A combination of economic strength and a rate cut from the ECB strengthens the dollar and sent the major indexes into free fall.

Introduction

Today was a big day for traders. The ECB surprised some with a quarter point rate cut and the U.S. economy grew faster than expected. Both helped to strengthen the dollar and lift futures trading ahead of the open of today's trading. Trading was mixed around the world. Asian stocks ended the day down, their markets closing before the key event of the day. European stocks were up initially but lost most their gains by the time those markets closed. The futures trade was basically flat in the early morning hours. The first boost came when the ECB announced the cut in interest rates, the second once unemployment and GDP numbers were released.


The first sign of trouble came at the open. Although indicated to open about 7 points higher, the S&P only managed to get about 3 points higher before sellers stepped in to drive prices lower. At first I thought that the market was just watching the Twitter IPO. It was kind of important to see for more than one reason. For one it is the first major social media IPO since Facebook. There were a lot of questions about what the stock was worth since the company doesn't make any profits. Apparently it's worth a lot since it opened $19 higher than it was originally priced. The second reason it was important was because of all the problems that Nasdaq has been having. It was reassuring to see it go down the way it did, very smoothly.

Twitter was a smoke screen. While everyone was focused on that the market simply began to move lower. The major indices hit an early low around 11:30 AM, moved back up and then moved back down to make a lower afternoon low. Market breadth was poor but volume on some stocks was high. I have been expecting another pullback of some sort and this may be it. One thing to note is that it is not being driven on fear. No negative catalyst sparked today's sell off. Better than expected data and the reassuring move from the ECB should have helped to reduce fear and maybe it did, to the point that some regular profit taking is setting in. The S&P for one is well extended from the long term trend and in an attractive place for taking some money off the table. The most recent all time high of 1771.95 is about 2.5% above the previous all time high and 7.5% above the most recent low.

The Data

Third quarter GDP was a real surprise today. This figure is one of the last pieces of data delayed by the shut down and is a lagging indicator at best. This is the first estimate for the third quarter and includes the three months ending September 30, just prior to California's unemployment claims problems and the government shut down. Estimates were low, the consensus was around 2% GDP, down from the prior estimate of 2.5%. The actual 2.8% was far above the expectations and helped to lift futures trading going into the open. The better than expected number led some to speculate that the impact of October events on fourth quarter and full year GDP would not be as bad as previously thought.


Initial claims fell from last weeks upwardly revised figures. Claims fell by 9,000 to hit a 5 low of 336,000. The four week moving average also declined from an upward revision and fell below the 350,000 mark. This is the fifth week since the spike in claims attributed to California and Nevada computer maintenance issues caused a huge back log. The decline from the peak is steady and has brought the number of first time claims back in line with the levels we saw just prior to the issues. On average the number of claims over the last two months has been steady around the 335,000 mark. Taking into account the California/Nevada issue it looks like the number of jobs being lost remained stable during the government shut down. Only two states reported a decline in claims greater than 1,000 with California topping the list with -4,460. There were 6 states with an increase greater than 1,000 for a combined gain near 14,000 claims.


Continuing claims rose by 5,000 but since the previous weeks number was revised lower by a similar amount the number of claims held steady. Continuing claims remains near long term low levels with no indications at this time of any increases. The government shut down has, so far, not shown itself in the data. There is speculation that some of the data we will be receiving won't be entirely accurate until next month but claims data is compiled on the state level so should not be affected. Total claims also gained, adding about 75,000 and bringing the total up to 3.958 million. This is still below the 4 million mark and in line with the longer term down trend in unemployment. The total number of people claiming unemployment held steady during the shut down with no as yet seen affects. This data is lagging the initial claims figures by two weeks so a few more weeks will help to solidify belief that the shut down and it's affects are small and soon forgotten.



Dollar Strengthens

Today two major central banks made policy statements. The Bank of England held rates steady as expected but the ECB surprised some with an unexpected quarter point cut in the prime interest rate. This move wasn't so much unexpected but just a little quicker than some had thought. There had been growing speculation of a possible cut or at least a hint of a cut at this meeting due to lower than expected inflation numbers last month. Mario Draghi's statements after the announcement echo that sentiment, “...the decision to lower rates was in line with guidance...”. The euro fell sharply on the news at the same time European markets were lifted. The EUR/USD broke the 1.3500 support and then the 1.3400 level testing long term support just above the 1.3250 level. This pair is indicated lower and could move down to 1.3250 or lower.

EUR/USD

The Dollar Index, which is euro heavy, moved up and tested resistance at 81 level. The index made a strong move up, breaking out of a short term bullish flag. The target for this break out is the length of the flag pole above the point of the break. This would be roughly $1.75 with an upside target near $82.50, contingent on a move above resistance. Now that the ECB meeting is in the past the next central bank meeting (BOJ) that could affect the index is in two weeks. Indicators are bullish at this time and are consistent with higher prices.

Dollar Index

The yen weakened initially, touching a 1 1/2 month high, but soon trading equalized and the pair returned to trade even with yesterday's closing prices. By the days end the pair had given up gains seen over the past few days. Today's action brought the pair back to retest, again, the 98 support level. Abenomics relies on a weaker yen, the ECB move could add pressure to the BOJ to enhance its own QE policies sooner than the expected spring of 2014. Indicators are still bullish and indicate support at the current level.

USD/JPY

Gold Weakens

Dollar strength means gold weakness and that is what we got today. Gold prices fell hard early on, breaking the $1,300 level for the first time in over three weeks. Once breached prices found some support and lifted gold back to around the $1,310 for most of the day. If data stays strong then taper talk could come back to the forefront and add some more pressure to gold. Tomorrow's NFP and unemployment numbers could play a part in this scenario. The Gold Index traded to the downside today as well. The index is trading along the 30 day moving average with a series of small candles getting smaller. This level is just above the lower boundary of the long term pennant formation the index has been stuck in. Short term indicators are now bearish and could be leading the index lower. The long term trend is still down for this index. The bullish momentum that came along with the pennant is declining and could lead to a break down of support. If the index does fall out of the pennant downside targets exists around the $66 level and the 100% retracement of the 2009-2011 bull market in gold.

Gold Index

The Oil Index

The price of oil fell again today. Rising supply, stronger dollar and easing tension with Iran are keeping prices low. The price of oil has been at or near a four month low for over a week and could keep moving lower. The shale oil boom is adding to the supply issue, reports, some conflicting, are pointing to U.S. oil independence as early as the next year or so. Low oil prices are great for the economy and the consumer but pose a problem for oil producers. Downstream retail sales could increase due to lower end prices but up stream profits could be adversely affected. The Oil Index has begun to show sign that it is not impervious to a sharp decline in the price of it's underlying commodity. Today the index dropped nearly 2% and is forming a short term triple top. The index could find support just below the short term moving average at the 1430 level but is more likely to retest the long term trend around 1400.

Oil Index

Tweet Tweet

Twitter has finally opened for sale. The stock priced late yesterday evening around $26 and was met with great enthusiasm this morning. Early indications pointed to the stock opening higher, about $5, but soon it was clear that TWTR was going to open much higher than first thought. The opening was very orderly, the price discovery took about an hour or so once the general market was opened. After some jockeying around the stock's first trade was for $45.10 and quickly moved up from there. During the morning it traded up as high as $50 and bounced around the $45-$48 range for a while. A late afternoon peak was met by sellers but prices held above the opening price.

Twitter

The Indices

The major indices fell today with the Nasdaq leading the charge. The tech heavy index,which has been a market leader for the past months, dropped close to 2% and just below the short term moving average. The candle stick formed on today's chart is an ominous engulfing candle that has consumed the past three weeks of candles. Bearish momentum is picking up and stochastic is moving below the upper signal line, suggesting some follow through selling could come tomorrow or next week. The next support is just below the current levels at the previous 13 year highs around 3800. If this level does not hold then the next target would be the long term trend line around 3600. MACD and stochastic peak analysis on the daily charts suggest that the most recent high will be tested again but this is not a guarantee. The next few days could determine if this is a small pull back or a more lengthy correction.

Nasdaq

The Dow Transports, another recent market leader, fell nearly 1.5% today. The trannies have not yet, and may not, form a H&S similar to the one seen on the Nasdaq chart. However, momentum has also turned bearish here indicating near to short term weakness in this market. Looking back over the past year this index is trending upward more strongly than the Nasdaq, the MACD peaks are much stronger and more highly convergent with the current all time highs. I am cautious in the near to short term on this index, a correction to the long term trend may be in the works but longer term I am still bullish. Support exists around the 6850 and 6750 levels.

Dow Transports

The Industrials fell from the top of the 6 month trading range. I have been watching this level for the past weeks and months, expecting the Trannies to lead the index higher and out this range. It looks like it may not be happening now. However, while momentum is turning bearish on the Nasdaq and the Transport the Dow Jones Industrial Average is still mildly bullish. The MACD is in decline and near the zero line but not necessarily going to do so. This index is also right above a potential support zone that happens to be coincident with the short term moving average. The longer term trend is still up but the index appears to remain range bound for the time being.

Dow Industrials

The S&P 500 fell just over -1.25% coming to rest on the upper boundary of the rising wedge it broke out of three weeks ago. Short term momentum has turned bearish and stochastic is about to fall below the upper signal line. Today's candle is a Dark Cloud Cover/bearish engulfing pattern that when combined with the bearish indicators and the index's position relative to the long term trend suggest a correction to trend is possible. There are several potential lines of support for the index on the way down that could halt the decline. The longer term trend is still up for this index but I am cautious going into tomorrow and next week.

S&P 500

We've finally gotten to the end of the data delays caused by the government shut down. Tomorrow's release of NFP and Unemployment rates are the last. There is not a lot of hope for a good NFP, the consensus is somewhere around 100K new jobs. This is a far cry lower than what the expectations for this number were before the government shut down. So far the data we have gotten suggests that the economy was growing stronger than expected going into the shut down and that job losses did not accelerate during the shut down so, at least to me, seems as though job creation during the month of October could be better than expected. Even if it isn't the underlying trends of slow to moderate economic growth are still in place and corporate earnings are OK. There is no sign of longer term correction yet, divergences on the charts are cause for concern but not yet reasons to trade.

Until then, remember the trend!

Thomas Hughes