Volatility is back & regular order

Short-term trading volatility, and especially the aggressive downside trading, has been absent from U.S. equities from as far back as September. So, in a way, the markets were overdue for a hiccup like the one experienced Tuesday, which has room to spill over into the next couple of days.

Yet, this was not a "black swan" event, as both the drivers for near term weakness and the potential extent of the selloff were very plain to see well ahead of the event. In fact, after our "'Fecstasy' Wins!! ...for now" post pointing out the potentially transient nature of the FOMC boost for the equities, questions over the Trump administration’s healthcare reform efforts were already weighing on the U.S. equities prior to Tuesday morning.

Yet, much like the near-term upside volatility in the wake of the FOMC announcement and Fed Chair Janet Yellen’s press conference last Wednesday was not a game changer shifting back to more sustained strength, neither is Tuesday’s sharpest selloff in five months. The U.S. equities had surged so extensively in the wake of the U.S. election into December and again since early February into the beginning of March, the current selloff can indeed drop a bit further just to reach aggressive up trend support. And we will cut to the chase on that due to the U.S. equities having experienced not only the most extensive movement, but also the only volatility of that extent compared to more orderly reactions in other asset classes.

Other asset classes not confirming

In fact, the lack of more extensive reactions in other asset classes reinforces the degree to which the U.S. equities had remained overdone on the upside in spite of the underlying psychology weakening due to concerns over the Trump reform agenda. Specifically the June S&P 500 future (front month since the end of last week) was critical into the support in the 2,370 area after gyrating above and below it prior to the FOMC announcement last Wednesday, as we have noted in all recent analysis. Yet, it also quickly overran the next 2,350 support Tuesday morning.

Fair enough, and additional weakness was therefore not all that much of a surprise. Yet, even the aggressive up trend support is at key lower levels that could allow for between a twenty and forty dollar further drop into the front month support in the 2,320 area and even more substantial 2,300 area.

Near term support violated

And having dropped below both the front month 2,354 and June contract 2,351 early March lows Tuesday opens the door to that much more of a drop. That is because all of the trading from late February into the (post-Trump Congressional address) March 1st bullish blowoff to the 2,401 front month futures all-time high above those trading lows is now resistance above the market. On a purely technical perspective, any initial trading back up into those violated lows is likely to be met with selling by stale bulls.

Yet there is good support at lower levels. It is important to note how the U.S. equities had led the way up, and held up near the March trading high much better than its peers after its spectacular rally into December and especially the top of March. That left a relatively large air pocket below 2,350 support that has now been violated. That leaves a lot of leeway to drop down to what should still be considered good support at lower levels.

Multiple support indications

Looking at the aggressive weekly up channel, moving averages and the evolution of the lower weekly Oscillator thresholds in the wake of still aggressive ($7/week) increases in weekly MA-41 is instructive reinforces that notion. The next lower Oscillator threshold moves up to somewhat above the 2,320 level this week. That fits right in with weekly MA-13 up into just below 2,320 this week and just above it next week. And another key lower Oscillator threshold (weekly MA-41 plus 75-80) is just below 2,300 at present, moving up to just about that level into next week.

Hybrid channel projection

Regarding the aggressive weekly up channel projection, we have used a hybrid method due to the distortion in the initial wake of the Trump victory back on November 8th. As was apparent at the time on the early overnight trading once it became apparent Trump was succeeding in his upset victory, there was a very temporary downside dislocation which was reversed by the time the U.S. markets opened on Wednesday morning (Nov. 9).

Eliminating that low volume high volatility spike down requires going back to the previous week’s 2,078.75 trading low. That provides an aggressive up channel support projection which is just below 2,300 this week, moving up to just above it next week.

And for purists who would still demand the use of that early Wednesday, Nov. 9, 2,028.50 as the anchor for the upward channel support projection, that does not come in until 2,340 this week and 2,345 next week. While it might still be relevant, it is probable that it will not be as useful this week or next as the ‘hybrid’ projection. That could be wrong if the Trump healthcare reform effort fails in the House on Thursday (see below.)

Yet, even that aggressive channel up from a sharp low has another projection which is often useful in these cases when the market runs away from a sharp spike bottom: the midline of the channel. That comes in at approximately 2,305 this week, moving up to 2,310 next week. All of this significantly reinforces the importance of the 2,300 area as lower relevant trend support in addition to its natural ‘big penny’ psychological factor.

Regular order returns to U.S. politics

Of course, our confidence that those lower U.S. equities trend supports will hold and the near-term technical thresholds in the other will as well could be shaken if the Trump reforms become more seriously bogged down. Yet, we are all not likely to know about that until late Thursday U.S. time; which essentially means Friday morning.

That is because when the U.S. House of Representatives schedules a still problematic healthcare reform vote (the likely reason for Tuesday’s U.S. equities weakness) for ‘Thursday’, that means anytime up until midnight Friday morning or even a bit beyond. As such, no less so than on any U.S. Employment report, this is now likely a critical binary decision (sharply up or down) into Friday morning. 

However, amidst all of the very contentious debate and arm-twisting and objections to aspects of the healthcare reform bill from within the various wings of the Republican Party (forget the obstructionist Democrats), a very constructive change has occurred in the U.S. political process: the return to ‘regular order’. They always say the two things that you do not want to see made are laws and sausages… it’s messy.


In fact, we have a culinary friend who protests that metaphor is very unfair to modern sausage makers, who engage in a far cleaner and more transparent process than the heavily politicized and devious legislators. That said, the vociferous U.S. healthcare reform debate and negotiation has restored what had always been the "normal" U.S. legislative process, which was abrogated to some degree under President Bush and totally abandoned under President Obama’s mutually obstructive relationship with Congress.

Finally moving on from ‘omnibus’ spending bills that merely approved the same marginal annual percentage increases for all departments, and the even more pernicious sequester that imposed restrictions on spending over the past several years (and allowed President Obama to claim credit for budget discipline) is a constructive development on quite a few levels.

End of sequester

In the first instance, the sequester not only placed restrictions on spending, it also dictated what items the departments’ budgets could be used for. For example, the military could only purchase the exact same items as the previous year. This was obviously pernicious for a government department with such significantly shifting needs year to year, and totally obliterated any necessary intermediate-term planning for new weapons systems or even required maintenance of existing equipment.

Of course, to one degree or another this is also true for every other U.S. government department, as it is for every government in the world. As such, the return to debating the specific areas which will see increased spending as well as decreases is a very positive development, getting back to ‘regular order’ of discussions in committee and then on each full chamber floor. And after that each budget discussion will go into ‘reconciliation’ between the two houses of Congress to reach a final bill that has all of the budgeted items becoming a matter of law.  

Back to the future

What a concept: Debate the actual content and spending priorities instead of just passing an omnibus proverbial "pig in a poke." Prior to the mutually obstructionist stance of the Obama White House and Republican Congress after 2010, that was the way it was. Is it messier than the ‘blanket’ budget bills of the past eight years? Extremely so.

Yet this is what U.S. democratic (lower case "d") process is all about. It represents a return to an aspect of first principles that are part of the ‘make America great again’ agenda which Trump did not likely even contemplate amidst all of his somewhat xenophobic utterances both before and after the election. And the real benefit is hopefully the return of another unique aspect:

The American "Creative Third," which is the process through which hard negotiations exploring the best ideas from both sides (and eliminating the weakest) yields a better plan than either side’s purely partisan plans. So far this is just among the Republicans. Yet, we hope that as the stubborn post-election Democratic Party acrimony cools down, it becomes a broader engagement.

The last U.S. President to engage in Creative Third collaboration prior to the specious serial (and diametrically opposed) claims of a mandate under Presidents Bush and Obama was Bill Clinton. And much like coming out of the radical 1980’s we hope he might once again convince his party to constructively engage with the opposition for mutual (and broader public) benefit versus its current sharp shift to the Left.

Thanks for your interest.

Rohr International’s active analysis of how short-term activity fits in with the intermediate- and long-term trend indications is another MODERN TRADER advantage.

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