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When all markets sell and hard forks

Looking across the equity and commodity markets it is not hard to find a reason for the current bout of selling.

With US equities falling over 1 percent per day, Oil makes 12 month lows at $52.50 and Bitcoin also plumbing 12 month lows. All of this off the back of a very negative October for equities, it would be reasonable to ask if a new bear market is underway. It seems unrealistic to consider when companies have just finished a strong quarterly update season. However, all markets are forward looking, the day to day fluctuations only account for the immediate news with Primary Trends developing as markets look forward into the next 6 – 12 months.

Are these two charts the culprit? The US dollar index, a measure of US dollar strength against a basket of major currencies including the Euro GBP and JPY and the commodity Oil, that effects the everyday spending power of the consumer the drivers of today’s market sentiment?

The simple economics are, as Oil moves higher the fallout is a decline in overall business confidence as immediate day to day expenses for transport impact profit margins and the spending power of the consumer, conversely as Oil moves lower day to day spending power increases, but this takes time to filter through into company reports of sales and revenue, and most importantly profit margin.

The chart of WTI shows a significant corrective move underway with no respect for past support levels, last night’s move lower into the $52.50 levels are now past the initial breakout point 12 months ago, with Relative strength now into the deeply over sold area of 15 only highlights the force behind this correction of price. How this recovers will be the key to future business confidence.

These current market movements can offer great opportunities to traders as moves become over extended and volatility remains high. I have regularly referred to the volatility index in the Monday webinar, in short the Australian XVI remains over the 13 level which is bearish for equities as the forward pricing of risk is being priced in.

The Weekly chart of Oil from the rejection of the highs of $75.27 shows a significant corrective move, the characteristic of the corrective move is having no retracements of price at past support levels. The move is well underway and it will be the recovery of price most keenly watched by analysts with $55.38 now becoming a key resistance level on any move higher. This fall in the cost of Oil will take time to flow onto consumer and business confidence.

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The US dollar Index daily chart is currently the most important chart for traders long and short term. Last night the DXY found support at the 96.15 level and the current trend line. The OP outside period is a key reversal candle and only points to higher values. With the US Fed continuing to remain hawkish on interest rates into 2019 markets are pricing in higher costs as an end to the current profit run. In simple economics, higher interest rates impact company profit margins and ability of companies and consumers to borrow money. In countries like Australia with a large consumer debt and increasing credit pile, higher overseas interest rates flow through to our banks as they source funds for mortgages, business and consumer credit.

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Bitcoin, some would argue is unrelated to global markets, buy the trading forces of opportunity still apply as those in profit are forced to sell and buyers take a step back. Margined positions are liquidated as volatility rises on the current breakdown below the key USD$6000 level. This chart is an excellent example of the reality of the chart against the hype of market views around Bitcoin. Whatever the reasoning of the recent "hard fork" in the underlying, the primary trend is down and volatility is now high following the September – October consolidation.

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The 26 year look back of the October - November period for the XAO shows the following. November has a higher incidence of closing lower than October that is often bearish on the back of an underlying bear market. There is no correlation of November being a negative month following a negative October and no correlation of November being a positive month during a bullish phase of the primary of the market.

The statistics show us October is down only 9 out of 26 years, where November is currently down 10 out of 26 years.

Year October % November % Comments
92 -59 4 27 2 Last Recession In Australia
93 150 8 116 5.5
94 13 7 -154 -7.5
95 -61 -2.9 83.5 4.1
96 67 3 39 1.7
97 -288 10.7 9 .4 Asian credit crisis
98 52 2 122 4.8
99 4.4 .2 148 5.3
2000 -44 1.3 20 .6 Tech Wreck
2001 200 6.6 87 2.7 Recovery from 911
2002 72 2.4 18 .6
2003 102 3.2 -85 -2.6 Bull market phase
2004 113 3 152 4
2005 -181 -4 175 3.9
2006 230 4.5 97 1.8
2007 186 2.8 -221 -3.3
2008 -582 12.7 -275 7 GFC begins
2009 -100 -2.1 51 1.3
2010 78 1.8 -77 1.7
2011 289 7.2 -178 -4 Recovery
2012 130 3 -11 -2
2013 206 4 -105 -1.9
2014 234 4.4 -230 -4
2015 218 4.1 73 -1.4 Bear Phase
2016 -118 -2.1 123 2.3 Recovery
2017 257 4.5 60 1.0
2018 -342 -5.5 ? US China trade war

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