Dow, Euro, Brexit Recap
Austin Galt | Jun 26, 2016 05:15AM ET
What a day! Some extremely volatile action took place that will live on in the memories of all those that witnessed it.
So, what to make of it all?
Well, this analysis will focus on the Dow and euro, and quite frankly there is nothing out of the ordinary to report which may sound strange. Today did nothing to alter what has been outlined in the previous analysis. In fact, it played right into my forecasts, which were for the Dow to head down to set up a higher low and the euro to also head further down a bit more and set up its own higher low.
Before we get to the analysis, here is an email sent to subscribers just after the UK polls closed and just before the results from Sunderland which gave Leave supporters their first cheer:
Hi all, the odds on Betfair for Leave got out to $17 before coming all the way back in to under $4 currently. Something could be up here. I actually personally had a little wager on Leave at $9 as I just thought things seemed overdone considering the tight polling. As for the markets, the Dow and other instruments are pushing things to the limit and even if the vote is Remain, it is an expected result which are the ones to look to trade against ie/sell the fact. The portfolio had its last remaining short position closed out at breakeven at 18096 in the after hours. However, I am going to add one short position back using today's close of 18011 with stops above the 2015 high. I personally have a small short position as well.
The betting markets can often be a good guide as to what is occurring in the financial markets, and this, combined with my view of the technicals, helped to shape my opinion that the risk to the downside was far greater than that to the upside. Hence, the Leave result turned out to be a profitable one and one which I expect to become even more profitable over the coming weeks.
Let’s firstly review the daily chart of the Dow.
The 20th April 2016 high at 18167 was pinpointed in a previous analysis on the 21st April 2016, and we have been bearish ever since, although it has been a bit frustrating waiting for the move down to really get going. That frustration appears to have ended today.
I have drawn a Fibonacci Fan from the August 2015 low to April 2016 high. This shows price found support at the 38.2% angle before bouncing back up to the 23.6% angle where resistance came in. Price had one last attempt at breaking higher yesterday but came unstuck today, and support from the 38.2% angle has now given way. I am favoring the final pullback low to be around support from the 88.6% angle, so still plenty of downside left in my opinion.
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I have added Fibonacci retracement levels of the move up from the January 2016 low to April 2016 high. I am targeting price to get back down to at least the 76.4% level at 16091, while I personally favor closer to the 88.6% level at 15760. It would not surprise to see the higher low form even lower, but I expect it to be above the January 2016 low at 15450.
The 100 period moving average (red) is above the 200 moving average (black), indicating bullish conditions, but I suspect we could see this alternate back and forth before the uptrend resumes.
The RSI is back in weak territory while the MACD indicator is bearish.
So, there is no change to the short-term outlook or the long-term outlook, which calls for price to resume the bull market after the coming higher low and crack to all-time record highs later this year or early next year.
Now let’s move on to the euro.
We can see price has been very choppy ever since the March 2015 low at 1.0462. This is typical corrective behavior. However, I favor one last surge to the upside which will essentially be the fake out to fool the crowd into thinking the bear market is over. Previous analysis has outlined the expectation the final bear rally high will be up at least around 1.26 and possibly even above 1.30. That forecast remains unchanged.
I have drawn a Fibonacci Fan from the March 2015 low to August 2015 high at 1.1617, which marks the high so far of this corrective phase and is denoted by the horizontal line. We can see price generally trading recently between the 88.6% and 61.8% angles. Today’s low pulled up just shy of the 88.6% angle, and I now favor price to head back down to test this low and marginally break it, with support from the angle to come in and help form the higher low.
I have added Fibonacci retracement levels of the move up from the December 2015 low to recent high. Today’s low of 1.0909 clipped the 61.8% level, which is a key level to look for higher lows. I favor one last test of this low before the uptrend commences. The 76.4% level at 1.0794 is also not to be dismissed and is my second favored scenario for the higher low.
The 100 ma is above the 200ma, indicating bullish conditions, and this is coming after these averages have already alternated, so this looks just about ready to go.
The RSI is weak while the MACD indicator is bearish, so lower prices are likely over the very near term.
These corrective phases can be quite boring and frustrating as price whipsaws all over the place. I believe this boredom is near its end, with one final exhilarating surge higher set to begin imminently. This will be confirmed once price cracks above the August 2015 high.
This final surge higher is the contrarian play. The crowd will wonder “how can that be?” given the Brexit. Trading down to new lows now is just too easy, and the markets are anything but.
What will be the reason for this surge? I don't know. What I do know though is that there is always a reason, and we'll just have to wait for it. This Brexit vote is not actually binding and will take a while to implement, so perhaps some will think there is a way out of it. Let's see.
Might I suggest that, right or wrong, the people have spoken, and to go against the will of the people now would be very dangerous indeed.
So, what was indeed a momentous day in financial markets will really just appear to be a blip on the charts given the fullness of time. We move on…
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