3 charts to suggest a ‘stress test’ for global markets

(and 3 that show there are always opportunities to make money!)

Well, things certainly livened up after Greece’s ‘no’ vote to austerity on Sunday…

Yanis Varoufakis, the outspoken Greek finance minister, resigned within hours of the country voting ‘no’. He said he felt that his departure would be a most helpful step in finding a long term solution to Greece’s troubles. (After being a total thorn in the side to Euro ministers!)ThinkstockPhotos-178019854

Greek Prime Minister Tsipras claimed he would have a deal done within 48 hours of the no vote. This seemed a bit optimistic but we’re entering uncharted territory here so who knows where things go next.

(In fact, Reuters reported that there had been no plans for an emergency meeting of eurozone ministers on Monday, simply because they would not know what to discuss! And if they don’t have a clear idea, what chance do us sideline spectators have?)

And one thing is for certain… there were more opportunities from those gap opens I was telling you about last week.

Did you spot them as the markets opened on Sunday evening? Did you take a position? More on those in a minute.

First, let’s have a look at what these recent events could actually mean for the markets.

On Sunday, the Greek people voted ‘no’ to the austerity measures that the eurozone was seeking as terms for the continuing bailout. Varoufakis himself eloquently puts it like this: “Imposing austerity is like trying to extract milk from a sick cow by whipping it.

Greece is simply unable to pay its debts. And when they are unable to pay it means that whoever was on the other end of the transaction – the creditor – isn’t going to be getting their cash.

So the outstanding debt (which was an asset to the creditor) will be written off, and this suddenly leaves a hole on whichever balance sheet it was showing. The debt write-off creates conditions where more euros would need to be issued in order to square things back up and other European countries like Spain – who are in pretty poor shape themselves – would be exposed to contribution.

It doesn’t take much imagination to see how a domino effect could easily ripple out with devastating results!

And the interesting thing is how major financial charts all currently point to an obvious ‘stress test’ period. Many markets suggest things are coming to a head and stand poised for their next move.

So let’s set aside the currencies themselves for just a moment and see what we can glean elsewhere…

The Stock market: running out of juice?

 S&P 500 Weekly chart

Here we see a weekly chart of the S&P 500. It’s an index of the biggest US companies by capitalisation and includes most of the biggest global brands.

Now you can see how the S&P has continued creeping upwards on the back of money the central bank has been printing and pumping in (it all helped to keep the economic picture looking rosy). But see how the relative strength index (blue line) shows declining momentum?

If you’re into your technical indicators you’ll know that this shows a divergence between relative strength and price. Could it be our early warning sign that price may be about to correct to the downside?

A second opinion from Dr Copper

And what about commodities – what can we learn there?

Let’s have a look at an essential industrial material: copper. As far as the markets go it is affectionately known as ‘Dr Copper’, a nod to its uncanny ability to foretell turning points in the market.

It’s not infallible of course, but it does do a good job of tracking activity across a wide spread of the economic landscape – houses, factories, electronics, power generation and transmission – they all have a requirement for copper. And a thriving global economy pushes up the price of copper accordingly.

So let’s have a look at the chart and see what Dr Copper prescribes…

Copper Futures – Monthly chart

Here we see copper from a monthly viewpoint. You can see the recovery in price beginning on the far right of the chart late in 2008 which runs to a recent peak in early 2011.

From there we’ve seen a slide to the downside. This market has respected key fibonacci retracement levels as it moved down in lock-step. The 38.2% level offered support through 2012 and the situation was turned on its head as the market made a push through the level in 2013… 38.2% then put a lid on the market and became overhead resistance.

And in a similar way, where the 50% level offered support in 2014, we now see it serving as overhead resistance… So far this year we’ve had a bounce off the 61.8% level, we’ve seen price batted back down off the 50% level, and copper now sits back on 61.8%, poised for its next move.
Will it be a continuing downward spiral though?

There’s not much support below 61.8%, which is generally the last solid fib level, so one way or the other this period could easily turn out be a decisive tipping point for copper and, of course, the wider economic message that copper’s movements would suggest.

Gold: still a friend in hard times?

Gold Futures – Monthly

It’s a similar picture in gold at the moment. The safe-haven metal is sitting on the 61.8% retracement in the same way as copper.

If things go a bit wobbly elsewhere you’d expect the price of gold to increase as global equity seeks a safe harbour. But things aren’t always as transparent as you’d expect. Rumours have been circulating among the conspiracy theorists for quite some time that the ‘paper’ price of precious metals is being manipulated.

A suppressed price here does add an extra sheen to inflated stock prices, so if stocks start unravelling would we see a fast knee-jerk corrective reaction in gold and silver as the manipulators run for cover?

Anyway, that’s all interesting stuff to ponder and we’ll see the effects of economic shifts in due course. But let’s take a look now at more immediate opportunities.

The Greek Gap returns

So did you spot them? After all the commotion at the weekend we had more lovely examples of gap opens in the Forex markets on Sunday evening.

If you recall my article from last week’s TN eletter you’ll remember how we can look to trade in favour of a price gap closing, and how we can take a decent edge in probability by doing so.

Here’s how things looked on the charts as we re-opened for week commencing 06/07/15:

EURUSD – 60 minute

EURUSD: As you might expect, EURUSD was hit with an amount of uncertainty already priced-in as trade resumed for the week on Sunday evening.

There was a respectable gap lower on the open but sure enough, by 6am Monday morning the vacuum was filled. A simple trade seeking the gap-fill would have netted 70 pips by the time you sat down for breakfast.

USDJPY – 60 minute

USDJPY: It was a similar situation in USDJPY. We had a very clean example of the market moving to fill the vacuum left behind by a nervous open. Another 70-pip opportunity was on the table and in the bag by 2am Monday.

EURGBP – 60 minute

EURGBP: Not quite as spectacular a result in EURGBP, but still, 30 pips isn’t to be sniffed at in this market, since it tends to move in smaller incremental steps. And there were always optional exit points on higher swings from Friday if you held part of a position to seek those bigger profits.

So that’s two weeks on the run we’ve had great examples of gap opportunities in the Forex markets.

They don’t come around so often because of the 24-hour nature of these markets, but while we’re going through turbulent times they might just become a more common fixture. They’re certainly something to keep an eye out for.

But the usual caveats do apply… as attractive an opportunity gap trades are, please do apply good position sizing practices to manage your exposure.

In other words don’t throw all your chips behind just one or two gap trades even though you might have watched them working week after week!

And if you do need to swot up on position sizing you can read my free Trading School material here.

Be Prepared: Market Moving Data Coming This Week (London Time)

Wednesday 8th July:
19:00    USD    Fed Minutes

Thursday 9th July:
12:00    GBP    Interest Rate Decision

Friday 10th July:
17:30    USD    Yellen Speaks

Monday 13th July:
– no big reports

Tuesday 14th July:
09:30    GBP    Consumer Price Index
10:00    EUR    German ZEW Economic Sentiment
13:30    USD    Retail Sales

So it’s a pretty quiet week in terms of scheduled data but all eyes will be on live developments between Greece and the eurozone as they happen.

Be prepared for volatility spikes in the markets as rumours and news trickle hit the wires, trade sensibly, and I’ll catch up with you again very soon.

Happy trading!

P.S. Don’t forget to nip over to the TN Facebook page here. Hit ‘like’ and leave me a quick comment if you can – let me know if you scooped up any pips from those gap trades this week.