Markets move in and out of balance as they gain efficiency.
Historically, severe market movement is triggered by unexpected actions by the Fed, economic reporting, catastrophic, or geopolitical events.
Last week’s sell off was forecast by weakening Technicals and necessary due to extended gains. Sell-off to the 2730 area in ESH; correlating with 50 Day Exponential Moving Average, 5 % pullback, and .382 retracement back to September highs was expected. An additional 200 point drop to the 2525 area and test of 200 D EMA after Monday’s RTH Close was not. There was no apparent trigger other than ‘program trading’. Please note if inflation was the big concern, then Oil and Gold would have moved significantly higher. The over-reaction lower would have been in Bonds and Notes not the ES.
Structurally the market continues to strengthen evidenced by 80% of companies reporting better than expected Q4 earnings, and the Atlanta Fed projecting a Q1 GDP above 4 %. Just in time inventory technology, capacity utilization under 80%, and a significant portion of the labor force remaining on the sidelines, global manufacturing competition, combined with increased capital made available by the Tax Cut and Jobs Act, and no evidence of significant inflation beyond the Fed’s 2% target, make it difficult to support inflation argument.
Note the big drop to 200 D EMA and .382 retracement back to the low printed on November 9, 2016 Election Day, came after the Close of Monday’s RTH session. Occurring when cash markets are closed thus reducing liquidity and exacerbating the impact of program trading.
Bottom line, market now has potential of being underpinned by 12% retracement. Expect volatility to continue as ESH works its Daily Cloud (Ichimoku Kinko Hyo) to firm over the next few weeks. First sign of next leg up will be a Daily Close and then full candle body printing back above the 50 D EMA and the Top of the Daily Cloud.
There is no fire.