Let’s skip all the hyperbole and focus on prices.
As mentioned yesterday, the markets were looking edgy and the OVI was turning down in a “beginning-to-be-meaningful” way. Being in earnings season, that didn’t necessarily give us the go-ahead to speculate, but it certainly gave us the heads up that volatility was on the agenda again. As such, cheap straddles were the order of the day in anticipation of higher volatility to follow.
Yesterday was always going to be an intense day because two of the big monoliths were reporting – GS and GOOG. Of course GS was the big news for a couple of reasons. First, its earnings were under scrutiny because instead of paying bonuses that would have reduced its figures, it made an equivalent and massive donation to charity, thereby leaving that figure on the top line. Once the analysts saw past that, the share price broke down severely and right through support.
I mentioned yesterday that GS was forming a bear flag but I didn’t anticipate such a wild day! This was in part caused by Obama’s proposed intervention with how the banks do business moving forward. However, read the small print and it appears that GS will be largely unaffected and may indeed benefit from it.
As for GOOG, well after forming a doji during the day session in anticipation of the earnings announcement after the close, it dropped severely in after-hours trading so you’ll see a gap today. This is exactly why I don’t trade directionally during earnings unless I have the clearest of signals.
So, what next? Well, we’re still in the middle of earnings season and some stocks are going to exceed expectations and some are going to disappoint. That means more choppiness, and we’ve already got more volatility.
We’ve already got another steep retracement on our hands with the indices (an inconvenient phenomenon we’ve had since August last year) but this could be the start of a prolonged downturn. If it is, we should have plenty of opportunities to ride it down as it forms its consolidations and retracements on the way down. From a trading perspective, it could be a bonanza if it plays out in a technical way as opposed to a grand panic.
In any case, let’s hope (medium term) for a determined trending move in either direction and no more of the nasty sideways chop.
All the best
Guy
