Zak Mir on the Market Meltdown: Will You Go Rogue?

Most years it is the case that you can bet good money and turn it into even more money on the basis that December is one of the best months to invest. In fact, it is usually the case that if there are no major mishaps by the end of November, those in the market are treated to a reasonably smooth ride. Unfortunately, 2014 has somewhat broken the mould. We had the “traditional” October sell off, but by the end of last month the party was over. The explanation? A collapse in Crude Oil prices – normally a cause for celebration.

However, in this instance, we apparently have yet another reason to get concerned about deflation. According to the doomsters the D word will be the cause of a horrific year for the stock market in 2015. Indeed, the sharp decline for the FTSE 100 last week towards the 6,150 level at worst will prove to have been just a dress rehearsal for a market meltdown. Ironically, I was reminded of this concept over the weekend in Waterstone’s when I came across a new board game called Market Meltdown, with the tag line “Will You Go Rogue?”.

Those of us who wish to emulate Nick Leeson with £29.99 to spend from their hard earned real trading profits of the year can “take on the role of traders betting hundreds of millions.” In fact, it seems that the game has been designed to closely match the casino banking with which we are now all too familiar, as “You don’t need financial wizardry or betting knowhow.” It would appear the game mimics exactly the hiring process of the likes of Lehman Brothers in its heyday….

Away from my Christmas present idea for those addicted to the financial markets, it may be worth taking a look at the state of play as far as key charts are concerned. For the FTSE 100 the setup going into this month’s decline was that we were looking for a break of the initial December range of 6,650 – 6,750. Rather unhelpfully, the index jumped the “wrong” way, given that the RSI had cleared neutral 50, suggesting that a break to the upside was on the cards. But at least the bull flag breakdown was a sell signal to be reckoned with considering that the target while below 6,650 was as low as an uptrend line from the beginning of 2013 at 6,100. The low to date has been 6,144. It may remain the low of the December sell off given the way that the RSI below 24 become so oversold – quite unusual for the UK index. In terms of any dead cat bounce we are looking at a return to the initial November 6,444 level. But it has to be admitted, if the FTSE 100 does break 6,100 again, we would be forced to look to a very bearish start to 2015.

As we are all too aware, the FTSE 100 has been a painful underperformer as compared to its U.S. cousins, the S&P and the Dow. What is interesting about the Dow at the moment is the way that we may have a credible support zone on the daily chart, as represented by an uptrend line at the floor of a rising trend channel from June at 17,080. Nevertheless, it would be perfectly understandable if cautious traders waited for at least an end of day close back above the 50 day moving average at 17,273 before taking the plunge on the upside and assuming an attempt on 18,000 was on its way any time soon.

Perhaps better than the cue from a break in the FTSE 100 at 6,650, or the Dow stalling at 18,000, the S&P Volatility Index gave us a hint that U.S. shares could have hit their best in the near term. The VIX started to rise even with stocks rising to record levels, with this divergence at the bottom of the range towards 12 effective a low risk / high reward buy signal. The index doubled, filling the October gap top at 25. What will be worth noting over the rest of this week is whether the 25 level caps the latest spike, or whether we see a new leg higher – something which would hint at fresh equities losses.

Finally, given the way that Crude Oil is ostensibly the cause of pain currently, it may be worth accessing the monthly chart in order to try and ascertain what the downside here may be? As can be seen, the message from the parallel lines drawn over the past 8 years is that while below the 200 month moving average at $60.25, a 2006 support line projection target as low as $40 could be on the cards over the next 1-2 months.