Markets by stealth

Over the past four trading days, the Dow 30 has given up the entire premium gained, following the Trump speech to congress. The futures market moved back to the starting point from last Wednesday. This was an orderly and measured move with support found at 20,888.

Market Data
Source: Bloomberg
This also highlights that the movement of the index has been making profit. Furthermore, the markets have not moved to a complete ‘sell’ mode. Healthcare remains the strongest performing sector in the US and in Australia.

The VIX, a measure of bullish and bearish volatility remains low and quite dull at 11.44. It fell again last night by 1%. This shows us that the markets have no real pricing concerns over the coming months.
Gold seems determined to move back to $1200, which went down a further $6.24 overnight. The bigger picture of this commodity is that the overall primary downtrend is in place, with further lows expected. Overnight, oil slipped over 4% to $50.54 a barrel. This does sound dramatic for now and it will be quite concerning to key players of the Organization of the Petroleum Exporting Countries (OPEC), which are currently reducing production, this is now 85% compliant. To contextualise the topic, the West Texas contract fell below the 11 week support level of $52 a barrel. These long consolidation periods often build up incumbent volumes of long positions and short positions with one side eventually having to fold the position. This leads to a tipping point and a violent move.

When comparing option volumes against oil, ETF skyrocketed from the 20-day average of 47,000 contracts to 220,000 contracts. With 47,000 contracts being traded for a May expiry at $10.50. This type of low-price contract is often taken in volume to manage the risk margin with at the money contracts. Overnight, reporting showed inventory levels went higher by 8.2 million barrels; the highest level since February 2016 and ninth straight gain.

Although the US is now producing more of their own imports, they still moved 1.7% higher, due to a strong influence from Canada. Traders will be weighing up if this is the start of a flush-out of long positions for the longer term, or a reaction to the $52 support level being breached - $50 remains the key support level and will be closely watched over the next few days.
The outcome for our market today will show in Woodside, Oil Search and BHP having the greatest exposure to the commodities price, and all expected to trade lower. The BHP ADR is pricing in $24.30, from the last close of $25.23.

The political news from Europe has fallen into the back ground with poll now confirming Marine Le Penn has little chance of securing the French presidency. Furthermore, the recovery in Europe has gained some traction and raising the question around whether Draghi will be considering tapering the Quantitative easing (QE) from the monthly $80B euro to $60B euro before Christmas 2017.

It’s now almost a market rising by stealth, with rising productivity across the globe, rising interest rates with inflation and inflation expectations. While retracements are inevitable, they are occurring in a low volatility environment.  

Iron ore also saw some pricing pressure with the futures contract. It closed at a price of $87.19, which is down from last week’s $92; this will bring a cap into the iron ore space today. SPI futures are suggesting a flat open, down one point.

From the remnants of reporting season, many equities are now going ex-dividend. This will become a further cap on the index in the coming weeks.

For the ASX 200, the resistance level of 5833 seems too far away for now, but a potential retest of the 5600 level could be possible. Within the index, many stocks offer good, technical trading opportunities, and these periods of consolidation offer time to reflect on the markets and the next move.

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