August 2015 Monthly Review – The Markets Black Monday crash

Yet another Black Monday for the financial markets. 
  

This month has been quite strange for the financial markets. It started off quiet, with most of the forex pairs moving slowly and trading in narrow ranges. The price action felt odd, but it was at least justified by the market sentiment during the holiday season. Then, by the end of the month things started to pick up. The Chinese stock market entered another phase of uncertainty and this sent jitters into the forex market. On Monday, the 24th everything went haywire, with currencies bouncing and crashing by several hundred pips in a few hours’ timespan. That hit us hard, and we hit our profit to make 177 pips profit so far this month. The market relaxed somewhat after the strong US GDP numbers were published, but there´s still a heavy scent in the air which kept investors on their toes.

Forex Signals

The market this month started out very calm and so did our team. Most of the big fish in this business leave their desks during the holiday season, so the moves have been steady and small for most of August. Pairs traded within ranges, which made it easier for us to make a few bucks. EUR/USD traded between 1.12 and 1.08, as you can see in the H4 chart, so we sold on top and bought at the bottom of this range. That proved to be successful as our first week finished with a 218 pip profit. On the second week, we had a bad run on Wednesday which reduced our profit but we still finished the week 60 pips in the plus. The third week was a bit better and we made 97 pips by Friday afternoon, even though the volatility really increased during the second half of the week. Monday of the fourth week was the day the market almost crashed. NZD/USD and JPY/USD went down about 600 pips and EUR/USD went up 350 pips. We got caught in the middle with a couple of long-term signals that day and lost 535 pips, but recovered most of them during the remaining days.

The top and the bottom of the range provided some good trading opportunities during the first part of the month.

Even with the ordeal of Black Monday in the fourth week of August, we still managed to come on top with a 177 pip profit. This profit might increase if we perform well next Monday, the last day of the month. Since the first three weeks were pretty quiet, the number of signals we issued during that time were below average; we issued 17 signals a week in the first three weeks of August. As the volatility increased, the price reached our take profit/stop loss targets quickly so the number of signals increased to 26 in the fourth week. Not considering next Monday’s business, we issued 77 signals in total this month. 56 of the signals hit the profit target while the other 21 hit stop loss, giving us a 73:27 win/loss ratio. That´s slightly under our last few months’ performance, but given the turmoil in the forex market it still is quite positive. Even with a long-term forex signal on Monday which put us 340 pips down, USD/JPY remains our most profitable pair. After that signal, we opened two more buy signals which more than made up for that loss, and this pair was worth 138 pips for us this month. As you can see from the chart below, we opened a buy forex signal on Monday. The bigger arrow indicates a spot just above support; hoping it would contain the price, little did we know that it would decline for another 400 pips in the next 15-20 minutes. After taking that loss, we opened another two successful signals (two smaller arrows) and caught most of the reverse up.  

The arrows indicate where we opened our three long-term signals in USD/JPY.

The market this month

We have seen some nice movements and price action in the forex market during the last few months, but by the end of July the volatility decreased substantially. So we entered August with a very relaxed market due to the holiday spirit. The price action was slow and the currencies traded within the ranges that were put in place the previous month. Most days USD/JPY traded in a 30-40 pip range and EUR/USD moved slowly back and forth between 1.08 and 1.12. Both were extremes for July, without even trying to have a go at resistance and support levels. This continued until the end of the third week.

By the end of the third week, things started to get interesting. The Shanghai Composite, which is the main Chinese stock exchange floor, suffered a mini crash in June and by the third week of August we saw another wave of selling. It declined from 4000 to 3000 in a few days which accounts for a quarter of its value. The Euro is the cheapest of the major currencies to borrow since the European Central Bank (ECB) holds the lowest rates, so a large chunk of the stock holdings around the globe have been bought by global investors with Euros. In times of trouble, investors sell the stocks off and convert them into the currency in which they were bought. That´s the reason the Euro rallied so strongly during that time. And it´s not just the decline in the price of stocks, the other thing investors hate just as much as value decline is the volatility and uncertainty. The Shanghai Composite sent shivers to investors elsewhere and the stock markets around the globe became very uncertain, which has brought in extra demand for the Euro.

During the last three days of the third week when the Chinese stock market was in trouble, the Euro made reasonable gains and EUR/USD broke above July´s high, which was a sign that the market was shaken out of its holiday mindset. But Monday of the fourth week was dramatic as the panic kicked in and the market wasn’t taking any prisoners. EUR/USD jumped about 350 pips that day while USD/JPY fell nearly 600 pips; this was the largest daily decline in this pair since 1998. Being tied to the Chinese economy, the Aussie lost 250 pips that day but the biggest loser was the poor Kiwi. It lost 6 cents against the USD and 10 cents against the Yen, which is about 12% of its value. With the slowdown of the Chinese economy, oil has been declining steadily in the last two months, reaching $37.50 this month for WTI and $42.50 for Brent crude. It made a nice $4.50 jump on the last Thursday after the US GDP was revised up.

Economic Data

This month the economic data provided more evidence that the Q1 slowdown of the US economy was only temporary. That doesn´t mean we will see a rate hike in September though; the global financial turmoil and the slowdown of the Chinese economy are putting pressure on the FED to keep the rates on hold much longer. Domestically, the only sector of the US economy which is not performing as well as the rest is the manufacturing sector. All the other sectors have posted positive numbers this month. At 60.3 points, the ISM non-manufacturing is well into an expansion, with the retail sales picking up and the core producer inflation going up 0.3% this month against the 0.1% expected. The house sales expectations and the unemployment claims remain at a comfortable level, but above all the unit labour costs increased 0.5% on the second quarter, meaning the labour market is doing pretty well.

Elsewhere, the Chinese economy is still suffering. The final manufacturing PMI, which came out 47.9 points, showed another month in contraction… and when the main sector is contracting it is a clear sign the economy of that country is not in the best of shape. The commodity economies of Australia, New Zealand and Canada are suffering as well as a result. The unemployment rate in New Zealand went up from 5.8% to 5.9% this month while in Australia it jumped 0.3% this month from 6% in July. In Canada, the manufacturing came out 1.1% below expectations this month and the inflation is virtually flat. Things have remained unchanged in Europe and the UK this month: Europe is pretty slow as shown by  the GDP coming out 0.1% below the expectations and the UK is keeping up with the US.

Pair analysis

The first two and a half weeks were very quiet as the EUR/USD respected last month´s high and low. As we can see in the daily chart, it traded between the two bottom lines which lay at 1.08 and 1.12, but by the end of the third week the volatility increased and it broke above the middle line. Still, it closed the week below the May and June´s 1.1450s high. But the market opened on Monday and the sell-off in stocks sent this pair flying. Not only did it break above 1.1450 (which came in line with the 100 MA) it broke the 1.15 psychological resistance level and reached as far as 1.1718. It reversed in the next four days and the 1.1450 prior resistance seems to be turning into support. Now the stochastic and RSI are headed down after reaching overbought levels, which is indicative of further declines. The weekly chart forms another bearish sign as the price failed to stay above the 50 MA after briefly piercing it, and the weekly candle has formed a massive upside-down hammer suggesting a reverse will follow.    

The price is back down within range.

This week closed with a big reverse hammer.  

The Chinese economy has been going through a rough patch during the last few months and the economy of New Zealand has been suffering too, since it is very affected by commodity prices that China imports. That weakness will obviously be reflected in the domestic currency, as the NZD has been in a continuous downtrend for four months now. It had a half-hearted go at the upside this month, but it only managed to touch the 50 MA in yellow on the daily chart. After that, the sell-off in the Chinese stock market escalated andNZD/USD fell about 600 pips. On the H4 chart, this pair has tried to consolidate in the last 5 weeks, but it broke the bottom line which is now acting as a resistance level. That´s a sign that this pair will have more troubled times ahead.    

The 50 MA provided strong resistance.

The broken bottom line of the range has turned into resistance now.

In conclusion

This month the market had two different behaviour phases. In the first two and a half weeks, the market was very quiet and unwilling to take any directions due to the holiday season. In the second part, the crash in the Chinese stock market brought fear into the forex market and made irrational moves by hundreds of pips. Most of these moves have been reversed now, but the volatility remains high. We finished the month with a 177 pip profit despite all the havoc. We expect the volatility to remain high in September when the traders come back from holidays and reassess their positions.  

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ABOUT THE AUTHOR See More

Skerdian Meta

Lead Analyst

Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.