A Quick Assessment of the May 6 Fallout on the 5 Cross Market ETFs

May 6, 2010: 3:11 PM CST

Today will be one of those days we reference for a long time to come.

On such days, it’s helpful to take a breath and assess the cross-market movements as seen on the five key inter-market ETFs as shown below.

Let’s look at the daily chart and take a quick overview of the S&P 500, Gold, Oil, The Dollar Index, and Bond/Note Prices.

First, the big news is the massive sell-off on Wall-Street, seen here in the SPY ETF:

No, what you’re seeing is not a data error.  It really happened.  Many of you watched it happen, either right on front of you on the charts on on TV.

Many posts will be written on the “why” of today, but this post tackles the “what.”

It underscores the point that 1,150 was critical support!  Once the level broke, the market spiraled into freefall.  That’s not the reason for the freefall, but it was a factor for many traders – taking stop-losses on a break under 1,150, or getting short under that level.

I mentioned in this morning’s post “Make it or Break it!  Here we Go at 1,150” that if we’re under 1,150, then we’ll most likely see 1,100, and if sellers push under 1,100, then we’ll see a retest of 1,050 (February Low).

I was correct… except I’m sure no one expected all of it to happen in one day!  But that’s what happened.

This is one of those days that the chart speaks for itself.

As a result of the Wall Street panic, Bond Prices surged, as witnessed in the tradeable/popular ETF TLT:

The sentiment of many traders was that bond prices were likely to fall.  The opposite happened.

I have been updating members to watch for a corresponding rise in bond/note prices on any sell-off in the stock market.

Such a large move was unexpected, but the play was forecast.  In one week, we broke key resistance to test the next likely target at the $98 level… tested and exceeded on a massive volume surge.

Next, let’s take a look at key commodities Gold and Oil via their respective ETFs:

GLD:

I also have been mentioning to members that gold’s likely upside target was a retest of the $1,200 level to complete the rounded reversal pattern.

I posted on this previously in “Gold’s Breakout Zones Trapped Between Support and Resistance.”

What we have now is a full mirror image pattern, where the right side of the chart (arc) mirrors almost exactly the left side of the arc.

These are beautiful patterns, and today’s surge in GLD/Gold fulfilled the target for the pattern.

USO:

I think the big surprise this week was the dramatic fall in oil prices, given that many traders expected the oil spill in the Gulf of Mexico to send prices higher.  They didn’t rise; they fell sharply.

It’s difficult to isolate a single pattern in Crude Oil prices, given that we could have a mis-shapen Head and Shoulders or a Descending Triangle (drawn).

Either way, we broke the rising trendline and that helped contribute in part to short-term traders taking stop-losses and initiating short-sale breakout positions, driving the price lower.

Support?  Look now to the prior immediate price lows on the chart.

Finally, the US Dollar Index benefited on news of the Euro’s decline… and market weakness.

The US Dollar Index, referenced by the ETF UUP, broke above an inverted triangle pattern (drawn) at the $24.20 level which sent prices higher on the break.

Remember, the US Dollar Index tends to trade opposite of the US Stock Market and Crude Oil.

It often trades inverse gold prices, but the key to understanding this week has been fear and debt.

Fear causes investors to rush to the safety that treasuries and gold can offer.  As an added bonus, concerns of the Euro collapsing (yes, those fears exist) as well as debt contagion spreading to Portugal, Spain and other European countries, sent investors buying gold as a hedge of safety.

In times of trouble, investors ‘hide’ in gold, so this decouples the inverse relationship of the Dollar and Gold… while the inverse relationship with the Dollar and Crude Oil remains.

I keep members updated of weekly changes and opportunities in my Weekly Intermarket Technical Analysis reports.

This weekend report should be a big one as we assess the fallout, levels to watch going forward, and other factors.

Take time to study the charts, realize that big moves can happen, trading involves risk (sometimes great risk), money management is often key, and it helps to be objective rather than biased in a particular bullish or bearish direction.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

6 Comments

6 Responses to “A Quick Assessment of the May 6 Fallout on the 5 Cross Market ETFs”

  1. CEO Trader Says:

    Great summary of what…now I want to know why.
    Is it because short sellers throughout the rally were dead and today is just a taste of what's to come?
    Was it because the stock market is electronically controlled like a Las Vegas casino machine and the program hit a glitch?
    Was it a profit scoop by the Fed via banks like GS C JPM so they can reduce their holdings and get back in at a lower price? Supporting question….why was the retail trader not able to make a trade during the fiasco, yet we saw a nice bounce? Who produced the bounce then? How can a mistake trade on PG cause everything to follow suit?
    I offer…the stock market here and around the world is a government sponsored ponzi scheme that remains alive via central banks/financial centers. Remember…Bernie Madoff was the Nasdaq chair.

  2. Corey Rosenbloom, CMT Says:

    I think we're all trying to figure that out – even the people on TV!

    We should know more by the weekend.

    There will be a lot of articles tonight written about why.

  3. TheYenGuy Says:

    The fall of oil reflected a violent exit from yen carry trades, including but not limited to the Aussie, the Loonie, the Peso, the Rand, the Ruble, and the Rupe, as investors bought the Yen, FXY, which rose a spectacular 3.8% to close at 109.77. The Euro, FXE, fell to 125.96. The US Dollar, $USD, rose to a 14 month high to close at 84.85. Currency traders sought safety, if it be called that, in the US Dollar.

    This one day violent extinguishment of carry trades was a repudiation of investment risk. The Aussie Yen carry trade, FXA:FXY, fell to its 250 day moving averge. In one day, currency carry trade investment fell back seven months, to the early October level when gold broke out. This extinguishment of carry trades represents a “vaporization of investment liquidity” which places one's investment capital at risk: further declines in the stock market may trade in an illiquid manner, meaning that there may not be buyers for securities: one may not be able to obtain one's funds in brokerage accounts and at money market accounts. I recommend that one be invested in gold and take physical possession in the form of gold coins. Gold, GLD, rose 2.9% today.

    Interest rates on Treasurys soared as investors sought the safety of U.S. government debt. The yield on the benchmark 10-year note, which moves oppoosite its price, fell to 3.37 percent from late Wednesday's 3.54 percent; IEF rose 1.1%, TLT 3.1 and ZROZ 5.8. Investors found safety, if it be called that, in the longer out US Government Bonds: I do not deem sovereing debt to be safe.

    Those short the market profited; for example the Proshares Bear Market ETFs soared
    1. EPV UltraShort MSCI Europe 10.10%
    2. BZQ UltraShort MSCI Brazil 8.32%
    3. EEV UltraShort MSCI Emerging Mkts 8.19%
    4. SRS UltraShort Real Estate 7.78%
    5. SJH UltraShort Russell2000 Value 6.91%
    6. SCC UltraShort Consumer Services 6.55%
    7. SMK UltraShort MSCI Mexico InvstMt 6.52%
    8. SMN UltraShort Basic Materials 6.22%
    9. SSG UltraShort Semiconductor 6.11%
    10. SIJ UltraShort Industrials 5.85%

  4. Bob Says:

    Yesterday's reports of a accidental trade triggering a massive sell-off points to a larger systemic risk. Didn't we learn something from the “too big to fail” risk associated with the financial crisis.

    If a single computer trade can, with one click of a mouse, initiate a trade so big it triggers the overall markets into a free-fall, the financial markets and the overall global financial structure underpinning this economic model is in serious jeopardy.

    When trust is at the core of functionality, fear and distrust result in a system that ceases to function properly.

  5. bernard12 Says:

    The 2-3x etfs are good for day trading and for playing periods of high volatility if you “happen” to know when those will be. I prefer the financials and real estate. Also, it is interesting to see if the arrival of the new small cap etfs will increase volume in small caps in general.

  6. ETF Rewind Pro – 05.06.10 [Courtesy Distribution] Says:

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