S&P Approaching Inflection Point? V

BarroMetrics Views: S&P Approaching Inflection Point? V

We saw a strong rally across the boards following Mario Draghi’s words in London that the ECB will do “whatever it takes” to save the euro within limits of its mandate. “Believe me, it will be enough”. (The Telegraph)

My normal approach would call for a closing of my short positions on today’s expected pullback; the question ‘continuation or change’ would be answered: “continuation up” (based on the tests I use to answer this question, the Normalised Volume, Buying Control and 50%).

But in a situation such as this, the normal approach would not be the best one. When there is an unforeseen news event, I by-pass the technicals and adopt Pete Steidlmayer’s classification method. I ask,  is this a

  1. Surprise event or
  2. Unexpected event.

A surprise event means the underlying direction re-asserts itself. In this case, the underlying direction was down. An unexpected event is one where the ‘news item’ changes the underlying direction.

The Telegraph article poses the two problems facing the ECB in its attempt to emulate the FED’s QE:

  1. The legal restrictions imposed by its mandate, and
  2. The German’s public growing resistance to more bailout. Germany’s support is a ‘must’ in any attempt by the ECB to by-pass its legal restrictions.

Given the above, I’ll assess Draghi’s comment as a ‘surprise event’. So, what to do about the short position at 1364?

  • Leave the stop at breakeven.
  • Today, we should see a down close – we saw a trend day yesterday and ‘trend days are not good continuation days unless they are the start of a new trend’. In addition the it’s probable that the market is now want to see the ECB deliver on its promise in its meeting next week. That being the case, this supports the view of a rotational down day.
  • If my assessment is correct, this down move will show at least normal Normalised Volume (and Range) and strong selling control.
  • Failure to meet either of those two conditions will lead me to exit the shorts at the close of July 27’s trading.

3 thoughts on “S&P Approaching Inflection Point? V”

  1. I find the Draghi speech interesting and possibly game changing (for the next few months perhaps):

    – It is similar to Bernanke’s Jackson Hole speech on Friday, 27 Aug 2010 (Draghi’s happened on Thursday, 26 Jul). Perhaps the context and price action then could provide some clues

    – It follows Nowotny’s comment recently on making the ESM a bank (giving the market a 1-2 punch)

    – Noyer follows up with comment on monetary transmission

    All in, i must say a pretty well played hand, especially compared to his predecessors who appear to be chasing tails all the time.

    It appears Draghi is trying to ease using words but talk is cheap, let’s see what action follows through next week at the ECB meeting.

  2. Hi Mate

    Thanks for the comment.

    The main issue is the ESM cannot be made into a bank without the support of Germany. Moreover, Draghi does not have the same unfettered discretion as Bernanke, given the ECB mandate.

    That being the case, unless Germany comes to the party, I can’t see Draghi delivering. So for me, I agree, talk is cheap.

    It will be interesting to see if the ECB will fulfill the promises made this week.

  3. Proverb Pro 18:20:
    With the fruit of a man’s mouth his stomach will be satisfied;
    He will be satisfied with the product of his lips.

    Bernanke, Draghi Nowotny, & Noyer are wise & practical men who understand the principle that:
    “Death and life are in the power of the tongue, And those who love it will eat its fruit.”
    (Proverb 18:21)

    Tongue Analysis should be an essential part of the Market Fundamental Analysis! 🙂

    __

    BTW, “mandate’ is the key word of Mario Draghi’s words in London.

    The critical question is:
    What is “within limits of its mandate”?

    Surely, NATO should be within limits of its mandate:
    – No Action, Talk Only? lol …

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