Stock Market Early Morning Insights – June 27, 2016

Reality set in quickly in Great Britain as the “Leave” voters immediately saw the consequences of their vote with the pound dropping sharply, and financial markets around the world in turmoil. The leaders of “Leave” who had been so euphoric after the results of the referendum were announced, were suddenly subdued as the enormity of their actions sunk in. This letter to the editor of the Guardian is a good analysis of the reality of the current situation. It is worth a read. https://www.washingtonpost.com/news/worldviews/wp/2016/06/26/an-astute-online-comment-has-many-wondering-whether-brexit-may-ever-happen/?tid=pm_world_pop_b

In the video I published yesterday https://youtu.be/ILlEnR2ZiUs there is a lot of talk about Friday’s market swoon being a Black Swan event. This a link to a Bloomberg “Black Swan” story published today. http://www.bloomberg.com/gadfly/articles/2016-06-27/black-swan-playbook

This remains to be seen because the major indexes are still trading about major support, and until this support is broken, the indexes remain in a trading range. Yes, the huge gap down on extreme volume was certainly a strong blow to the Bulls who on Thursday were looking for new highs in the indexes. 

Markets will continue to be volatile as uncertainty reigns. We all know the old cliché about how markets hate uncertainty, and it’s true, but for some traders, and option premium sellers in particular, they love uncertainty because it pumps the options premiums up.

Let’s see how this plays out. You should have one thing in mind: capital preservation. If you’re like me your inbox was flooded with emails from trading services that want to lead us through the Brexit turmoil. If these advisors so good at this, why aren’t they just trading their own accounts rather than suckering people in for a large fee?

I get a big kick out of people sending out advice after the fact that if you had seen such and such and the chart the S&P 500 or any other major market index, you would’ve seen this coming. Of course, they want us to join their service so we will know in advance when this will happen in the future. I started investing for my own account back in 1983, and I cannot count the number of these advisory services that have come and gone. In the early days, I even subscribed to a few of them!

For those who stick around long enough, they find that in trading, less is more. The fewer the indicators, the better. It all comes down to a few basics: support and resistance, price and volume, fear and greed, and most importantly, risk control. If you don’t know your risk going into a trade, you leave yourself open to all kinds of emotional battering when trades go against you. You must not over allocate capital into positions. Position sizing and risk are paramount to survival. There is no guarantee that a signal, or a trigger will follow through because every signal becomes a random event.

Using Thursdays extremely bullish candle as an example, traders and investors going into the Brexit vote assumed the vote would be to stay based upon Thursdays trigger. Friday proved this assumption incorrect because the result of the referendum results were a random event. This is why risk and position sizing are so important. The gap down on Friday triggered stops, and many traders lost more than they had risked, but with position sizing, if they used it, should have prevented complete disaster.

Stock index futures are down again, but are off of their lows. The Dollar index is up, the Pound Sterling getting hit hard again, gold is up etc. Surprisingly, the SP E-minis were slightly positive at one point in the overnight session. Be careful, because the markets will more than likely be volatile for some time to come.

STOCK MARKET EARLY MORNING INSIGHTS

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