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Market Insights

Russia invades Ukraine: nothing good happens below the 200 daily moving average

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We’re waking up to a pretty unprecedented, sad and troublesome time.

Russia has invaded Ukraine after all the posturing that has been going on for the past few weeks.

And things don’t look pretty.

A brief rundown…

The ruble started the day at the highest opening vs the dollar EVERUSD RUB candy stick chart 1 day

The DAX has opened at the lowest price since March 2021… Germany 40 Candy Stick 1 Day

Wheat and corn futures have gone limit up ALREADY (limit up is when trading is suspended for price moving too high)...

And EURCHF traded down to a level not seen since 2015! EUR CHF1 Week Candy stick chart

And of course, Brent Oil shot beyond the $100 barrier, and WTI is following too. Oil Brent 1 day Candy stick chart

The current situation is dire, and is indicative of a very risk-off regime.

I wanted to highlight something to you in this note.

As the title says, nothing good EVER comes from the market being under the 200 daily moving average for a long time…

Let’s take a look at the DAX initially. Germay 40 a Day movement

You can see that we had a very weak 2021 on the index, with a big range being built up between 14.8k and 16.3k, even with lax monetary policy and fiscal handouts…

The index was in complete contrast to the two main US indices which had a great 2021 (will get onto those in a second)...

But what to note is how price behaved when we got underneath the 200 dma and it’s an important study to make.

We have a changing macroeconomic environment in terms of monetary policy (central banks have been looking to raise rates which is not good for risk assets like equities generally), a weak price action outcome because of this through the last year, and when that flip lower through the 200dma occurred, there was confirmation of the market not wanting higher.

Three weak bounces into the 200dma, using it as support should be some good indication of what the market is looking to do, especially with the tense geopolitical situation we’ve had and are having.

The same can be said for US indices too S&P 500 1 day movement

Above is the SP500. Again, note the weakening price action from last October, and a flip through the 200 dma.

Price action is of course one aspect of a trade to factor in, but on broader timeframes, you want to be looking at what stage of a market cycle we are in. If liquidity is being withdrawn and we are below the 200dma, it’s likely the market is going to find bearish catalysts to send it lower.

If it is above it with liquidity being supplied, then it’s more likely to find bullish catalysts and ignore the bearish messaging. This liquidity is naturally provided by central banks through low rates and QE.

Be cognizant of this over the next few months and pay attention to what the major central banks are saying, even if before you have traditionally been a price action trader!

Side note: the 200dma sounds rather arbitrary.

That’s because it is.

But the fact of the matter is that many Commodity Trading Advisors, systematic funds and algorithms run off the 200dma. It acts as a trigger for them to take action.

Where you can differentiate on this is by being a nimble discretionary trader, with an understanding of the macroeconomic backdrop.

Not investment advice. Past performance does not guarantee or predict future performance.

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