Even though the Brexit vote will have very little immediate impact on European economies (it will take time to separate if that's the way the vote goes) and it will certainly have very little impact on the U.S. for quite some time. But it shows how the market hates uncertainty and is simply waiting to get through Thursday's vote.
Today's Market Stats
It was another quiet day in the markets as we wait to get through the Brexit vote and relieve the anxiety many are feeling about it. Especially for the U.S. there's little to worry about since any changes will be slow in coming and they won't have as much of an impact on us as it will on Europe. But the market hates uncertainty and once we get through Friday we can get on with worrying about what the Fed will/won't do. Certainly the market is not worried about such things as the economy or corporate earnings or any other such silly nonsense.
There's very little to discuss tonight since all eyes and ears are on Britain and its upcoming vote. We'll have the results tomorrow night and the overnight futures will tell us what to expect Friday morning. Will it be a relief rally or will it instead be a sell-the-news event? One could easily argue each case and we'll have to let the dust settle on Friday before we'll get a better sense about the market's next move.
Speaking of overnight futures market, I see equity futures popped back up when they opened at opened at 18:00 and that was apparently a reaction to two new polls this evening that show the votes to remain are ahead of Brexit support and starting to widen. Whether or not the early-evening pop will hold through tomorrow is anyone's guess. Each rally attempt this week has faded in the afternoon and it's one of the reasons why I wonder if a relief rally on Friday might not lead to a sell-the-news reaction (a little bit for both sides). One can only speculate and that's not a good trade setup. Unfortunately the charts look just as confused and they're not much help in figuring out what might happen on Friday. I'll start with a weekly view of SPX.
S&P 500, SPX, Weekly chart
The June 8th high for SPX, at 2120, was a minor new high above its April high at 2111 and it was also a test of its downtrend line from May-July 2015. The weekly shooting star at resistance was followed by last week's red candle and that puts SPX on a sell signal, which can only be negated with a rally above 2120. A stronger bullish move would obviously be a rally above the May 2015 high near 2135. The expectation from here is for a strong decline in the 3rd wave of the great bear market that started off the May 2015 high. There's a lot to be done by the bears before that becomes a more likely outcome, starting with a break below last week's low at 2050.
S&P 500, SPX, Daily chart
Monday's high for SPX was a small throw-over above its broken uptrend line from February-May, near 2093 at the time and currently near 2100 (and back-tested again today), as well as its broken 20-dma, currently near 2093. The daily candle finished as a shooting star at resistance, which is not bullish. Yesterday's candle was a doji, indicating indecision. Today's candle is another doji, more indecision. The morning high was held back by the broken uptrend line and the afternoon low was support at price-level S/R near 2085.
At the moment the short-term pattern tells me we have something more bearish than bullish but in reality it could go either way, and following the Brexit vote it just might do that. If it does break down into the 3rd wave of the decline from June 8th, it will be a strong selloff and likely down to price-level support at 1992 and potentially much lower. If we get a rally above the June 8th high I think it would be a good time to chase the market higher (always cognizant of a possible head-fake break higher since at the moment I think upside potential continues to be dwarfed by downside risk).
Key Levels for SPX:
- bullish above 2121
- bearish below 2050
S&P 500, SPX, 60-min chart
The short-term pattern that I'm watching, to see if we get another confirmed sell signal and get an advance warning of how Friday might go, is shown on the 60-min chart below. We don't have a clean wave pattern for the leg down from June 8th but from a bearish perspective it's a 1st wave down and the 3-wave bounce into Monday's high is a 2nd wave correction. The next big move should be a stronger selloff below last Thursday's low at 2050. Based on some short-term price projections for the wave count, a drop below 2070 would keep the sell signal active. Above Monday's high near 2101 would negate the bearish pattern and above 2117 would put it on a buy signal. Let price lead the way before making any big bets.
Dow Industrials, INDU, Daily chart
The Dow's pattern is very similar to SPX so all the same comments apply. It too back-tested its broken uptrend line from February-May on Monday and is now trying to hold support at its 20- and 50-dmas, near 17820 and 17803, resp. Today it closed at 17761 and remains on a sell signal but not a strong one. It could go either way here and while I like the short side better than the long side, I'm not trading without protection.
Key Levels for DOW:
- bullish above 18,120
- bearish below 17,400
Nasdaq-100, NDX, Daily chart
Today's bounce attempt by NDX was rejected at its broken 50-dma, which it has done several times since breaking on June 13th. Today's high was also a test of Monday's high but it left a bearish divergence and under normal circumstances I'd strongly recommend a short play here, especially since it also closed again below its 200-dma, near 4414, as well as its uptrend line from February 8 - May 19, near 4418. The short-term pattern suggests lower prices and that's the way I'm leaning. But there are plenty of reasons to be cautious heading into Friday.
Key Levels for NDX:
- bullish above 4537
- bearish below 4362
Russell-2000, RUT, Daily chart
Different name, same pattern -- the RUT also looks like it will head lower following the 3-wave bounce off last Thursday's low into Monday morning's high. It's been struggling with resistance at price-level S/R near 1160, as well as its broken 20-dma, currently near 1159 (today's high was 1161). A drop below 1110 is needed by the bears to prove it's not just a pullback correction since below 1110 would be below several layers of support (trend lines, 50- and 200-dmas) and below a downside projection for two equal legs down from June 8th for a possible a-b-c pullback correction.
Key Levels for RUT:
- bullish above 1190
- bearish below 1110
Volatility index, VIX, Daily chart
We might be getting some clues from the VIX but in reality I would expect it to register some fear (higher VIX) as we head for the Brexit vote. A decline in VIX this week would have had me thinking the market is too complacent when it should be worried. The VIX dropped from last Thursday's high but then started back up after Monday's morning's gap down. What's interesting is how it's finding support at its 200-dma (only a minor break below it, currently at 18.13) and its broken downtrend line from January-February, currently near 17 (Monday's low was 16.59). If this was a stock I'd be interested in buying it and of course a rallying VIX would mean a declining stock market. I would not trade based on just the VIX but it does offer up a reason for concern about the stock market.
If you're an option trader you need to be aware that prices are inflated right now, which means you'll pay a higher time premium. If we get a relief rally on Friday we could find the VIX collapsing, which would collapse the time premium as well. How many of you bought a call and the trade went in your direction but you lost money on the option position? Maybe that's only happened to me (wink) but that's why it happens. Puts are better plays (unless the underlying rallies of course) because you generally make money with the direction and the inflation of time premium. It's a win-win kind of trade. Calls can be more difficult to make money if you're not careful to note the current IV (implied volatility) vs. the historical IV.
10-year Yield, TNX, Daily chart
Last Wednesday I had mentioned I expected to see a bounce correction for TNX since it looked like the leg down from May 31st was completing an impulsive move and should be followed by a bounce correction before heading lower. The next day it spiked lower but then did a v-bottom reversal, which was then followed by a rally into this week. I thought the bounce might make it back up to the 1.72 area to back-test its broken sideways triangle and its 20-dma, currently near 1.71. It has now retraced 50% of its decline from May 31st, at 1.70, so if it climbs above 1.72 I see upside potential to its 50-dma, at 1.77 and perhaps its broken uptrend line from July 2012 - January 2015, near 1.80. Lastly it would close its June 3rd gap down at 1.81. Above that level and I'd feel much less bearish TNX (bullish bond prices) but at the moment watch for the possibility of a turn back down at any time. Perhaps on Friday following the Brexit vote?
KBW Bank index, BKX, Weekly chart
The weekly chart for BKX does not inspire any bullish feelings for me. While it could bounce back up a little higher, perhaps back up to its broken 50-week MA (69.68) and its downtrend line from July-December 2015, it's currently risking a breakdown from support at its 200-week MA, currently at 66.41, and price-level S/R near 66.50. Yesterday's low was 66.05 and today's was 66.53 (it closed on 3 cents higher at 66.56). If it gives up support here and then drops below last week's low at 64.67 I think we'd be hearing the fat lady signing a song of sorrow for the bulls.
U.S. Dollar contract, DX, Daily chart
The US$ is still inside its down-channel from December 2015 and has dropped back down to the top of its up-channel from May 2011, which it had broken above in December 2014. Like the stock market, many currencies are just chopping sideways while waiting to get through Brexit. The larger price pattern for the dollar suggests an upside breakout, I'm wondering if we're going to get at least a retest of its May low at 91.88.
Gold continuous contract, GC, Weekly chart
Last week gold made it up to its 200-week MA, near 1313, and has since reversed back down. The two new highs since March have left significant bearish divergences and it's not a rally I'd chase higher from here. We're due at least a larger pullback before heading higher. But I'm not convinced yet that we're going to get higher prices before first making a new low (down towards 1000).
Oil continuous contract, CL, Weekly chart
Oil is doing a slow roll over from resistance near 51, which includes price-level resistance (October 2014 high), some internal price projections based on the wave pattern, and the broken uptrend line from 1998-2008. It could run higher, such as to price-level S/R near 58.50, but at the moment the price pattern suggests the bounce off last Friday's low should be shorted against the June 9th high. The past few weeks I've shown the daily chart with the rising wedge off the April 5th low at 35.24. The breakdown from the wedge suggests a quick trip back to the 35 area.
There's nothing to see here, move along. Anyone watching economic reports this week? Me neither. It's all Brexit.
Brexit polls show the vote is going to be extremely close but betting places, like predictit.org, shows the vote is narrowing but not close. The stay vote is currently 70% vs. 30% to leave. In other words it's more than 2:1 in favor of staying if the bettors are correct (and they put real money behind their votes). That's not a close vote and these betting sites tend to be more accurate. Therefore, if the final result of the Brexit vote shows an overwhelming majority voted against Brexit it's likely to boost stock markets worldwide and we could see a big gap up on Friday. The results will be in late Thursday night for Britain and in the evening hours for us, which means we'll see the results in the overnight futures market.
But, and this is a big but, the stock markets have been rallying/holding up into the Brexit vote, probably due to an expectation that the Brexit vote will fail. I don't think I'm overstating the significance of a Brexit vote that passes since I think it would be a shock to the system and stock markets around the world are one black swan event away from crashing. When I say downside risk dwarfs upside potential it's because of this crash potential. The lack of liquidity in this market is a very dangerous situation that doesn't become apparent until we get a big selling event.
It's never a good idea to bet on a market crash because they're so infrequent. But it doesn't mean you should never prepare for one. Stop orders on positions could get gapped over if the market opens with a big gap down (if they're limit stop orders) or a market stop order might find a buyer much lower than you thought possible. I think it's very important to at least have put protection on your portfolio. The premiums are inflated right now with the higher VIX but that's a small price to pay to protect yourself. Dump them next week if you think they're still not needed.
Even if the result of the vote is to stay, there is the risk that we'll see a gap up but then a quick sell-the-news reaction, especially since the market already rallied on Monday to recover the previous week's selloff on Brexit worries. Monday's rally is holding as we approach the vote but the price patterns are not clear enough to offer a higher-odds trade setup. As far as trading this event, I don't think we can hazard a guess how the market will react to a vote either way and therefore heading into Thursday's close would be a good time to get flat and then let the dust settle on Friday. Trading is different from protection -- the former is by choice while the latter is required if you have long positions that you don't want to sell right now.
If you really want to try a trade going into Friday, the most I'd risk is a long option position that you're prepared to lose (but potentially make some good money on it, depending on whether you bet on black or red). I prefer trading with good setups that enable me to control my risk whereas betting on "red" or "black" is simply gambling and it's very important to understand the difference between trading and gambling. We don't do gambling here, right? Having said that, I do like the idea of a couple of puts (all risk, no stop) and hold it into next week before deciding whether to keep the position or get rid of it.
Good luck the rest of this week and I'll be back with you next Wednesday when we should have good confirmation of whether the bearish patterns win or get negated.
Keene H. Little, CMT
In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying