Monday and Tuesday of last week, the Dow started down 200 points. This came on the heels of the previous Friday, where the Market was also down over 100 points. Then something happened. Suddenly the Market put on 400 points. What changed? Was it price action or sentiment that changed the Market's direction?
Price has been said to be the best indicator of Market direction. Traders identify price action patterns (price oscillation swings from low to high and vice versa) through technical analysis, such as double tops and bottoms, moving average crosses, MACD, overbought, oversold, support and resistance. For traders, price action patterns imply future Market direction. Traders rely on pattern recognition in an effort to succeed. Technical indicators are used as potential stop loss or target levels. Price action is an effective trading system.
But was it price action this week that caused the Market to swing higher by 400 points? Or was it just Market Sentiment?
What is Market Sentiment?
Market Sentiment is the predominant attitude amongst institutional traders, such as hedge funds, mutual funds, etc.. Institutional traders are directly influenced by economic events, assumptions, overall behavior, even gut feelings. Sentiment measures Market optimism or pessimism. Optimistic market sentiment shows market participants willing to add to their existing holdings and acquire new positions. Pessimistic market sentiment demonstrates that market participants are unwilling to add new positions and are liquidating existing holdings.
This last week was driven strictly by Optimistic Market sentiment. Technical analysis did not warrant a 400 point increase in the Dow. How did market sentiment turn optimistic?
Simple. The ECB spread rumors that it would purchase Spanish debt. There was no official German denial. Merkel was on vacation. Germany's Finance Minister, Wolfgang Schauble made no statement one way or the other.
This was followed up by comments made by European Central Bank President Mario Draghi on Thursday, when Draghi promised "to do whatever it takes to save the European single currency."
He basically stated that he would lower the high borrowing costs for Spain and Italy. Draghi told London business leaders that the ECB would "do whatever it takes to preserve the euro," and then said, "Believe me, it will be enough." This left Market sentiment extremely optimistic going into the weekend.
But wait. Is Market sentiment about to change? And will price action once again drive the Market? Over the weekend, Finance minister Wolfgang Schauble finally spoke. He stated in Spiegel that, "For days, it is rumored that the ECB will buy Spanish government bonds in a big way. No, this speculation is not true."
Schauble said that the 100 billion euro package to recapitalize Spanish banks along with an emergency aid of 30 billion was enough. "The short-term financial requirements of Spain is not so great", he said. "The high interest rates are painful, and they create a lot of anxiety -- but the world does not go under if you have to pay for some bond auctions a few percent more."
Schauble's comments may undermine the optimistic Market sentiment statements created by Draghi this week. And here's what we all want to know: were Draghi's comments nothing but hot air, bluff, or outright lies? The Market had dropped 300 points in 3 days. Market participants were looking for any reason to run the Dow and S&P back up. Draghi's comments could not have come at a more opportune moment.
But was it all a fake-out, just to stop the Market from falling even further? If Market sentiment drops out this week, price action will again take control of the Markets, with technical analysis driving the price lower. Watch the Euro's price on Sunday night / Monday during the European day session. If last weeks’ comments were nothing more than hot air, the Euro may be headed back down towards 1.20.
Barbara Cohen CIO, Shadowtraders, and professional day trader, specializes in teaching students how they can be trading futures with their own trading system and trading strategies. Ms. Cohen has helped hundreds of traders achieve their goals trading. Find out if trading futures is for you by attending one of Ms. Cohen’s Free Webinars.