Good morning traders,

Pretty much across the board, from domestic to international stocks, currencies, commodities and financial futures, we are seeing volatility return to the markets.  Also, as we look at world markets, (and this is a gross generalization) most of the moves that have emerged over the 2 and a half trading days have been against the trends that were in force at the end of last week.  As I read news articles, blogs and Twitter posts, it seems a lot of energy is being expended on trying to predict the future, with the typical handful of people making the usual dire predictions.  The thing to keep in mind is that no one knows.  As a short-term trader, I have always found this kind of speculation to be very counterproductive–at best it’s a drain of time and energy, at worst it creates opinions and biases that can be fatal to a daytrader.  My advice would be to pretty much take it one day or one week at a time.

In the case of stocks, we have very strong uptrends that are unlikely to turn on a dime, so, for swing traders, any weakness probably should be bought.  These first countertrend moves should probably be seen in context of pullbacks, which will keep us from trying to pick tops.  However, most indexes are overbought and overextended, so it’s also quite likely we’ll have a pullback with some potentially dramatic down days.  As daytraders, we have to be very flexible in these types of market conditions.  Be prepared to play both sides and just basically prepare yourself mentally for all possibilities during the day.  Don’t be locked in to a higher timeframe scenario that blinds you from what is happening at the turns intraday.

Yesterday was kind of interesting, as I said in my Waverly note this morning:

Yesterday’s moves in the Equities markets were large if taken in context of the prevailing low volatility levels, but it is impossible understand their true significant without a few more day’s price action.  Domestically, large caps held up dramatically better than small caps, but what we find intriguing is that we did not see money flows into traditionally defensive sectors.  If the market “believed” that yesterday’s weakness would have followthrough, we should have seen relative strength in these sectors.  Instead, at the end of the day, we had slight outperformance in Utilities and some Healthcare names, but fairly widespread weakness in Staples—this is not (yet?) the psychological backdrop of a soft market.

As we come in this morning, we are looking at Europe down significantly (Europe broad indexes down about 1.6% – 2.0%), with Asia more or less flat.  Taiwan, which has been the strongest stock market in the world over the past several months, is down 4 standard deviations at -1.9%.  Today’s price action could potentially change the big picture for domestic stocks, especially with the catalyst of the jobs numbers, but the 1256 level is the key inflection point to watch.  Be careful of leaning too short as long as this level is holding.

If the market rallies today, I would focus more attention on Energy stocks than I have in recent days.  Also keep Industrials and Basic Materials on the radar.  MOS earnings could potentially put some ags in play.  Financials continue to be a mixed bag and I would tread cautiously there.  If the market is weak, I will look to Financials and Tech first, but, as I said earlier, they key to a day like this is being flexible.

Metals were very much in play yesterday.  Here, the big picture is relevant:  Silver has been the clear relative strength leader over the past 2 months, but the precious metals complex failed at the highs in late December.  So far, the bulls have been unable to regain those highs and the complex may be setting up for a bigger break.  Be on guard for a potential flush in Gold and Silver… don’t anticipate but do keep an eye on them intraday.

In terms of currencies, the theme so far seems to be Euro weakness and Loonie strength, with the US Dollar getting a slight lift from the Euro.

As I finish writing this, the SP’s have rallied strongly on the ADP number from the 1256 level.  That probably is the line in the sand today, so plan accordingly.