Violent day for the Markets; S&P Suffers Largest Loss in Over 2 Months
As traders we live in a world of good and bad news. Not always does it end up that bad news is bad for the markets, nor does it necessarily mean that good news will be good for the markets. Yesterday, the ECB’s Mario Draghi announced to the world that the ECB would extend it’ss quantitative easing stimulus programs throughout next year, and into 2017. This move is designed to give continued support to the European financial system, but the response was the exact opposite, as the DAX was down over 1.4% before the US stock markets opened. With the exception of ‘a few’ rallies, the index futures market sold off all day. At 1:11 CT crude oil futures were (CLF16:NYM ) up 1.65%, S&P 500 futures ( ESZ15:CME) were down -1.47%, and back down on the year. The Dow Jones Futures (YMZ15:CBT) were down -1.39%, falling further into negative territory, and the Nasdaq 100 futures (NQZ15:CME) were off -1.93%. On the 3:15 CT Futures close the losses in Europe were even larger. The French CAC fell -3.58%, the German DAX fell -3.58%, and the FTSE fell -1.36%. The overall trade was not like anything we have seen in over two months, and there was a violent unwind of some over crowded sectors. It was broad based sell off as the ECB announcement pushed the dollar to its largest one day decline since 2009.
The U.S. treasury market sold off as the 30-year bond (ZBH16:CBT) fell throughout the day, retracing all of this week’s gains, and trading back near the November lows. Gold contracts (GCG16:NYM) reversed early losses, but was mostly quiet on the day settling higher by 7.80 points. The biggest move of the day was in the Euro currency as it gained more than 400 pips against the dollar, with its highest close in more than a month, almost completely retracing the big losing month of November for that pair. We knew going into the week that there was going to be a high level of ECB, fed speak, and economic reports, but things seemed to eclipse to the downside yesterday with everything from commodities to currencies moving sharpy.
JOBS Friday
The S&P is known for its sharp reversals with Jobs Friday being one of the biggest days of the month for that type of price action. The last jobs report was a big surprise to the upside, and because of the higher Non-Farm Payroll print, the markets began processing the idea of a real chance of a rate hike on December 16th. In turn, the ESZ fell nearly 100 handles over the next 6 sessions until the Paris lows. The difference going into the November jobs report is that the ESZ15 is coming off its worst single day loss in over two months. MrTopStep has a trading rule that has been a key element of how we look at Jobs Friday, and Friday’s as a whole. Over many years of being at our S&P desk on the floor, we got used to seeing big reversals during Fridays jobs reports. We had a name for it, “Counter Trend Friday”. Below is the trading rule, but to learn more about MrTopStep’s Trading Rules, download our e-book (MrTopStep Trading Rules E-Book).
COUNTER-TREND FRIDAY: Over the years this trade works best on monthly NFP jobs Friday when the S&P futures gap sharply higher or lower on oversized pre-market Globex volumes of +400k ES contracts before the 8:30 am CT open. This is a fade, “the bus is too full” type trade. Example: The S&P is down 6 handles at 6:00 am and then down another 8 or more handles after the jobs number is released. Now, the S&P is down 14 handles or more at the 8:30 am open. With 400k+ minis traded before the open, this tells us that traders have already voted (sold). Depending on the price action, the idea is to buy a sharply lower open or allow for another 2-4 handle drop just after the open. The idea behind this is that with so many minis traded and it being a Friday and knowing most traders can’t hold the futures over the weekend, they put in buy stops and the algorithms go right for the buy stops. With all the selling used up pre-open, the ES will start to short cover into the buy stops that lift the offer side of a buy program.
From our Partners at ForexLive:
Preview of all the numbers that matter ahead of the November 2015 non-farm payrolls employment report:
- Median NFP estimate 200k (190k Private)
- Oct 271K
- Highest estimate 267k (Southbay)
- Lowest estimate 150k (Deutsche Bank)
- Average estimate 201k
- Standard deviation 22.3k
- Unemployment rate exp 5.0% vs 5.0% prior
- Participation rate exp 62.4% unch
- Avg hourly earnings m/m exp 0.2% vs 0.4% prior
- Avg hourly earnings y/y exp 2.3% y/y vs 2.5% prior
- Avg weekly hours exp 34.5 vs 34.5 prior
HARD COLD REALITY
MrTopStep has always said that the S&P never does what most people want it to do when they want it to. One of trading’s ‘hard’ realities is that not every trade or call will be correct. Knowing and being able to say you were wrong has to be part of your trading philosophy, because there is no way to over look bad trades and losses and act like they didn’t happen. Traders learn from mistakes and move on. While the S&P had its worst day since late September, we doubted the beginning of December could be so weak, but we also warned people ‘not to get long above 2100.00 the first time up’, and for the S&P to go higher it had to ‘close above 2105.00.
In conclusion, the markets go, up and the markets go down. No one will ever be right 100% of the time. As traders we do our best to cut our losses quick, and try and hold the winning trades as long as possible, but right or wrong we always get up the next day to fight and trade the markets.
In Asia 11 out of 11 markets closed lower (Shanghai Comp -1.67%), and in Europe 10 out of 12 markets are trading lower (DAX -0.40%). Today’s economic calendar includes the Non-farm payrolls, International Trade, Patrick Harker Speaks, Baker-Hughes Rig Count, Treasury STRIPS, James Bullard Speaks, and Narayana Kocherlakota Speaks.
Our View: It was Wednesday, prior to the weakness when the ESZ was trading near its high at 2103, when I posted in the forum that I thought that equity index futures would see some selling into the ECB news, but I didn’t think the S&P could fall as far as it did. On Monday I told the PitBull the ESZ could fall to 2060, but I didn’t see the futures falling to 2040. That said, I think the fall was extreme, and it’s possible we see some upside retracement. If not today then the ES starts going back up next week. Santa has not forgotten us; we lean to selling the rallies and buying weakness.
As always; please use protective buy and sell stops when trading futures and options.
- In Asia 11 out of 11 markets closed lower : Shanghai Comp. -1.67%, Hang Seng -0.81%, Nikkei -2.18%
- In Europe 10 of 12 markets are trading lower : CAC -0.44%, DAX -0.36%, FTSE -0.13% at 6:00am CT
- Fair Value: S&P -1.40 , NASDAQ -0.85 , Dow -13.16 –
- Total Volume: 2.64mil ESZ and 11k SPZ
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