Trader thoughts - buying the Dow after 4 down days has a 91% win rate

At Pepperstone, our clients were net short across the EUR pairs, so there were some small profits made here, although EURUSD has pushed back to the pre-ECB levels now and is flat on the day.

Round number support at 1.1800 and the 50-day MA (1.1803) needs to give way for shorts to get any real traction here. Short EURCHF has been the better trade (given the movement), with price making a lower high and reversing off the 100-day MA into the August swing high and former downtrend. This may kick lower – one for the radar.

EURUSD daily

(Source: Tradingview - Past performance is not indicative of future performance.)

German bunds fell 4bp on the day, while Italian 10yr BTPs -8bp, so I guess the reaction to the ECB meeting was net dovish, even though on first blush and as suggested could be the case (in yesterday’s musings), the bank moved to a more “moderate pace” of asset purchases, with Reuters later detailing this was closer to E60-70B. Christine Lagarde was quick to hose this down saying “the lady isn’t tapering” and described it as a recalibration. The fact that estimates of core inflation in Europe for 2023 increased by mere 10bp to 1.5%, despite all the stimulus shows not only that price pressures are expected to be transitory, but one has to ask how on earth do they get to 2%??

GBPUSD has seen good flow too, with the move into 1.3850 attracting a few sellers – a messy tape on the daily, price action needs work to convince the herd will start to move as a collective – otherwise, this is one for lower time frames.

Talking of inflation, this coming Tuesday (22:30 AEST) we see US August CPI, and that may get bonds and the USD fired up – the consensus is for 5.3% YoY on headline and 4.3% on core, which is largely unchanged from July – depending on the outcome the CPI read could move expected inflation and therefore have an influence on real US Treasuries – in turn, maybe gold could break out of its shackles.

As mentioned in yesterday’s live Gold stream the hallmarks are for Gold to be a range trade with 1819 to 1765 the higher probability play – on an options distribution model a break of 1833 over the coming week, the real test for the yellow metal, sat at just 7.4%. We’ve seen small net buying, likely driven by another move lower in US real Treasury yields (10yr TIPS are -6bp) but price is capped at the 5-day EMA.

Staying in the commodity vibe, and Nat gas has seen some good flow and is wearing a 5-handle, with the rally taking the move from the March low to 91%. Lumber has pushed 2.6% higher and copper to has etched out a 1% rally. Crude, on the other hand, has dropped 2%, something clients would generally be receptive too given 59% of open positions are held short. Positions given a nice boost on news China was going after the high energy cost base, releasing additional supply from its crude reserves. Price action wise, a bearish engulfing off the 50-day MA puts us on notice – if this can kick on lower then $66.60 would be a near-term target.

In equities, all the move was in the HK50 and AUS200 yesterday, with Chinese authorities going after gaming plays – Tencent remains a trader play, although while we see decent movement its one that is subject to increased news risk. The lead-in from futures is a touch more optimistic, so we expect a small pop in Asian equities (in the cash) on open, but whether this can be sustained, or whether traders sell into strength is a key point.

US stocks are down smalls, with both S&P 500 and Dow falling for a fourth straight day 2000, with small early gain evaporating and it was one-way selling into the close – a market closing on its low is rarely a good sign. However, on that point, I ran the numbers and saw that since 2000 if one was to buy either index on the following open (after four down days), hold for a day and sell on the next open, the strike rate would be 90.6% - the average win would be 3.9x the average loss. Can history repeat?

Back tested results after four down days

(Source: Bloomberg - Past performance is not indicative of future performance.)

Value seems to have outperformed – with COVID-19 cases falling in over 80% of states (in the US) perhaps the banks and re-opening plays may work better – put the KBE ETF on the radar, or the individual banks, such as BAC or JPM.

Crypto is looking perky with Dot and Link getting some attention. Bitcoin has traded a range of 47382 to 45,562 and you can trade the potential opportunity with Pepperstone.