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One Shade of Gray

Last updated 10/19/2012 4:29 PM EST (GMT -5) 0 Comments - Add your comment

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Neal Gilbert

Technical Analyst, GFT

Follow @FXexaminer

Gray Friday

The bleeding didn’t stop in the second half of North American trade; it just slowed down after a morning that was stricken with selling fever. By halftime, the Dow and Nasdaq had lost close to 1%, and by the time the closing bell rang, the Dow was down near 1.5%, and the Nasdaq dropped an incredible 2%. Currencies and commodities took similar spills on a day that began with everyone remembering what they were doing on October 19, 1987, AKA Black Monday.

Granted a 1.5% drop in the Dow is nothing compared to the 22% drop that was seen on Black Monday 25 years ago today, but the thoughts of markets crashing probably helped investors hit the sell button a little more resolutely. Providing fearful words of discouragement was a non-event European Union Summit, anemic North American data points, and disappointing earnings from Microsoft and McDonald’s with a pinch of a Google drop hangover. Therefore, perhaps Gray Friday is more appropriate moniker given the degree of magnitude of the drop in comparison to the more famous sell off.

This morning’s Canadian release could be the most topical report due to its proximity to next week’s interest rate decision by the Bank of Canada. Canadian CPI printed at 1.2% vs. 1.3% annual expectations and shows that inflation isn’t an issue in the Great White North. Earlier this week, BoC Governor Mark Carney was mysteriously less hawkish during a speech he gave where he said that the BoC may continue to be highly accommodative.

For the past few BoC interest rate decisions, the Rate Statement that accompanied the decision specifically mentioned, “…some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.” If that wording is left off the statement that is released on Tuesday, it may signal that the BoC is no longer thinking about raising interest rates in the near term. With the USD/CAD currently trading below parity, the exclusion of that sentence could send the USD/CAD soaring.

One of the reasons the CAD has been outperforming so much is that the BoC was looked upon as an outlier in the community of central banks that are cutting rates across the globe. Now that the BoC appears to be on the path of falling back in line with its brethren, a sharp snap back on the USD/CAD may be the result.

In Europe, the continued disenfranchisement of French and German views on how to handle the continued Eurozone issues is becoming more apparent. French Prime Minister Francois Hollande is all in for more social programs and spending, while German Chancellor Angela Merkel is in favor of more austerity and fiscal prudence. Being that Germany is the one who holds the purse strings; Merkel will likely continue to win that battle.

Not all was lost though at the meeting as some progress was made on a banking union between the nations of the EZ. Nothing final was decided, and any kind of union may not begin to exist until late 2013, but the groundwork is being laid out for its realization. The frustrating pace at which decisions have been made though didn’t calm the masses and evidently Spain and Greece were not discussed at all.

Earnings Ain’t Over Yet

With the sour mood over earnings so far this quarter particularly when it comes to Google likely won’t fade in the near term. The idea that the internet search giant performed so poorly isn’t being lost on the other internet stocks that are yet to report. A lot of attention will be paid to Yahoo! who will be reporting at the end of trade on Monday of next week.

Funny thing is, Google was supposed to report at the end of trade as well, but accidentally reported during the lunch hour which just led to confusion and panic that carried over to today’s market. Since Google had such a dismal report, many of the expectations for internet based businesses are being downgraded. If Yahoo! were to somehow meet or beat their estimate, it could create a significant surge as the Chicken Little’s return their equity to the market.

Looking Forward

While this week was exciting with all the earnings reports and secondary news items, next week is setting up to be a wild ride. There are going to be three important monetary policy decisions, more earnings reports, European Central Bank President Mario Draghi will be visiting Germany, and US Gross Domestic Product will all likely create a lot of buzz and market movement.

To prepare for these potentially volatile events, please take a look at my Fundamental Outlook: The Week Ahead that will help you prepare for both the fundamental events as well as some technical levels to keep in mind.

For more intraday analysis and trade ideas, follow me on twitter ( @FXexaminer ) and/or Facebook (FX Examiner).

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About The Author

Neal Gilbert, an avid follower of the markets, began working at GFT in 2006, educating new and experienced traders in an easy-to-understand manner. His focus has been teaching common technical indicators, risk management, and sharing his favourite trading strategies. His Braving the Rapids strategy guide can be found on GFT’s website.

Neal conducts live webinars throughout the day, including his” Long and Short of It,” which is a Fundamental Live Market Analysis webinar centred on key economic releases. He also conducts webinars in Basic and Advanced Technical Indicators, Volatility and Risk Management, Trader’s Edge, and Fibonacci Trading and Theory.