Current Affairs #1: A Grexit Lurks

Current Affairs: June 29th – 4th of July. This posting is part of a series called “Current Affairs.” Current Affairs will be posted on the first day in the sub-title with updates periodically ending on or before the final date.

 

Monday, June 29th, 2015

Depending on who you ask, the markets were “slammed” today. While this is true, it’s not the story. The story is the way in which the market reacted, not necessarily the reacting itself. It was surprised. It was shocked. It was afraid. Let’s take a look at the VIX rising as much as 39% from Friday’s close.

 

$Volatility Index - INDX
$Volatility Index – INDX

 

Ticker symbol “XIV” is an ETF that rises when volatility remains calm and falls when it spikes. Examining the price action of XIV, you can see investors were completely caught off guard from Friday’s close. This ETF has not fallen as much as this in one day – down more than 17% today – since early 2013.

 

 

XIV
VelocityShares Daily Inverse VIX Short Term ETN

 

How’s that for a Monday morning for you?

 

Tuesday, June 30th, 2015

 

Virtually all of the major markets acted in concert today. All of them opened at the highs or very near the highs and then slowly drifted lower, some diving to new lows before recovering. At the end of the day, most of the indices were relatively flat though slightly up. Volatility as viewed through the Volatility Index opened at the lows of the day (participants were happy the markets didn’t lose ground at the open), before rising to new highs while finally ending the day lower, between the open and the high.

 

SPY_20150630

Markets behaved very similarly today, June 30th, 2015.

Markets behaved very similarly today, June 30th, 2015.

 

All of this action doesn’t signal much to the technician except that there is cause for a pause. And maybe expectations have shifted downward somewhat because if this were truly a passing fancy, participants would expect the markets to quickly recover over an incident that “shouldn’t affect US markets much” anyway. Normally when you see small-bodied candles that hover around the lows of a large bearish candle, consolidation is the most likely outcome. Given the violent nature of the volatility index, consolidation – or worse – may be more likely than recovery in the short term.

 

Thursday, July 2nd, 2015

 

Markets ended the (short) week mixed. After the jolt they experienced on Monday, markets have remain relatively stable, although have not recovered their losses. Depending on who you ask, the Greek vote will have dire consequences or none at all for US markets. The word on the street is that a “no” referendum vote will signal the exit of Greece from the Eurozone. However, when analyzing markets from a technical perspective, it is not possible or advisable to predict geo-political events for even if predicted correctly, may not cause the coincident predicted reaction from markets as there is always the possibility that events and conditions are “priced in,” and one attempts to become a predictor of both events and their consequences, which is greater than the scope a technician reigns over.

 

 

Grexit humour..

Grexit humour..

 

The Volatility Indicator jumped around all week, and in true jumping fashion, finished the week a perfect long-wicked doji, or “spinning top” classification candlestick. Spinning tops signify short-term agreement, whether about price or in this case, volatility; they may also signal indecision, or humorously, agreement about shared indecision. The famous Charles Bulkowski has measured their performance, here labeled “Rickshaw Man.” Depending on where they occur, they may also indicate stability in addition to indecision. For example, a spinning top candle after a large move may indicate stability as the (hypothetical) price would have been able to hold after the advance. However, a spinning top as an “island” or part of a bigger pattern may be reason for indecision. Let’s take a look at this weeks action…

 

Weekly VIX chart for week of June 29th - July 2nd, 2015

Weekly VIX chart for week of June 29th – July 2nd, 2015

 

You can see from the above chart a virtually perfect spinning top/”doji” right above the 200-week SMA. It remains to be seen whether this is a stepping stone to a greater spike in volatility (and lower prices for markets), or an evening star: a high marked by a doji peak, and likely recovered market prices.

 

What happens when Greece votes no?

 

What happens when...

What happens when…