Well after commenting that we might roll over in the afternoon from my last post, we did just that and proceeded to bounce off the 50% fibbo retracement level in the ES and the TF from the last swing move (ie low from Japan Earthquake to recent swing high). The fact that tick levels on this day did not make new lows (finished around -30,000 ticks) was a good indication that the selling was slowing.
After again retesting near that 50% fibbo levels on the TF yesterday, we quickly bounced off them and rallied very nicely. There was telling divergence during the retest yesterday when the TF was making new lows but oil, the Euro, gold and the AUD/USD was not. Remember the world is massively net short of the USD and YEN and long oil, gold, AUD/USD and equities so if there is a move to risk aversion we should always see the USD and YEN rally to new highs whilst the other so called "risk assets" are making new lows. Failure to do so and that raises a red flag as to how real the fear is.
I would say that things are again back on track for the bulls after that one day shock. I think the market realized that so what if S&P have downgraded the US outlook as it does not change things materially in the short term. Remember the market does not have to price anything in until it has to because it is not efficient. Only when there is a real chance that the US cannot repay its long term debt and you will see this in terms of yields rising significantly will the market take notice (the majority or ie the lemmings).
Still the fact that treasuries sold off hard and then rebounded reinforces the fact that any risk aversion trade will still see money flowing into treasuries no matter what the long term outlook is. Quite funny really. Just goes to show you that there are really no better alternatives. This is the same for the US dollar as well.
As for today, the large up gaps above yesterdays highs probably indicate that we are likely to finish higher. I don't think we will get a full blown trend day but we could as odds do not favour gap fill. We are already above the highs from yesterday and the day before so that should add some fuel to the fire. Definitely the trade would be to get long from a good location.
As for trades, I've finally gotten comfortable doing more directional or speculative type option trades. Yesterday I bought the 830/840 RUT may call spreads for $4.10 and will be hoping to perhaps turn this into a 3 legged box depending on how we travel.
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