The EU Referendum delivered a shock to the financial markets, and we saw on Friday one of the most volatile days ever seen. Volatility will likely continue this week, particularly in currencies, stock indices and interest rate futures, but will not likely continue at such elevated levels as were seen on Friday. When volatility reaches extremes, it rarely lasts for an extended period.
Many markets moved on huge volume. When such high volumes are seen it is usually either at the start of the next move or indicates exhaustion at the end of a move. Price action this week may give us an indication as to whether Friday’s moves were overdone hysteria or the start of much deeper trend moves.
The S&P 500 rallied to new highs as markets had priced in a Remain win and the risk-on rally got underway. What then followed was a massive reversal, taking 120 points off the S&P 500 at one stage, before the market rallied somewhat to close at 2018, just a couple of points above its 200-day moving average. Incredibly, that one-day reversal engulfed the price action of the past three months.
The Nasdaq 100 was also extremely bearish, closing well below its 200-day moving average and right on a support line from the May lows. There is an enormous potential head and shoulders top in the process of being formed that could play out over the coming months.
The Dax, which had rallied through to Thursday’s close, put in a massive reversal having gapped lower hundreds of points at the open. At one point, the Dax was almost 1200 points lower than its high of the day. These are not moves to get in front of, and we can expect further wild swings this week.
Gold had a huge turnaround on Friday, having earlier drifted down through short-term support. Friday’s recovery from the lows was a massive one-day rally that took the market its highest level since March 2014. However, the was quite a firm rejection of the highs and a $40 pullback followed. Silver followed suit but also experienced a significant pullback following the strong rally. The trend remains up for both metals.
The biggest trends of the year to date, Soybeans and Soybean Meal, which resulted in the most profitable trades in 2016 for the LS Trader system, both came to an end this week. Soybean Meal broke support and continued lower to test its 50-day moving average, and we saw very similar price action in Soybeans.
Huge moves have been seen in the currency markets. In last week’s update, we said to expect volatility to be at least two to three times higher than normal levels and also stated to look for 500+ pip swings in either direction on a daily basis. As it turned out, that was conservative!
The British Pound broke the 30-year support level on Friday before bouncing sharply higher. The price action on Friday alone engulfed the entire trading year to date.
The Euro also had a large reversal day but not on the same scale as the Pound. Here the Euro reversed from its high of the day at 1.1455 down through both its 50 and 200-day moving averages, through the May low and on down to 1.0947. This move included a break of the trend line from the December 2015 low. For now, the long-term trend is still up for the Euro. The RSI narrowly held the 40 level as well, but this could all change during the week ahead.
Interest rate futures
From last week: “We could see some swings in interest rate markets, particularly in the UK Long Gilt as the EU Referendum draws near.”
The interest rate futures delivered some monstrous moves, even larger than expected. The Long Gilt, which represented a high-risk trade due to it not being a 24-hour market, gapped from Thursday’s close of 123.70 to Friday’s open at 127.02. Anyone trading this market was exposed to unnecessary risk. We went into the second-half of the week flat Long Gilts for this very reason.
Very large moves were also seen in the US interest rate markets, which all rallied to significantly new highs before pulling back into Friday’s close. The trend remains up across the sector. Yields could yet fall to much lower levels as the sector rallies to new highs. Prices could go higher over the coming months, and yields fall lower than anyone can imagine. Let’s see what happens.