US Closing Update
Gap Fill
The US market made a strong intraday bounce but that action must be taken in the context of overnight futures action. Before the US cash open and following tweets from the president about an increase in the rate on existing tariffs, news and speculation about China's potential to refuse to continue meetings - and thereby bargain under pressure - took the initial futures drop in ESM19 to an overnight low below the comfort zone of 2900. SPX closed down only -0.45% at 2932.47 and ES is still in play after forming a top distribution area around 2935. Copper and oil made their own magnificent intraday recoveries but the AUD/JPY and USD/JPY remained weak. Technology stocks were a major influencer in the action lower and materials are the laggard at close.
ES tested 2883.50 overnight and came into the cash session on a massive gap lower with most participants short, opening near the overnight point of control at 2897.75. As a reminder, 2890 imho is a place the bulls do not want to lose on closing basis because of some less than perfect structure underneath. From the open we got a long single print bounce to 2914.75 during the initial balance. Above that you start to see the daily profile balance out with the main body of balance around 2920 and the point of control moving rapidly from 2897.50 to 2935 as of this note. That middle distribution point was followed by another single print string higher and as you can imagine, the profile is a very long one. By the
profile structure you see a strong intraday recovery was made as the short overnight interest was heavily exploited during the cash session. Take that into account when considering the validity of the bounce itself.
Treasury futures were much higher coming into the open but receded as the cash session equity futures came off the lows. The 2-year note is at 2.31% lost a basis point of yield and the 10-year lost 3 bps and is at 2.50%. This prompts traders to consider whether the market's nervous system has been bludgeoned enough by tweets that it has grown numb to verbal threats vis the trade war -- like the transitional dynamics of an animal's nervous system as it adapts to new environments and threats. They probably also have to consider that indices lay a series of scaffolding constructed by competing and even cooperating interests, therefore they do not always bend instantly to a new short or long term paradigm. Put another way: just because they get a scare doesn't mean they react right away.
And finally the happy optimists will consider the possibility that the gamesmanship going on in the trade war is a controlled thing with all actors well aware of the risks to the financial markets they depend upon. This possibility would lead to the suspicion that influential market participants are well informed or better initiated than in the past; just like retail traders, funds have short and medium term goals. And finally traders will consider that the hedging systems put in place on a weekly basis have a huge influence on market moves. Unless they become undone by something very big, they tend to ensure a kind of resilience to the indices. That capacity for bounce-back will now be scrutinized as traders watch overseas action and wait for more news. They'll also be waiting to feel the assumptions that trade war architects will make about their capacity for errors in judgement after they consider today's market action.
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