Tuesday, August 18, 2009

Morning Briefing for August 18th: Bounce in Risk Assets

8:19 AM CT - I've added the top Market Delta chart to the briefing to show how we rejected the pre-opening highs after the 7:30 AM numbers, trading back into the overnight range. I'll be watching how we trade relative to the day's volume-weighted average price (red line); staying below the overnight highs and below the VWAP would target yesterday's low for a downside test. Staying above VWAP should target those overnight highs to see if we can get fresh buying interest. Note that day session volatility remains low, which should have you questioning any seeming breakout.

Before I launch into a discussion of how the markets are positioning themselves ahead of the 7:30 AM numbers (see morning tweets each day for U.S. numbers coming out; see evening blog briefing for international numbers that are scheduled), allow me to thank readers for their recent, generous support. Yesterday eclipsed all previous records for daily traffic on the blog, and it was clear that the interest was sparked by the continuing evolution of the blog as a decision support tool for traders. With briefings in the morning, midday, and evening and trader and market psychology commentary between, the goal is to expand traders' vision and thereby help traders help themselves.

We can see from the chart of the S&P 500 Index futures (ES) above, that we've bounced overnight from yesterday's lows on the heels of a favorable ZEW report in Germany. (This is one reason it's so important for traders to know international reports due out each day). If you take a look at the Demand/Supply numbers for Monday in the recent tweet, you'll see that the day qualified as a very weak momentum day. This post will help you understand how I interpret short-term momentum from this indicator; note from this post that it is not unusual to get a short-term bounce after a very weak momentum day (though, as you'll not from the post, the bullish edge diminishes thereafter).

I remain focused on those lows from 8/12, because--as long as we stay below them--we are sustaining a downside breakout and accepting value at lower price levels. That is what we see in short-term downtrends. A sustained move back above those 8/12 lows begins to make yesterday's downdraft look like a trap for bears and would have me thinking about a short-term rally back into the prior multi-day range.

All of the risk themes that sold off yesterday are bouncing so far this morning: oil and gold are higher, 10-year Treasury interest rates have bounced, and the euro is up versus the U.S. dollar. In pre-opening trade, we're seeing significantly more volume transacted at the offer price than the bid in the ES futures, suggesting underlying buying interest.

I will be updating during the day via Twitter and the blog to see if we can sustain this bounce and to see if those intermarket themes continue to sustain a buying of risk assets.