Are you ready for a busy trading week? This week could turn out to be one of the more volatile trading weeks of the year so far. Either be prepared to act swiftly or make sure you have a strong stomach.
Last week the S&P 500 reached all time highs by the end of the week. Then on Friday at around 12:30pm EST the sell button seemed to get stuck only to get unstuck towards the end of the trading day. Much of the media focused on the tensions in Ukraine. This week will bring an active economic calendar culminating in the much anticipated monthly US employment report. US economic data will include: Personal Income and Outlays, ISM Manufacturing Index on Monday; ADP Employment report, on Wednesday; Weekly Jobless Claims, and Factory Orders, 10 and 30 Year US Treasury Auctions on Thursday; Non-farm Payrolls on Friday.
Usually during the week of a Non-Farm Payroll report the beginning of the week has normal to increased volatility met by a lull in market volatility the day before the announcement. This week that may be different with a lot of attention being paid to the situation in Ukraine. However, the employment report at the end of the week will be an interesting one and will dominate price action, barring a collapse of the Ukraine crisis. The excuse of the harsh weather will be a continuing theme for the employment report. That being said, it is more likely that there is more of a “good number” risk due to the fact that a less than ideal number is already expected. A stronger than expected report will mean the US Federal Reserve Board will continue to decrease its monthly bond purchases meant to stimulate the economy. The rate of the reduction of participation in the capital markets of the Fed has been met with skittish market behavior as investors enjoy the “less uncertain” nature of the Fed supported market. Leaving the market to its own devices and valuations seems to give traders a reason to pause as there are a myriad of opinions on the current health of the global economy. If the Fed support of the market is removed at a pace that is faster than expected, traders may sell first then buy later.
Looking at the SPY, the ETF that tracks the S&P 500 index, we see that market is still trying to break above the upper levels of the trading range established at the beginning of 2014. What is interesting here is that the drop at the end of January that took the SPY out of that comfort zone was met by a strong rally. While that rally still seems to be in place, the pace has certainly slowed. Looking at a recent chart of the SPY, you can see that when the pace of a strong rally slows, it is followed by smaller moves that seem to seem to consolidate the price action and establish a sideways trend. There are still opportunities for both long and short players of the market, and the sideways trend will lead to either a strong rally or sell off, however you should also prepare yourself for a sideways market where it will be less clear to spot a trend while you are in the middle of it.
Chart Courtesy of StockCharts.com
The duration of the recent sideways periods seem to last about a month. For this week, SPY is likely to end up between $180.80 and $188.60.
Gold is back at another interesting level as of late. Like the S&P 500 it is hovering around a recent high that it cannot seem to break up and away from. Unlike the SPY, it is a high that occurred way back around the end of October of 2013. If you haven’t read our latest discussion of Gold, take a look here. It seems that Gold has finally emerged from the recent crater it formed. With the story of trouble in Ukraine dominating headlines and the employment report, there will be ample opportunity for Gold to show if it wants to retreat back into the well or jump out of it. While the media will make it seem like the action is driven by news events, it is important to remember that the price action will come from increased volume that gives traders the ability to load and unload positions. So don’t be surprised if the market moves in a different direction than the media implies it would. This week a probable landing spot for GLD, the ETF used to trade Gold, is between $125.90 and $134.50.
Chart Courtesy of StockCharts.com
While the media will drive a lot of hype this week, stick to your game plan and be ready to take advantage of opportunities that may come quicker than expected due to increased volatility. Your trade may not have a long lifespan, as you might reach profit targets or loss limits sooner than expected.
Good luck and trade rationally.