The summer of selling 2016: Brexit slams the Dow Jones futures

June 25, 2016 03:07 PM

Fundamentally, Brexit slammed the Dow Jones more than 600 points on June 24. Not even the smartest hedge fund managers nor the English book makers predicted this outcome and the fall out for U.S. equity indeces like the Dow is not over. The bookies in the UK predicted only a one in four chance that Leave would win out. They made money I'm sure as folks bet that Remain would win.This will be a summer of selling in the Dow as I've predicted over the last several days and weeks. Brexit is just the catapalt.

The Dow doesn't like uncertainty and there is more now than pre-Brexit. Will Boris Johnson, ex-mayor of London who supported the Leave campaign from the start be the next Prime Minister of England? Will the British pound recover from the worst day in 30 years? Will there be a "snowball" effect causing other nations like France to leave the European Union? Will the petition that already has a million plus signatures for a re-vote actually push a re-vote? When will Britain actually leave the Euro Zone? Most importantly, how much lower will the Dow go?

I'm a believer that the Fed will continue to make excuses as to why that can't raise interest rates, Brexit being the latest, and before it's over we will be looking at Q20. Britain just forced a recession and probably their first round of quantitative easing with Brexit and what many are calling their day of independence. A small price to pay I guess for safer, more secure borders which is the biggest reason why Leave won out I believe.

At any rate, the selling in the equity index futures will continue as we head into the "dog days" of summer and the employment numbers for June I predict will be appalling. There will be one stress after another on ideces like the Dow Jones. 

There are great ways to make money when markets go lower and that is with put options that provide a limited risk for an investor. It's been my experience that when studying charts, markets come down faster than they go up. They tend to take the escalator or the staircase up and the elevator straight down.

Or better yet, they jump out the 50th story window and go splat on the sidewalk below.

Contract Specifications: YM

Symbol - YM

Name - Dow Jones Industrial Average mini-sized (YM)

Exchange - CBOTM

Trading Months - HMUZ

Trading Unit - $5 times Index

Tick Size - 1 point ($5.00 per contract)

Daily Limit - 7.0%, 13.0% and 20.0% decline below the Settlement Price of the preceding session (limited to 5.0% outside of RTH)

Trading Hours - 5:00p.m. - 4:00p.m. (Sun-Fri) CST

Last Trading Day - Thursday before the third Friday

Value of one futures unit - $5

Value of one options unit - $5

From a technical standpoint, I am bearish as well, I have added my favorite technical indicators to the charts below. I have coined them the "10/20/50/BB Trend Finder.". They are the 10- (red line), 20- (green line) and the 50- (blue line) day simple moving averages (SM). I have also added Bollinger Bands or BBs (light blue shaded area) and candlesticks (the red and green bars with the candlestick wicks, and on a daily chart each bar represents one day of trading). 

These few technical indicators can tell me many, many different characteristics about the market at a quick glance, so I have them saved on my charts in markethead, so they can populate on any chart I choose at the click of a mouse.

On the daily YM chart above, the market had its single worst day since March. Or it's best day of selling on the chart as the E-mini Dow futures plunged more than 600 points. This moved pulled the market down below the BB's and into oversold territory in one day. Remember, markets can remain oversold for long periods of time.

Also on the chart above it is important to note that with this day of selling, the market has taken out all areas of downside support.

On the monthly chart above the market has rested on the support of the 10-period SMA. Once the 10-period SMA is taken out on the downside, then the next area of support comes in at about 15,400.

About the Author

Matt McKinney is a full-service options broker at Zaner Group both buying and selling energies, metals, grains, softs, currencies and the 30-year bond market. My strategies include time frames of 45-120 days with the ability to liquidate at any time. I can be reached at mmckinney@zaner.com.

Whether you're a novice trader who wants to participate in options on futures or an experienced trader, you can also check out my blog at http://www.mmckinneyfutures.com/.