The financial sector as represented by XLF got slammed after hours on Thursday, falling more than 2%. The downside pressure is being blamed on an announcement from J.P. Morgan (JPM) in which they stated that they lost $2 billion in a trading portfolio designed to hedge against risks the company takes with its own money. In addition, oil is again under pressure in overnight trade, breaking below its Thursday low. At last check the dollar is nearing a breakout above its Thursday high and copper is busy treading water above its Thursday low. All of these developments are likely to pressure the market as the week draws to a close.
While all of these should have bearish implications, we can’t help but feel a good portion of that downside has already been priced in on the move from 1,413 to 1,343 over the last couple of weeks. Why do we feel that way? Because of the action in the VIX, which fell by more than 6% on Thursday. In our experience, the VIX is the lord of the land when it comes to predicting big down moves in the market. We will say though, if the VIX stays above its low from Thursday that would represent a higher low on the daily chart and signal a move back above 20 could be imminent.
If the market drifts lower at the open but the VIX doesn’t streak higher then we would be inclined to actually get long and position for a bounce. Remember, this JPM news that the media is making a big deal out of is coming out after the market has already declined by 4% or so. Thus, the news isn’t likely to have the same impact as it would have 50 points ago. With that said, the market does appear to be looking for more reasons to sell off as evidenced by its inability to hold onto gains from Thursday. Watch the 1,347-1,350 range on SPX, a break below there could see 1,340 act as a magnet for further downside. Otherwise, we prefer the risk/reward scenario for an intraday bounce.
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