courtesy of StockCharts.com
The key to the selloff was the presence of computer trading. So, in fact, what we saw last week was a repeat of the “Flash Crash” in the stock market, which happened just twelve months ago. As sell stops got hit, the computer programs began to sell, then the margin calls came in, and more sell stops got hit, setting up a vicious cycle. Silver and oil clearly took the brunt of it. Oil may have been moved by the death of Osama bin Laden. Selling in silver accelerated once the news that the Soros funds were sellers hit the mainstream press.
According to The Wall Street Journal, the cascading selling in crude oil on Thursday came as a result of “sell orders” which had been set in place to protect profits by traders (sell stops). And “once the liquidation gained momentum, each successive price drop triggered a wave of these automatic sell orders, sending crude sliding further—and starting another round of selling.” The selling was described as a “panic.” One trader told the Journal that at one point “the orders (to sell) were just pouring in.” The Journal added: “Much of the selling, however, wasn’t carried out by traders, but rather their computers, which were programmed to sell once the price of oil hit certain levels—$105.50 and $102.70, for example. Investors, not companies that produce and consume oil such as refiners, are the primary users of such sell orders.” So, the selling was speculator or trader driven, which should come as no surprise to anyone as “Those speculative investors were present in the oil market in near record numbers on Thursday. Open interest, or the total number of open contracts, of the Nymex’s main oil-futures contract surged to a record 1.65 million.”
Chart Courtesy of StockCharts.com
So the key to success in this market now is to remain patient. Crude oil and silver will have their bounce. West Texas Intermediate has support as far down as the $92 area, its 200 day moving average, while resistance is in the $100-$105 area. It will take a few days for this situation to sort itself out, but at least we have some parameters. And yes, what happened on the way down, could also happen on the way up, as computer related buy stops could get hit and the market could melt up.
Chart Courtesy of StockCharts.com
Silver, on its own right, also has support near the $30 area, with resistance in the $35-$40 price range. Silver bulls are more like bulldogs, with plenty of them shrugging off the selling last week and reaffirming their support for the metal. One set of bulls in the silver market that won’t be coming back soon are likely to be small investors who got in within the last two weeks as prices were blowing off.
Conclusion
The markets are in the midst of a very risky period which is being exacerbated by the presence of mechanical, computer driven trading, in stocks, and commodities. There has been little evidence of the bond or currency markets being as vulnerable to this kind of activity, as of now. But it makes sense to consider that as another possible event in the future.
The key difference between bonds and currencies and stocks and commodities is that the two former markets are much deeper in their liquidity and their size. That means that smaller amounts of money can get lost in the bid and ask process of the bonds and currencies while stocks and especially the often relatively small commodity markets are much easier to move.
What’s the best recipe for success right now? Patience. Stick with stocks that are working and let the commodities do their thing for the next day or two. As those key resistance and support areas, listed above, are approached start considering your trades. We’ll be monitoring the markets and updating as needed. We suggest monitoring our Twitter feed regularly as we’ll be updating changes there as soon as they are updated on the web site.
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