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SPY Warnings Were Tradable

May 11, 2011 1:12 PM ET
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Wednesday saw a negative start to Wall Street trade, with equities and commodities moving lower as the trading session got underway. The initial moves subsequently built momentum as the cash market in Europe closed, but the warning signs were in place long before the 09:30 ET opening bell sounded.

The buying potential seen in TheLFB trade signals created recently in Humana (HUM) from 77.20, Intel (INTC) from 23.20, and Armstrong World (AWI) from 46.20 would be negated by a drop in global equity indices values. However good a buying potential seems to be on an individual stock, the day’s that equity indices are falling in value is not the time to enter a new position.

When risk is being sold in the wider market, attention needs to be paid to the near-term impact on high liquidity stocks. The swing in global equity sentiment meant that upside potential would be limited on Wednesday in the above named stocks.  As noted in TheLFB Trade Desk’s previous article, not being able to operate until 09:30 ET can be frustrating for traders who work without Plan B.

As risk (read equity indices) is sold, there is a move to cash or to bonds. The most liquid of bond markets is USD-based Treasuries, and therefore an inverse correlation exists between SPY and USD. When SPY goes lower, the USD will historically rise in somewhat equal measure, outside of near-term black swan events.

May 11 11 TheLFB SPY-DXY

The SPY/USD Inverse Correlation

As commodity markets drop in value there is an automatic long-USD reaction, as most global commodity valuations are denominated in dollars. When equities and commodities both drop hard, the long-USD reaction is inevitable, and that scenario played out ahead of the Wall Street open on Wednesday.

When the US trade balance numbers at 08:30 ET reported an increase last month in the amount of goods imported the equity and commodity futures market extended their drop lower. S&P 500 trade opened the session below 1350, which sent SPY, the exchange traded fund that tracks S&P 500 momentum, from the previous close at 135.90 to 135.65 at the open.

Gold dropped from 1526 to 1505, which created a 70 point gap lower from the previous close to the current open in GLD, the exchange traded fund that tracks gold bullion momentum. Silver traders saw a reversal from 39.40 to 36.40 which created a 100 point gap lower from the previous close in SLV, the exchange traded fund that tracks silver bullion momentum.

The same kind of gaps in price were seen in USO, the exchange traded fund that tracks oil trade, which opened lower after crude oil futures dropped in value ahead of the 09:30 ET Wall Street open.

Currencies offer the opportunity to be in a trade before the regional market opens. In the above example, S&P 500 futures started to reverse off a test of 1358 resistance at around 05:00 ET. That was the same time that TheLFB trade desk sent a note to clients stating that any open positions in equity or commodity futures should be closed. Marco Hague

Traders who had access to the 24-hour currency markets could trade the moves in equities and commodities, either to offset whatever losses when Wall Street opened lower, or to make good use of the momentum ahead of the open. There is potential to analyze and trade currencies in a high-volume market that is supported by the inter-bank system in the same way that most exchange trading floors operate.

May 11 11 TheLFB SPY-AUD
SPY/AUD Correlation Holds Firm

Trading the currency pair AUD/USD was in-line with the potential seen in global equity and commodity movement on Wednesday. Buying the US dollar and selling the Australian dollar is a simple process of placing a sell order on AUD/USD, and then closing that same position in a similar way that equity trades would be bought and sold.

The above chart shows the initial drop lower in S&P 500 futures trade ahead of the Wall Street open. Currency traders were able to play that momentum and be in the moves when the opening Wall Street bell sounded, rather than having to wait for the open to assess potential.

Whether to hedge existing positions that are losing value, or to trade the momentum built in the global market, currency trading is making up an increasing part of the savvy investor’s trading arsenal.

TheLFB provides 24 hour market support for traders, investors, and institutions. Service offerings include analysis, market alerts, trade signals, videos, and trade plans in three asset class areas:

    * Foreign Exchange (EUR, GBP, AUD, CAD, JPY, CHF)
    * Equity indices and ETFs (SMH, XLF, XLE, XLK, and EEM)
    * Commodities (Gold, Oil, and Silver)

TheLFB services are available to all skill-set levels. The global market alert and signal service is great for traders of all skill set levels. Receive 24 hour trader support, and get TheLFB trader advantage.  Sign up today!

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