The Rooster Call: China Meltdown Fueling Drop in Index Futures

Hit the Mark Trading’s Brief Review of Overnight Market Action Setting the Tone for the Trading Day

Good Morning Traders!
By now you have read of the 7% drop in the Chinese stock market. Incredibly, this drop occurred in the first 29 minutes of trading and the exchange closed.  Bloomberg reports genuine panic telling us of a fund manager in Shanghai liquidating his entire $46 million holdings…in this 29 minutes.

The panic wheel is in motion in China so that the leveraged and the common small time trader are in the same boat. We should assume when markets open, renewed selling shall continue in frantic pace as if someone yelled “fire” in a theater. The government seems too in-experienced in stock market action to craft a strategy and market crowd forces of fear dominate.

The melt-down in China was fuel for the already started fire in global equity index futures, which continued burning.  We have noted the run-a-way gap in DAX and STOXX 50. Then yesterday’s nightly client video reviewed our downward targets.  One of our targets was 1930 on ES. The futures low hit 1931. 

The folks responsible for trying to save the USA market are at work and no doubt today the financial television will have “experts” talk of an incredible buying opportunity in stocks. This is what they do.

I am of the opinion the experts move to cash whilst telling the public to buy stocks. This is why you must become your own “expert.” Your job, if you are a trader, is to read the charts as your newspaper…your critical source of information.

The overnight drop in ES guarantees momentum stocks should gap lower at open. ES was down 2% at one point.

30-Year bonds soared overnight, yet aggressive profit-taking ensued. Bonds show incremental gains at the moment, but are a day trading instrument today.

Crude continues falling as traders finally focus on supply and the global economic malaise.  The next data point I am looking for in the crude market as a exercise of how more pain and suffering could occur for crude is backwardation in the futures. If we see farther out months trading less than front month, my gosh…the implications are dire calling for massive bankruptcies of wild-catters and small producers.

Until the crude market sees strengthening pricing…existing players are forced to keep pumping in order to pay the bills. Remember once a well is dug, the most expensive part of the well has passed. Therefore, the owners simply pump and pay off the bank loans. They cannot afford to shut off the wells. 

One of the strongest seasonal influences in trading occurs with crude showing rising price tendency starting in February.  Time will tell….time will tell.  Crude currently trades at $32.66 as I write. Each round number becomes a magnet…32, 31, and 30. Recall we have maintained $37.10 as resistance.

In other news, Eurozone unemployment drops to 10.5% in November. This is the lowest level since 2011 representing good news for the currency bloc. 

German factory orders rose 1.5% in November over previous month. Forecast called for a rise of 0.1% growth. This is great news as Germany is the economic powerhouse of Eurozone. Euro higher on the news of Germany and unemployment level.

Yesterday’s FED Minutes highlight concerns for persistent low inflation. The FED is in no hurry to raise rates, however yesterday Vice Chair Fischer said an increase four times in 2016 seems okay.  (These guys issue comments testing market reaction…the idea…will the dogs eat it?)

The World Bank cut the 2016 world economic forecast to 2.9% GDP, reducing a previous published forecast by -0.4%.

Economic Events
Chain Store Sales
7:30 Challenger Job-Cut Report
8:30 Gallup Good Jobs
8:30 Initial Jobless Claims
9:45 Bloomberg Consumer Comfort Index
10:30 EIA Natural Gas Inventory
2:15 PM Fed’s Evans: U.S. Economy
4:30 Money Supply
4:30 Fed Balance Sheet

 Markets
Equity index futures melt-down globally.

VIX soars over 22…not good.

Gold moved higher yesterday and Silver started a move, then fell victim to profit-taking. With gold higher overnight, Silver could see movement for day trading today. Remember Friday is the Employment Situation report which can move US dollar and by extension gold.

US dollar lower helps gold find support.

Euro higher thanks to economic reports.

Pound lower as fear of UK leaving the European Union take toll on currency.

Yen climbing is worrisome for very large traders using the carry trade financing risk asset purchases.  Thus as Yen climbs, liquidation possible in risk instruments adding to market sell-offs.

Aussie dollar plunge thanks to Chinese market drop.

Canadian dollar lower with crude.

DAX and STOXX 50 have second runaway gap lower!

Crude tests new lows.

Gasoline we look for lower prices at the pump early next week thanks to crude falling.

Natural gas maintains consolidation. Heating oil drops with crude.

Copper whack thanks to Chinese market drop.

Grains in the red.

Cocoa continues lower.

Cotton tests support.

Other softs we follow are quiet.

Bonds shot higher in knee-jerk, but have profit-taking drop price off highs.

Think About This!
This is an excellent 3 minute video of former FED President Fisher I sent out yesterday as a “MUST WATCH.” 

Even though Fisher does not want to blame China for the sell-off, of course we see crowd behavior acting off China.  Still, he brings cogent comments on FED actions AND the idea the trading managers he talks to have been shifting out of stocks.

Our day trading yesterday was wonderful.  We typically stop around 11:30AM ET.  The trading on Tuesday was horrible and choppy. The difference Wednesday was acknowledging the runs we typically in TF see were not occuring.  We must acknowle the environment for counter trend trading accelerates when markets are unable to catch trend runs.

Crude still holds as anchor in the morning day trading of equity index futures.

Have a great trading day! 

To learn more from Martin, visit HitTheMarkTrading.com to join his mailing list and receive blog updates.