3 key market signals that professional traders are watching for this week
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Local stocks have edged into positive territory to start the week, following a soft lead from Wall Street as the S&P500 posted five straight losing sessions.
And with some volatility creeping into global markets, Chris Weston — head of research at trading platform Pepperstone — has outlined where professional traders are focused for the week ahead.
With options, traders pay a fee which gives them the right to buy or sell a security (in this case, shares) for a given price at a specific date in the future.
They’re based on a set time period, which means they expire. And the expiry date for the latest round of S&P500 options is this Friday.
The breakeven rate for the at-the-money S&P500 options set to expire this Friday is for a 1.6% move in the S&P500 — either up or down.
So as a guide, that setup “offers some insight into the expected movement here”, Weston said.
And over the past six months, price action in the week before the options expiry date has been less than stellar.
“Almost like clockwork, over the past six months the S&P500 has fallen in the week leading into OPEX,” Weston said.
In turn, that sets global markets up with some downside risk heading into the trading.
Then again, if the trend has solidified and markets are ready, “perhaps it’s all too obvious now”, he added.
Weston said the chatter among professional traders suggests that the big S&P500 market-makers are using option positions to hedge risk.
When those positions roll off, “it typically means the index is free to move as it should”, Weston said.
The S&P500 closed the week at 4,458, and Weston said that if US stocks do fall further, then 4,424 is the key level to watch.
That marks the index’s 50-day moving-average, and a clear fall below that could prompt traders to re-test the 100DMA. At that point, “rising equity volatility could spill over into other asset classes”, Weston said.
For now, those spill-over effects aren’t in evidence with some additional strength across the commodities space into the end of last week.
Price for benchmark Brent crude oil have consolidated back above US$70/barrel, while “copper looks to have broken above horizontal resistance at US$4.42p/lb”, Weston said.
And as ASX investors saw this morning, the uranium trade is still well and truly in play.
The opening bell brought with it another round of big gains in the small cap uranium space, as uranium prices climbed back to their highest levels since 2014.
Weston also noted the NYSE-listed Global X Uranium ETF rose by another 8.2% on Friday, taking the year-to-date gain to 71%.
“This is a hot play right now, helped by news the Sprott Physical Uranium Trust had purchased 6m pounds of physical uranium,” Weston said.
Lastly, Weston highlighted the key global data event of the week — US inflation figures for August (scheduled for Tuesday 10:30pm AEST).
Annual core inflation figures are expected to come in at 4.2%, slightly below the previous month.
Weston noted US bond yields edged higher on Friday night, after a hot PPI (supply-side inflation) print and a rare round of dialogue between US President Joe Biden and Chinese leader Xi Jinping.
While markets have so far digested higher annualised US CPI prints, an upside surprise could add fuel to the post-COVID ‘stagflation’ argument, Weston said, where prices continue to rise even though economic growth is slowing.
In such a scenario, US bond yields could rise further, which would put upward pressure on the US dollar. In that environment, gold “may struggle”, Weston said.
“As we’ve seen on the daily charts it lacks a spark, and range trading has been the tactical play,” he said.