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October: it’s the month of some of the nastiest markets in history. Recently, however, it’s been the month of some of the most impressive interventions (remember Kuroda’s Halloween surprise in 2014?) Which will this October be?
On the one hand, we have another potential global financial meltdown brewing. Deutsche Bank’s 18% rally off last week’s must-hold bottom [see: Deutsche Bank: Will it Survive?] is in danger of faltering, as the rumor of a deal with the DoJ is turning out to be nothing more than a rumor. Who would do such a thing!?
On the other hand, several of the most powerful algo drivers have been coiling for the past month, signaling a potential break out.
continued for members…
USDJPY, in particular, appears ready for a move. Will it break out or break down?
And, CL ran into resistance the other day without poking through.
So, while ES has found support, SPX will break down below the rising red channel midline on the open. Recall that it completed a small Bat Pattern last week at 2175.61.
If it can hold at the SMA10 at 2158.07, it will have been very fortunate. Though the .618 retrace of Thursday and Friday’s rally is at 2156.70, closer to the SMA20 at 2157.03. If not, we’re likely heading back to the red channel bottom at 2147.65.
UPDATE: 9:50 AM
There’s the SMA20 and very close to the .618. I’d cover here at 2157.18, though I wouldn’t be surprised to see it slip further. DB hasn’t finished, and I’d hesitate to take a long position until it is. If you do, at least use stops. If the reason for Friday’s DB rally is truly no more, then you’d expect it to drop back to 11.19. ISM coming up at 10:00.
CL is making noises about bouncing here at its SMA5 200.
UPDATE: 10:08 AM
ISM just came out at 51.5 versus the 50.4 expected. DX and USDJPY are rallying. Note that USDJPY is almost to the purple neckline of a little IH&S. 
While, CL is mostly breaking down.
DB is trying to find support, but it just isn’t there. In fact, at the moment, it’s backtesting the broken purple TL — which signals further losses.
Stocks are just plain confused.
UPDATE: 10:35 AM
DB continues to slide. They’ll probably try to hold it at the SMA10 at 12.45. If that fails, then it’s likely headed for 12. But, for now USDJPY is taking care of the pumping duties, with a little help from CL.
SPX is inching higher on the appearance of a USDJPY breakout, but I wouldn’t be surprised to see it have trouble when the SMA5 20 arrives on the scene, probably around 2162-2163. USDJPY can hold this position as long as it needs to. So, for now at least, it’s able to offset DB and CL. 
UPDATE: 10:46 AM
If we’re going to get another leg down, it should start here. But, USDJPY is still “broken out” and DB is holding steady. Now, CL is getting in on the action. Looks like we might test the SMA5 200 at 2164.74.
UPDATE: 11:29 AM
SPX just backtested its SMA5 10, so we’re probably going to get that dip down to 2156.07. I’d try a short position here, just to see if it can push even lower.
It’ll probably depend on whether DB can find support here or is headed for 12.45 (or even to 11.99)…
…and, whether CL runs out of room here at horizontal resistance.
UPDATE: 11:53 AM
Just tagged the .618. Back to cash here if it starts bouncing. CL has pushed above resistance, suggesting that it will.
CL will likely need to push through TL resistance in order to get SPX back above its SMA10 and falling SMA5 10 at 2158.
Note that USDJPY is back below its “neckline.”
UPDATE: 12:13 PM
CL is sitting right at TL resistance. I’d revert to cash on any sustained move through the SMA5 10. For now, it’s holding below — suggesting this is more of a delaying maneuver.
UPDATE: 12:30 PM
Just noticed this TL, which suggests 2148.63 at the end of the day. It’s currently around 2153.25. And, it negates my earlier comment about reverting to cash. I’m going to give it some more leeway.
It would explain the drip, drip, drip that this decline has taken on and VIX’s breakout rather than gap close when it had the easy opportunity earlier. It would also explain why USDJPY and CL are sitting right at a breakout point — so, they can put the brakes on when necessary.
The alternative to timing at the EOD is 1:15 PM where the white channel crosses the .886. It would mean dropping through the purple TL, so we’ll watch to see what happens when SPX tags the TL itself.
Note that DB has rolled over, and doesn’t have much support between here and 12.45.
UPDATE: 2:04 PM
CL spiked higher, and VIX spiked lower. The net effect on SPX is a pop up to the .500 Fib at 2160.25. This is about where we entered the short, so I’d watch your stops carefully here.
UPDATE: 3:22 PM
Still feel pretty comfortable with holding short for 2148.63 – either at the close or first thing in the morning. But, as always, watch your stops and don’t hold overnight if you can’t hedge it, watch it, or bear the thought of a 10-pt gap up in the morning. DB has been edging higher, which is propping up everything. But, if I’m not mistaken, it just ran out of room. CL is likewise ready to drop. And, USDJPY is sitting right on the purple neckline — suggesting it could go either way.
If it doesn’t break down into the close, there’s a very good chance that SPX will head up to tag the SMA5 200 at 2162.25 instead. And, if it does that, it might decide to run on up and close this morning’s gap at 2167.77. Watch your stops, and trade safe.
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Quick heads up: I’m going to be traveling to the East Coast beginning Tuesday afternoon for some meetings and family business. It might be through the end of the week, or possibly into the following week. I’ll handle it as usual: post my thoughts each day, first thing in the morning and then whenever I get a chance during the day. If you’re in the Boston or New York area and would like to connect, drop me a line.
Comments
13 responses to “Welcome to October”
I honestly can’t believe anyone wants to own Deutsche Bank right now… Are people this certain that it will be saved AND the stock will shoot up? If you owned DB, wouldn’t you want to sell now, while it’s off all time lows – knowing it can get even lower than that next week?
There are speculators who are willing to bet on a rescue, and there are central banks which are also willing to prop up the price in order to prop up the overall market. Then there’s DB itself, which for all we know has chosen now as a great time to exercise their stock buyback program. Whoever’s doing it doesn’t matter so much as that it’s being done. And, as long as it goes sideways, the “market” will assume the risk is contained.
During one of the last days of Lehman, the stock had spiked 25% in one day. (Maybe it was 24.x%) So, even though people did not expect Lehman had a good ending, they were seeking for quick and unreason high return. It is probably worst than gambling.
And DB probably is “safer” than Lehman because DB is too big to fail.
All good points. We assume DB is too big to fail. But, of course, that assumes that the risk can be contained if it starts to unwind. I’m sure they thought the same thing with Lehman. The reality might match the expectations…or, it might not.
DB’s entire market cap is just a day at the printing press for Draghi or Kuroda. They could just buy the entire bank today if they want. They will keep the stock price up until the bank fails on a payment of some kind and maybe even after that
In terms of real risk, I worry less about the share price of DB and more about those payment failures.
Indeed. I used to work in the CDS world for a living and a lot has changed since 2008-9, mainly because of the activity of the central banks. DB is correct that they have offsetting positions for their derivative exposures (in a vacuum), so the real risk is just liquidity and timing mismatches. If people on the other side of trades with them start getting nervous and calling in their derivative positions there is a period of time where, if their capital and credit lines aren’t sufficient, they will have a shortfall until they can call in their offsetting derivative positions. That obviously caused a huge problem for Lehman when word got out that Goldman wouldn’t take a novation opposite of them. In today’s world, however, the ECB would simply step in and take that exposure. If things got bad enough they, or the German government/central bank would likely just step into DB’s shoes…since the problem isn’t the exposure, it should offset, it is the liquidity. Point being – “they” won’t allow the first domino to fall this time
Thanks for the comments. Very helpful perspective! Scary, though, to think of central banks taking on that kind of exposure. With gross notional of somewhere between $700 trillion and $1.5 quadrillion, is there an amount that could sink the whole ship?
Well, they would pass it off as not taking any exposure at all since they would be taking the offsetting exposure as well and it should net. Now we all know that is an accounting fiction because the creditworthiness and ability to pay of the offsetting positions is not always the same. But I suspect they will say it is simply a liquidity problem, assure counterparties that they are backing DB so no need to call their positions nd then operate the bank as a zombie and try to unwind in a more “orderly” fashion. Where “they” really got in trouble with Lehman is when no one at Treasury or the Fed stepped up – derivatives of all sorts seemed to be new to the central bankers then – I don’t think they will allow that to happen this time, because it would crumble everything. Maybe if Trump wins they will 😉
Hi Pebble, do you think that you could do a little session on the importance of your moving averages and which ones can affect what etc. Like approaching a moving average might do this or that. I have them on my charts but dont know how they might impact price support or resistance. Thanks in advance
Good idea, Elsa. I’ll do it in the next day or two.
Spike in USDJPY wtf?? Now back down?
ISM beat estimates. Typical USDJPY stuff, spike on any news just in case. In this case, a stronger economy is supposed to mean a better chance of a rate hike, which strengthens the dollar and thus USDJPY. Of course, a rate hike could also kill stocks, so there’s no real logic to it. The spike shouldn’t hold. But, there’s always the chance it’ll break out because the BoJ is panicking.