Learn Fundamentals Through Technicals

Recently, there have been some massive moves in stock indexes, treasury futures, precious metals and energy. Each sector moved in response to unexpected news. Every week there is a list of upcoming reports as well as estimates of what the data will reveal. Professional traders track consensus estimates so they can react accordingly if the numbers are unexpectedly bullish or bearish. Outside forces that affect price movement are also known as event risk.

Stock indexes declined dramatically when the employment report (Feb. 2) revealed an unexpected uptick in wage inflation. That fundamental event incited a steep decline in equity and treasury futures. When inflation rises it could indicate the economy is overheating. Thus, the Federal Reserve policy makers will have to raise interest rates faster to slow down the pace of growth.

The chart below shows the S&P future from the moment the bearish news was reported. The ensuing two sessions saw a historical decline. A savvy technician marks the prices where the move originated and finished. These are now critical support and resistance areas. When these areas are retested reversals frequently occur.

Stocks have risen steadily for quite a while and at times seemed immune to bearish news. Now we know that the biggest fear for stock owners is inflation. We also learned that interpreting price action immediately after an event will help you understand the vulnerabilities and pivotal prices of the market you trade.

John Seguin
Senior Futures Instructor
Market Taker Mentoring, Inc.

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