The Rooster Call: Does Volume Impact Price

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

Good Morning Traders!

There is a great chart from Business Insider this morning depicting the rise in the S&P 500 over-laid on a chart showing money flowing out of equities.

Last night’s discussion of the rising ES pointed out the declining three-day volume even as the ES rose.  Now I am not the fan of volume due to the fact of the new era of trading where equity index futures rose more on central bank printing than investors seeking long term investment appreciation out of belief for better economic recovery.

I think the text books should be re-written on volume.  Logically we understand volume should increase with price leaving a trail of higher volume holding hands with price advances…uh, we cannot count on this.  All we can count on is trend, momentum, support, and resistance.

In yesterday’s equity index trading, the Russell 2000 (TF) futures showed increased volume.  We were expecting a large rise.  You see, the TF is much like a Jack Russell terrier.  If the TF finds it is behind, while everyone else (ES,YM, NQ) are moving higher…the TF will over-compensate moving higher…or like a Jack Russell terrier, make a fast run.  This action is typical of TF.

US dollar is higher.  This starts the count-down for a gold whack. Silver follows gold like two peas in the same pod. Gold traders you are on notice, especially day traders in gold…make sure you are watching your charts.

The DAX made a robust move higher overnight pulling up STOXX 50.  This action lends additional support to USA equity index futures as we start the trading day. Perhaps the DAX is higher based on the ECB showing an increase in bond buying planned for May and June. Once again a central bank moves the market. Don’t fight it…learn to love it.  What is really interesting is how the ECB strives to break the “sell in May and go away” mentality with today’s announcement the ECB will front-load bond purchases. “Front load” means buy an increased amount of bonds rather than an equal amount across a selected time span. This action is also the ECB’s attempt to stop the global bond sell-off witnessed last week.

What you need to know…central banks buy…stocks rise. 

With seemingly declining positive USA economic news, we expect Wall Street shall latch on to the DAX as if hanging onto a rising star. Price action today certainly agrees with this thesis.

Euro is falling and in play based on the ECB re-confirming bond buying. US dollar is higher.  The expected ripple effects are showing up…copper breaks the tight side-way channel. Grains are lower (since a higher US dollar makes US grains less competitive in the world market), crude lower, meats lower. All major currencies are lower. 

A Greek newspaper reported the European Commission supposedly offered a bail out deal tied to less strenuous austerity measures.  This report is not confirmed.  However, if true, the market will likely embrace the bail out as uncertainty is removed.  Separately, European Commission President Jean-Claude Juncker said he expects an international agreement unlocking emergency aid for Greece to be reached next month (Bloomberg Business).  This sounds like an attempt to “talk up” a resolution in order to soothe financial markets. So let’s add this to gold…you take out the uncertainty over Greece and gold suffers in addition to a rising US dollar affecting the yellow metal…the shine dulls.  The next Greek payment deadline is June 5.

The European Union’s statistics office “Eurostat” confirmed Euro zone prices were flat year-on-year in April, ending four months of price falls.  This is good news for the ECB seeking inflation (Reuters). The news is mildly market positive. Separately, UK slips into deflation as prices fall 0.1% in the year to April. This is the first period of deflation in more than half a century (FT.com).

USA retailers are reporting results as an important window on the consumer.  Home Depot sees rising sales. Wal-Mart same-store sales miss expectations. Wal-Mart speaks the truth saying its customers were using tax refunds and savings at the gasoline pumps to pay down debt rather than spend on discretionary items (Reuters).

Any deep pocket traders out there? Rice bucks the trend. Rise rises on the idea El Nino will parch the Asian rice growing regions.  Rice also at multi-year lows.  The only time I have traded rice was using options.  The bid / ask is wide, which means you must really expect a move in rice to make the trade worthwhile…AND you go out in time with your option strikes. Rice is not for new traders. The volume is very low and back in the pit trading days, rice had about three traders in the pit. Not a healthy environment unless a long term position view is takenDanger is the operative word in low volume markets.

Continuing with grains, I think the recent rise in Wheat is interesting considering the USDA forecast 2016 world stocks ending at the highest levels in 13 years. Blame the rise on El Nino and the thought India’s rice growing region will experience drought.  What wheat shows us time and time again is the remarkable resilience.  Wheat is the most noble of all weeds and as you know, weeds are hard to kill, thus while El Nino may or may not intensify, it is too early to declare crop threat.  However, speculators will use any excuse fostering a short-cover rally hoping they can trigger trend and momentum movement higher.  Wheat is expected to trade with erratic hiccups on El Nino weather reports.

Economic Events
8:30 Housing Starts -BEATS CONSENSUS ON STARTS AND PERMITS – BULLISH
8:55 Redbook Chain Store Sales

Markets

  • VIX tests lower support as fear of market correction or even pull-back dim.  Professionals are expressing their beliefs, through their actions, the S&P 500 will remain side-ways with an upward bias.
  • All USA equity index futures are higher.
  • DAX and STOXX 50 up strongly.
  • FTSE 100 incrementally higher.
  • Nikkei 225 higher.
  • US bonds incrementally higher, but off overnight highs.
  • US dollar shows strength.
  • Euro falls hard two days now.
  • Pound hurt by dollar and deflation report.
  • Canadian dollar hurt by dollar and lower crude.
  • Aussie lower tests an uptrend line.
  • Metals are lower…not unexpected.
  • Crude lower, both Brent and USA CL contract.
  • Grains lower, except rice.
  • Cotton pulls a whack day yesterday taking us out of a trade.
  • Coffee strengthens.
  • Sugar consolidates.
  • Cocoa takes pause in the rise.

Think About This…
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