Saturday, October 5, 2013

High volatility expected next trading week; shutdown, debt ceiling


Volatility in the markets is usually a good thing. Without volatility we wouldn't be able to make any money, however too much volatility increases risk exposure and goes hand in hand with a lack of direction most of the time. Two major events will dominate the next trading week, the government shutdown and the looming upcoming debt ceiling crisis scheduled on October 17 (although that may be delayed due to the government shutdown). Regardless how both will play out, there'll be a major shakeup in the (global) markets. It's a very important trading week. Will it mark the beginning of a new recession, or are we able to hang on just a bit longer? It's highly likely that there will be a compromise between the two bickering political parties next week, but that's not really the real issue. The debt ceiling crisis is what I'm most weary about. It's a good idea to already take a look at some positions you can take on Monday, and start researching some other trades you could do throughout the week. Here's what I'm looking out for;

Regardless what happens (even if the shutdown is over, there will be an aftermath), the volatility index $VXX will be affected significantly and there's a very good chance it will spike up due to investors bracing themselves for what is yet to come. So, the volatility index is a good index to watch next week. In fact, I think it's the first thing you should buy on Monday if you haven't done so already last week. Another one to watch is the US Dollar index (Index that tracks the USD against six other major currencies), this regarding Forex trades like the $EURUSD, $AUDUSD and the $GBPUSD for instance, the tone will be set in the beginning of next week. Watch the starting trend closely (breakout), it's likely to continue throughout the week.

Furthermore, watch out for stocks which are susceptible to high volatility ($BKS, $S, $RSH to name a few - think retail sector) and stocks which are most likely to be affected due to the government shutdown (Lockheed Martin $LMT, or other companies tied in with the government).

The overall picture can be traded via ETF's that track the Dow $DIA, $QQQ etc), below 15k is highly likely. (end of June, August territory - and that was without a government shutdown - see below).

The Dow Jones Industrial Average is likely to close below 15k at the end of next trading week.
Opportunities

Remember that volatility always creates opportunities, certain quality stocks could become available for bargain prices, and that exactly what I'm aiming on - however, this whole debt ceiling issue has to blow over first before I'm making any sort of bullish trade.

Have a great weekend and happy trading!

-John

Disclaimer:

All opinions expressed, trade recommendations/advice on this website are solely of John van der Munnik and are not affiliated with any investment firm or any other organization. You should not make an investment only based using this website VDM Trading for your trading needs without seeking help from your own financial advisor.