ES 03-15 (5 Min)  1_13_2015

It seems like anytime someone says they think crude oil is going back up, its goes back down. Over the weekend Iran and Venezuela said they were “teaming” up to halt the fall in oil prices. Saudi billionaire businessman Prince Alwaleed bin Talal said oil will not trade at $100.00 again. In the end crude oil sank and S&P 500 futures (ESH15) went for the ride.

U.S. stocks dropped for a second day as investors shift focus to the fourth-quarter earnings season. The Dow Jones Industrial Average (^DJI:DJI) declined 96.53 points, or 0.5%, to 17640.84, while the S&P 500 index (^GSPC:SNP) lost 16.55 points, or 0.8%, to 2028.26. The Nasdaq Composite Index (NQH15:CME) lost 39.36 points, or 0.8%, to 4664.71.

Stocks rose going into the open, but then turned as crude oil headed to new lows. The energy sector, which now seems likely to report weaker earnings, posted the sharpest decline among major indexes with a loss of 2.8%. Among the big oil and gas companies, Chevron Corp. posted the biggest loss, down 2.2%. Exxon Mobil Corp. fell 1.9%.

While just about everything that can be said has already been said about the effect of dropping oil prices on stock prices, the additional factor of volatility is also part of the new normal. The Wall Street Journal reports, “The Chicago Board Options Exchange Volatility Index, or VIX, rose 12% to 19.60 on Monday. That is above its average since 2010 but in line with its 10-year average of 20, which includes a spike to 80 during the 2008 financial crisis.”

The VIX, also known as the “fear gauge” reflects option prices, which tend to go up when investors perceive more risk of large fluctuations (like the one we saw early this month. While some traders use options to hedge, others use them just for speculation, which leads to further rises in option premium. Given that crude oil is central to the fortunes of ISIS, Russia, and other sources of unrest, the continued linkage between crude and stock prices means continued volatility. That in turn means profit for those who can be nimble and greater risk for those who don’t time their entries and exits or hedge their long-term positions.
In Asia 5 of 10 markets closed higher and in Europe 10 out of 12 markets are trading higher this morning. Today’s economic calendar starts with the NFIB Small Optimism Index, Philadelphia Federal Reserve Bank President Charles Plosser’s speech on the economic outlook, Redbook, JOLTS, 10 Yr-Note Auction, Treasury Budget Minneapolis Federal Reserve Bank President Narayana Kocherlakota’s speech on goal-based monetary policy to MNI Connect event in New York, and earnings from KB Home (NYSE: KBH), IHS Inc. (NYSE: IHS), and CSX Corp. (NYSE: CSX).

S&P 500 Down 6 of the last 8 Sessions

Our View: While I called for a bounce I never said the decline was over. Just as the algorithms affect how far a rally or drop can go up or down the price axis of a chart, those same algorithms can extend or shorten the time it takes for a move to complete. Algorithms often pace themselves; we frequently see buy and sell programs kick in or ramp up on the hour and half-hour. If a buy program is bent on trading a certain volume, it will keep attacking the stops for as long as it takes, unless a stronger force opposes it and causes it to cancel or reverse itself. Because of that, we continue to say that a bounce will happen. We won’t be surprised at all if it happens in the Globex session, since as we have reported Globex has become the scene of much more trading action than before. But we still expect the algos to pull in as many short sellers as possible and then start using their buy stops to drive the market higher. We’ll stay with the same call to sell the early rallies (like the one yesterday morning) and then buy weakness. Vikram’s chart shows some levels of probable bounces.

“S&P Crude Oil Rollercoaster”

January expiration study: https://mrtopstep.com/january-expiration-statistics/

As always, please use protective buy and sell stops when trading futures and options.

  • In Asia 5 of 10 markets closed higher: Shanghai Comp. +0.19%, Hang Seng +0.79%, Nikkei -0.64%
  • In Europe 10 of 12 markets are trading higher : DAX +1.17%, FTSE +0.59%, MICEX +0.84%, GD.AT +1.64%
  • Fair Value: S&P -6.36, NASDAQ -7.11 , DOW -76.39
  • Total Volume: 1.6mil ESH and 8.2k SPH traded
  • Economic schedule:NFIB Small Optimism Index, Charles Plosser speaks, Redbook, JOLTS, 10 Yr-Note Auction, Treasury Budget, Narayana Kocherlakota speaks and earnings from KB Home (NYSE: KBH), IHS Inc. (NYSE: IHS), and CSX Corp. (NYSE: CSX).

[s_static_display]

Categories:

Tags:

No responses yet

Leave a Reply