Sharp selling in US and Europe, but no new lows broken, AUD resting just above 70c, ASX futures down 62 points

Last night's 470-point drop on the US Dow Jones index will send a few shivers down spines this morning, but in the context of the current volatility it is not an unexpected move and it wasn't large enough to trigger 'new' selling. By new selling I mean that no new lows were made. Looking back to the late-August sell-off, we saw US equity markets break hard and down out of their 2015 calendar year ranges; and as soon as that layer of buying support that had been present throughout the year was broken, stop losses resting latent below the bottom of those trading ranges kicked in and short-selling fuelled panic-selling, which saw three huge consecutive moves down on the S&P 500, which you can see in today's second chart. Last night--at this stage--broke neither the August intra-day nor closing lows of the S&P 500 futures, so the territory that we're in now remains an area where recent buying activity would suggest some cushioning should exist.

Last week I did warn that--once broken--the previous 2015 range in the US S&P 500 would give way to a new key level just above 1,800, which is still over 100 points from where that market closed last night. This is not to suggest that this is exactly where we're heading, but it is the key level that traders should be watching out for if the recent August S&P 500 futures daily closing low of 1,871 is broken and markets settle beneath there.

Interestingly S&P 500 volatility (VIX) did not move significantly last night, rising from a previous close of 28.43 to 31.40. This is quite telling, suggesting that last night's brand of volatility is entirely expected and options premiums--which drive that instrument--are not willing to price in big increase in risk from their existing levels (at this stage).

Today's last chart shows the Australian dollar, which has continued it's path downwards through the current down-trend channel, and because these levels have not been tested for six years, the trend channel is proving more useful than support zones and moving averages. Until it can manage to break sideways out of that channel, it may be the case that 'the trend is your friend'; however, Rivkin's FX Analyst Richard Sexton will continue to look for major lows to be put in for this pair and stick, which will be required in order to see some solid buying. Readers might like to take a look at our recent blog article: "Five stocks for a plunging Australian dollar," which was written on 31 July when the Aussie was at 73c.


Source: Rivkin, Saxo Bank

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This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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