Markets Set for a Large Gap Down Amidst Global Economic Uncertainty

Given the crisis in Japan, it is important to consider how a slow down in the Japanese economy can affect the rest of the world (Japan GDP is forecast to shift from +2% to -3% since the earthquake). Japan is the third largest economy after the United States and China, so trouble in Japan has a significant effect on the rest of us. A slow down in Japan's economy will mean less use of raw materials and oil. Less demand, means lower prices. Note the drop in the price of oil futures since the quake.

Activity at many Japanese factories/businesses has ground to a halt as power outages as well as the inability of workers to find transportation to get to their job locations, have disrupted work-flow. If this disruption limits the number of mechanical and electrical parts that Japan can produce, it will reduce supply of these products and in turn drive up prices for those who import these goods. So a declining economy in Japan does not bode well for economies elsewhere. This is something to consider when factoring the odds that the current down-turn in the equities market in the United States may continue further.

Another thing to remember today, is that volatility is high, so price swings are going to be greater. We have already seen multiple 10 and 20 point moves on the ES in overnight trading. Don't expect this to change heading into trading today. Wait for trade opportunities to come to you. If you miss a trade, don't chase. This simple piece of advice is even more important to remember in the current market environment, because mistakes can be much more costly given the volatility.

Overall, I continue to be short-biased in this market, but acknowledge the potential for a rally up off this mornings gap down. We could see a pierce of the 1250 lows and then rally from there. As usual though, we'll trade it as we see it.

Key levels to watch on the ES:
Resistance above at: 1261-1263, 1269-1271, 1279-1281
Support below at: 1249-1251, 1237-1239