June 15th, 2012
in Gary's blogging
A Classic Bull Trap In the Making
As I have noted before, the odds of the Greek New Democracy party wining are 2:1 over Syriza taking control. However as noted below, if the New Democracy wins without a majority, it will be the least bearish outcome of possible scenarios noted below. But what happens after the vote is announced is very unclear along with the Egyptian issues. These events in Spain, Itaily and Greece could disrupt international markets for days, possibly for weeks as the sentiment is sorted out. These expected wild volatility and stresses will make day trading a dream come true and a nightmare for the swing trading crowd. The expected Spanish banking bailout** and continuing worries that Spain and Italy will get dragged into a sovereign exit are enormous. They will also play heavily on investors risk appetite as the World deterioration continues to turn sour and a classic bull trap. Follow up:
Follow up:Not helping this fragile situation is the looming Egyptian election and continued unrest in the Middle East with Iran's determination to disregard the United States and other Western Nation's demands for withdrawing nuclear aspirations. The FED's meeting next week have investors hoping that something will be done to keep the party going and China's manufacturing report will keep investors on their toes.
Looking at today's action I can see some betting but mostly serious manipulation going on by DaBoyz as the low volume tells it all. Monday is going to be interesting as we witness a classic 'Bear Trap' in the making.
SCENARIO #1: New Democracy wins elections and has parliamentary majority (> 151 votes) - EUR BULLISH - 10%
SCENARIO #2: New Democracy wins elections but does not have majority - EUR BEARISH (least bearish outcome) - 45%
SCENARIO #3: Syriza wins elections but does not have majority - EUR BEARISH (increasingly bearish outcome) - 40%
SCENARIO #4: Syriza wins elections and has parliamentary majority - EUR BEARISH (most bearish outcome) - 5%
CAUTION: Greek Elections Could Spur Immense Volatility, Euro Outlook Unclear
Greece is headed back to the polls this weekend following the inconclusive results of the May 6 parliamentary elections. Unlike the first elections, the June 17 elections have significant consequences tied to it that will likely result in exceptional market volatility.
With the significant event risk expected to occur during hours FXCM's trading platform is offline (17:00 EDT / 21:00 GMT on Friday to 17:00 EDT / 21:00 GMT on Sunday), Sunday's open poses the threat of not only a significant gap, but spreads wider than usual as well. Accordingly, we believe that this is not the trading landscape to speculate, and we suggest reducing position sizes given the significant amount of uncertainty forthcoming. Download the Full PDF Article
“The market continues to be volatile. Equities seem to be going through alternate sell-offs and rips up on a consistent basis recently. It is almost like there is a tug of war between those that believe in the fundamentals of the equity market (Low PE's, great corporate balance sheets, easy financing, etc. …) and the credit markets which are primarily concerned about what is going on in Europe.
In my experience, the credit market is almost always right and it is the primary reason I am very cautious here and have a high percentage of my portfolio in cash and have some short positions as well. I continue to pick up some long term bargains when a significant selloff occurs but I am holding most of my dry powder as I believe we will have lower entry points in the summer.”
“Well, that market reaction to the Spanish banking bailout was underwhelming! I wrote last week that seeing a market’s reaction to an event can be an important clue to future direction, as it is an indication of investor expectations and what news is priced in.
We now know the path of least resistance for stocks is down. We got the first hint last week from the lukewarm market reaction to the ECB announcement and Draghi press conference; and later the reaction to the Bernanke testimony . . . “
** Assuming the fund is ratified by all national governments and brought into operation as planned at the beginning of July.
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Written by Gary