Some commentary on the Irish Situation.

Good morning.

My first week for some time of non-blogging, and a very interesting week its been. The Irish/European Crisis seems to have come to a head (for now), and the markets saw some very strong corrective activity, which has certainly helped to de-froth them, particularly in the wake of the QE2 announcement.

In line with my earlier comment from this week, where I announced I will be slightly stepping back from daily blogging, I still intend to occasionally update my page, including a weekly blog at least. I hope to get some analytical stuff out on Monday. For now however I would like to post (or refer) to a couple of articles from other contributors.

The first posting is by NAB economist, and ex-colleague of mine Nick Parsons. Nick is a brilliant economist who has great understanding of markets from both an economist's angle, and having worked closely with traders for many years, a trader's angle. His commentaries and writing style are wonderfully perceptive, witty, and slightly acerbic, all at the same time. Here is his commentary for today (19th Nov):

As millions of freckle-faced, tousle-haired Irish kids set off for school this morning, they’d be well advised to pay attention in their German lessons. It might not be a bad idea to stay awake during Economics too, and they might even find basic Mathematics comes in pretty handy. Their parents’ generation, unfortunately, spent too much time in Politics and Creative Writing classes whilst making the elementary mistake of studying History but failing to learn from it. We have the laughable but tragic situation today of hearing Irish political leaders insist on what is non-negotiable as if somehow they will ultimately have any say in the matter. To be sure, it’s the only bargaining tool they have and they might as well use it, but threatening to bring about the collapse of a European project which has been more than 60 years in the making will cut no ice in Brussels or Berlin. Dressing up a sovereign bailout as a mere accounting issue, a technical plan to provide a loan to the banking system, should fool no-one. Crucially, it’s unlikely to impress the European Central Bank, which is finding its mandate to ensure price stability increasingly undermined by a new requirement to become the lender of first resort to a bankrupt system. The Frankfurt-based ECB is likely to be headed next year by a German central banker. This will be the minimum price for German acceptance of a commitment to underwrite the EFSF for what could become perpetuity. The German economy is booming and a German-led ECB in Germany will increasingly set interest rates for the good of Germany. So it’s not just the Irish who should concentrate in school today. The rest of Europe, like it or not, is likely to find out soon that real power lies with creditors, not debtors.

The second article of the day is from the 'Daily Telegraph' newspaper. The Telegraph is the most widely read of what are known as the Broadsheet newspapers here in the UK: These include -'The Times', 'The Financial Times', 'The Guardian', and 'The Independent'. The article is entitled 'Margaret Thatcher knew the single currency would devastate Europe'. and can be viewed by hitting the highlighted link. I have always considered Margaret Thatcher as the greatest British Prime Minister during my lifetime - by a country mile. However she and many of her followers have often been maligned in the British press, yet she was one of that rare breed that had the courage of her convictions and did what she thought was right for the country, not what was popular, or right according to the opinion polls and columnists.

I think if you read the piece fully you may appreciate our lucky escape here in the UK, and although Margaret Thatcher fell from power in the early 90s, I think her influence and opposition at the time to joining the Euro built up enough of a head of steam to ensure that it never materialised in the ensuing years. In fact looking now at what is happening a short hop across the Irish sea from us, I can't helping thinking that joining the Euro may have achieved for Germany over the UK what 2 World Wars failed to achieve.

At that point I will bid you all a great weekend. 

Less Regular Blogging.

Dear readers and fellow traders.

Just a short notice to inform you that I will no longer be providing regular updates on a daily basis. I have recently become involved in a new project (related indirectly to trading), which is growing and now constraining me time-wise. I will continue my own trading (which I doubt I'll ever stop), and I will try and provide occasional updates. However, this will almost certainly mean many of you will probably cease stopping by on a regular basis. - Therefore may I say I would like to thank you for following me, and allowing me to publish this blog, which I have enormously enjoyed doing, and I wish all of you the best of luck in your own trading endeavours going forward, whatever they may be.

Regards

Gooner70

The PIIGS and Risk aversion - The sequal.

Concerns over European Sov Debt continue to rattle these markets. Irish 10 year yields are pushing close to 9%, to put some perspective on that just two weeks ago they were below 7%. The Irish contagion has spilled over to other PIIGS as CDS prices have risen strongly for Portugese, Spanish and Italian govt bonds. Meanwhile traditional safe-haven currencies USD, Yen and Swissy are outperforming the Euro and the risk orientated currencies such as the AUD. - Stocks have been wavering through the week, however overnight futures markets have seen heavy losses, and the risks are growing of a much deeper setback. The chart below is the SP500 e-mini futures over the past year. I have highlighted strong similarities between the period Dec 2009 to May 2010, and the period over past few months, the likeness is almost uncanny. - If history were to repeat itself here, (or more to the point rhyme), then things could start to get very ugly. The runaway train which was the SP500 last week may now be getting ready to come of the rails.

Something for the weekend:
Here in Britain, these rain-swept islands perched off of the North-West coast of Europe, we have generally been deemed largely irrelevant in the great race into space. The first country to send anything successfully into space were Germany, unfortunately for us in the UK, we were the intended target, with most of Germany's V2 rockets falling back from space and on to London. Since then the US, Russia and China have all managed to send people into space, plus the odd dog and monkey. We did try sending a probe to Mars a few years back, but we don't think it ever actually got there. -  Finally however, I am very proud to report that Britain finally has a space first, something which has been achieved at a mere fraction of the cost of the many Billion Dollar programmes achieved by other nations. Britain has become the first nation to put a paper plane into space. The story can be seen by hitting this link.  -- So lets hear it for British genius, ingenuity and inventiveness, and from now on, whenever you think of nations pertinent to space exploration, please remember to include Britain very firmly on that list. 

Have a great weekend .........

Other markets may be pointing to equity correction.

The past 24/48 hours has seen some big swings on Bonds, FX and Equities, though ultimately in many cases they have not actually move that far. The US has a public holiday which may induce a calming effect on markets for today. A few notes on a couple of themes I touched on yesterday:

GBPUSD FX bounced strongly, and has broken the 1.6135 area which I thought may cap it. The strong bounce has also kept the Cup + Handle pattern scenario alive, though the '3 Black Crows' patten I highlighted yesterday still weighs heavily on this, for now I would like to sit back and see how this develops and whether the 1.6200 area can cap this for now.

EURUSD FX continues to under perform, linked closely to shenanigans occurring on the periphery of the Eurozone. Although it overshot the 1.3700-1.3800 support zone yesterday, it did not proceed too much further, and I think this zone may still offer some support, however the ease with which 1.3700 was broken does not bode well. 


The sustained strength of GBPUSD and recent weakness of EURUSD fits well into EURGBP FX moving lower. A couple of weeks ago this cross rejected the upper line of a large downward sloping trend channel which has been forming over the past 2 years, this suggests further significant weakness may be a theme for EURGBP in coming months (See chart below).

A couple of other developments which may be significant. USDJPY FX may be putting a base in. I say 'may be' because trying to pick or even identify a bottom on the USDJPY is tantamount to skating on thin ice. The chart below is the 2-Day Candle chart over the past 9 months. 

Also the US 10 year yield has possibly completed an Inverted Head + Shoulder pattern, the chart below shows the US 10 year yield daily. If this is confirmed over the next few trading days, yields could push back over 3% in the next few weeks

To summarise, it looks as though some of the trends of recent weeks are under threat or facing corrective forces (EURUSD,USDJPY,10 Year Yields). These markets moved pretty much in tandem with the SP500 rally in recent weeks, if a correction were to take hold on these markets, this may suggest a co-ordinated correction in equity markets over the next few weeks.

SP500 , GBPUSD and EURUSD updates.

Last week I put the idea forward that we may see a 'Buy the rumour - Sell the fact' type reaction to the QE news, however I suggested it may not happen until the payroll data was behind us. It is possible this may be happening, though whether this is part of a bigger bearish turn I have no clue at this stage. First support, and strong support, should be at around 1195/97 where the base of the rising channel since early Sep occurs.

GBPUSD FX

Last week's 'Cup + Handle' pattern breakout may have failed. Yesterday's move has seen GBPUSD move back below the breakout line, although it is only a marginal break thus far. Nonetheless, the speed of the rejection of the breakout, suggests to me at this stage that this may be a valid failure, interestingly it has also occurred as a very bearish '3 Black Crows' candle pattern. Breakout failures can often be more telling and significant than successful breakouts. A sustained GBPUSD break below 1.5800 should confirm the failure, and could set-up a move much lower to around 1.5300. I would expect 1.6130 to act as a firm cap if this is going to move lower. 

EURUSD FX

Short-term the EURUSD may have find support in the 1.3700/1.3800 area, whilst on the 4 Hourly Candle Chart there is some sign of Bullish Divergence on the RSI and the MACD Diff, a correction back towards 1.3900 - 1.4000 can not be ruled out at this stage, whilst a clear break of 1.3700 could suggest more downside to come.

SPAIN IRELAND V SP500

I will keep this short and sweet today... Spain Credit Default Swaps are soaring, as have Irish CDSs been. In recent weeks Greece and Portuguese CDS have soared. The SP500 has shaken these off so far bolstered by QE, it may continue to do that, but I can't help thinking that a lot of good news is now priced in, whilst new global concerns may start to weigh, particularly as Spain is a much bigger fish than either of the other three. The charts below shows Spain and Irish CDS versus the SP500 over the past year, I have highlighted previous periods where CDS prices started to soar and how the SP500 reacted at the time.

My SP500 system passed its summer test. +. EURUSD and Spain worries.

Over the past couple of years I have been monitoring the performance of a 'Trend-Following' system which I created and which I have back-tested going back to 1970. The system faced a major test of its performance this summer, when equity markets went through a torrid correction and phase of up and down swings: Various moving-average indicators (such as the 50/200 Death Cross), and other signals such as the 'Hindenburg Omen' produced Bearish signals.Though my system came close to giving a bear market signal, it ultimately failed to trigger it and retained its Bull Market signal, which was generated in August last year. The system can either be 'Bullish', 'Bearish' or 'Neutral'. I first mentioned my system in a post on the 29th July (Can be seen by clicking here). The system, being a trend following system, is not used to give advance signals, however it does seem to be doing a great job of capturing the underlying trend of the market. Without giving too much away the system is a combination of moving average and trend strength, moderated by volatility and a stop-loss rule. The chart below is the SP500 Index on a Log-Scale from 1970 to 2010, below that is my Bull Marker/Bear Market signal produced by the indicator.

The following is a basic comparison of this system versus the 50/200 cross, Buy and Hold, and 3 year compounded Treasury Yield,I have kept it as simple comparisons. Thus as well as producing a far better return than all these measurements, the system had a much better ratio of winning signals to losing signals on the 50/200 day crossover method; my system had 75% of all directional signals producing positive results, versus 55% for the 50/200 crossover. 

 
As I said the system is trend following not leading, however it does provide a reliable guide to longer-term  market conditions.

Getting away from my system and focusing on the short-term outlook, I believe the SP500 may be vulnerable to some profit-taking. Last week's big news is now out of the way, the April 2010 highs having been hit, a great run-up for stocks since early Sep is now at a mature stage, and elevated concerns of the European Sov Debt crisis are re-surfacing, with all this I can not help thinking some longs may wish to take some chips off the table.  

EURUSD and the EUROPEAN SOV DEBT CRISIS.

Concern continues over the re-emergence of the European Sov Debt Crisis, this continues to undermine the EURUSD. Friday's post highlighted the weak daily structure of the EURUSD on the daily charts, the weekly chart also looks unfavourable for the EURUSD and suggests a possibility of deeper losses to come. I have shown a weekly chart of the EURUSD below, last weeks price action produced a 'Shooting Star' candle. I have highlighted previous 'Shooting Star' candles on this chart.

For the last couple of weeks the Sov Debt crisis has been bubbling under again, I focused on Ireland and Greece in a post a couple of weeks ago whilst Portugal has also been getting much attention. However now the Spanish yield spread v Germany is starting to re-widen and Spanish CDS prices are also pushing up towards their highs of the summer. The charts below show both of these over the past 6 months, technically they both appear to have broken out of a large triangle pattern, which suggests higher levels ahead.

The market, whilst paying lip service, has largely ignored the Greece, Ireland and Portugal woes in recent weeks, however if Spain starts to have problems, then it will have trouble ignoring this, the table below highlights the glaring reason why this would be so.

One final point on the EURUSD, the whole pattern since the June low may be starting to take on the appearance of a '3 Peaks and a Domed House' Pattern (see chart below). As I have mentioned in the past these are very rare patterns but can be extremely dynamic if they follow through. This is one to keep an eye on.

SP500 runaway train, EURUSD faces Sov Debt worries, Trader Psychology and the best Technical Analyst,

The SP500 continues to surge it has the full force of the Fed, and the market trend behind it right now. I don't much care at this moment whether it is overvalued or undervalued, whether its behaviour is rationale or irrational, right now it is a runaway train: If you are not already on the train, then it ain't gonna be easy to catch, however I'd rather be on it than standing in the way right now.

The big event today of course is Non-Farm payrolls, this either has the ability to accelerate the speed of that train, or to slow it down slightly, but I doubt on its own its gonna stop it. Also I am keeping half an eye on the European Sovereign Debt issue, this is bubbling under again, particularly in relation to Ireland, much like it was in April this year. Already this morning the EUR is well off yesterday's highs, I can not rule out the possibility that the EURUSD slips back to last week's lows, or even lower. It may even be possible that the high for this move is in for now with regard to the EURUSD at least. The chart below shows the EURUSD with 2 day candles, note how the RSI and MACD are showing very strong Bearish Divergence, in a similar way to the early 2008 peak and late 2009 peaks. Finally I have re-posted the EURUSD chart I produced a couple of weeks ago (See lower chart), back then I hinted that price action suggested an extended consolidation is possible, this seems to fit in with a failure in the Euro in the low to mid-1.4000s and further consolidation in the the upper 1.3000s to low 1.4000s..  

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Some more on trader psychology: I was recently writing an article for someone on the characteristics and traits of successful traders. One of the major traits all successful traders have is their ability to think independently and when necessary stand back from the crowd. - I used an example from my younger trading days working at an Investment Bank in the City to emphasise this.

It occurred at the start of the 1994 bond bear market. - Bonds had soared over the previous 12 months, I was part of a trading group of 12 traders. Early in that year all the talk had been about further Federal Reserve rate cuts. - Bolstered by a strong trend, and a favourable economic scenario, all the traders loaded up on the same position (long of bonds) to take advantage of the suspected rate cut. - I had a slightly different view, I was somewhat anxious about the state of the market; furthermore our ‘Technical Analyst’ was  recommending a short position; her view was that the market was dangerously overbought and ripe for a (severe) correction,and possibly a full trend change. Most the traders were, like me, fairly young and relatively new to the game, most of them had jumped on this trade largely because the two most senior traders were on the trade. - Close to the end of pre-meeting day, I had actually wanted to go the other way, but found myself compromised, however I cut my long position and went flat.

As expected the Fed cut rates by 50 basis point that night, however after a momentary jump in bonds, the market turned around and started dropping and just continued to drop, by the end of the next day bond prices had made a serious and dramatic turn lower. Although the Fed had cut as expected, they also indicated that the economic cycle may be turning and that this could be the last rate cut. Some traders cut quickly, but most hung on in the hope that this would turn, eventually suffering heavy losses and being forced to cut.

This highlights the danger of a lack of independent thinking. Some of the younger traders learnt a harsh but valuable lesson from this, those that heeded this lesson went on to become highly successful traders.

For the record the Technical Analyst at the bank at the time was Carol Harmer. She was the best tech analyst I have had the pleasure to work with. She still provides daily technical analysis for intraday traders across a wide spectrum of markets from her base in Gibraltar. - Her link is Charmer Charts which can be seen by clicking here. - She offers potential new customers a free trial of her service, I would recommend giving her service a try.


On that note, I will bid you a good weekend. However before I go, 'Something for the Weekend' :  In honour of US equity markets- Soul Asylum and 'Runaway Train'.




Have a great weekend.

SP500 further gains and USD further weakness still on the cards.

QE is now done and dusted, the market was not disappointed, and the green light has been given for equities to rally and the USD to weaken further. On the face of it, that is how it seems, and until I see anything to tell me otherwise I think that is the way forward for now. -- I say this as someone who does not look through rose-tinted glasses and think everything is alright for now, far from it, I think dark times lay ahead. The US economy as well as most other major western economies are in a mess caused by such excessive levels of debt, that it will takes years, perhaps tens of years to work off. - The ideal would be for moderate levels of inflation to ensue for a number of years, not too hot/not too cold, but enough to raise asset values, whilst growth increases employment, and consumers, governments and municipals are able to repay debt and banks continue to repair their balance sheet. At the same time the emerging or emerged economies can continue to grow, whilst their currencies revalue over time and the world starts to re-balance.  At which point all the fairies at the bottom of my garden could hold a little party and perhaps invite Father Christmas.....

As I stated above, there seems little in the wake of the way the market has reacted to the QE announcement thus far to alter my short-term view, the SP500 has run into the consolidation zone from April this year, which may provide some resistance, but I see little else currently standing in the way of higher equities levels right now. 

GBPUSD FX still seems on course for an attempt at the 1.6700 area, as per Tuesday's analysis. The Cup and Handle pattern has held the 1.6000 line (despite a brief intraday dip below), and looks to be following the textbook behaviour of this pattern. - See chart below - The text book pattern and Tuesday analysis can be seen here. 1.6000 should now act as solid support; much below there is likely to be indicative of a failed breakout.

The weekly chart is also supportive of this move (See chart below).  Note, there is heavy resistance from a number of sources around 1.6700, if GBPUSD reaches these levels this will likely be a major battleground between further gains, and a correction all the way back to 1.6000.  

'Inner Circle' research survey on Fed QE

There is only one topic of discussion, I am not going to try and predict what happens in the minutes and hours post tonight's FOMC meeting. However I have received a good piece put together by a leading research house, it is a survey of some leading players (Inner Circle) in the treasury market and what they think may happen tonight in regard to the Fed's action and likely reaction.

** *The Survey ***

1.Q- How much do you thing the Fed will ultimately buy....?

A- The average came to $862 bn, with several respondents indicating a bias to more if conditions warranted.

2. Q-How long will they buy for....?

A-The consensus says for the next 10 months.  The devil is in the details with the focus on the next six months, about $100 bn per month, and then tapering off in H2 of 2011.

3.Q- Will the FOMC offer a degree of shock and awe, i.e. $100 bn for each month for the next several months and then review, or something more open?

A-The answers were interesting.  On the one hand, overwhelmingly people felt the statement would offer a high degree of flexibility and therefore be somewhat vague and open-ended.  This could prove a bit
disappointing and the point was made to us.  On the other hand there were several who felt the lack of shock and awe in terms of size could or would be offset by the Fed changing the language about 'extended
period' by  extending it even further or perhaps put explicit focus on a sector, i.e. the belly.

4. Q-With 10s at 2.61+%, how much is priced in (name a figure)?

A-This was tough as we got percentages, basis points, and dollar amounts.  Dollar amounts got the most responses and so with that we offer that this survey says $400 bn in priced in.

5.Q- If they buy 500 bn, how much lower can 10-yr rates go?  1 trillion?

A-The consensus came to 2.35% for $500 bn and 2.10% for $1 trillion.

6. Q-How will you position going into the meeting?

A-54% or those who responded (a majority) said long and/or in a flattener.  35% said flat.  And 11% said short or in a steepener.

7. Q-What are you expecting to do coming out of the meeting?

A-31% of the respondents said 'Wait' or 'Watch' with some saying they'd follow the action.  21% said they would buy with 18% apparently thinking the same way only they said they would buy pullbacks.  26% said they planned to sell strength.

GBPUSD (Cable) maybe be preparing for a decent move.

The GBPUSD spot fx (cable) rate has made steady gains of late and looks as though it may be gearing up for a possible breakout to the upside. What I like about this is that it also appears to have formed a pattern within a pattern, when this occurs moves can sometimes be dynamic.

The pattern within the pattern is as follows:

1) The larger pattern is the Weekly 'Descending Expanding Triangle' pattern formed over the past 15 months, which may actually be part of a big double-bottom pattern. The actual pattern bears a strong resemblance to the bullish pattern formed on the AUDUSD over the past year, which was covered in detail in the 17 Sept post which can be seen by clicking here. An illustration of the ideal formation can be seen here:

2) The secondary pattern, which has formed as part of the breakout of the above pattern is a Cup + Handle  on the daily chart. Cup + Handle patterns do not necessarily have the greatest success record with regard to pattern reliability, however what I like about them is that they offer excellent risk/reward ratios. The stop level is usually quite close to entry, whereas the upside (if the pattern is successful) is often relatively large. The following illustration highlights an idealised Cup + Handle pattern.

Put the two together, and there is potential for a decent move if this can hold over 1.6000 on a sustained basis. The chart below shows these pattern on the GBPUSD.

There are one or two reservations with this: Firstly and principally the weekly 'Descending Expanding Triangle' pattern does not follow in the wake of a large trend, the prior move is short trend which itself is a reaction off a low following a very large decline. Typically these patterns follow strong sustained trends as per the AUDUSD example. I also prefer these patterns to have largely tracked along the upper line at fairly even spacing, the GBPUSD pattern has touched (or nearly touched) the upper line on four occasions prior to breaking out, however the gap between the third and fourth was very large. -- Perhaps I am being picky, ideal patterns are very rare, however I feel these points are worthy of a mention. The Cup + Handle pattern does look textbook though, and as long as this can sustain itself over 1.6000 (allow a spike or two lower), then this favours a move to around 1.6700.


A quick note re: the SP500: Despite a strong move at the open it once again failed to maintain and hold a move higher, and it also failed to maintain an afternoon push lower, once again closing slap-bang in the middle of last weeks daily closing 1182-1186 range. - dull, dull, dull.

Have we had 'the pause that refreshes' the SP500??

The past week/two weeks has seen largely consolidative price action as the market has geared itself up for some heavy news and data releases. The main event of course is this week's FOMC with the results due this Wednesday with the likely announcement of the details of the next bout of 'Quantitative Easing'. There is also the mid-term elections, although I think this will probably have limited market impact, more importantly we have some major data including the ISMs and the key employment data.

The strong rally in equities and the large sell-off in the the USD over the past two months has been largely on expectations of further easing actions by the FED. Last week was volatile but never went anywhere, despite ranging from 1171 to 1196 the actual closing levels on all of last week's days was within a tiny 4 point range of 1182 to 1186. The question for many is whether this has merely been corrective consolidation, or part of a topping process. My favoured view at this stage is that we are still within a bull run, and that the past week or two has been part of a consolidation that may be close to running its course, or may still have further to go, particularly if the reaction to this week's news sees a 'buy the rumour, sell the fact' reaction. I do not believe we are in a topping process, though one can not rule this out, though I do think the market will eventually top-out, probably sometime next year from somewhere in the mid to upper 1200s or maybe even a touch higher. I think it will take a failure of QE2 to ignite that, and if that occurs it is unlikely to be well into next year. The main features of the SP500 currently, are a strong rising trend, however some waning of momentum which could be suggestive of a deeper or more pronounced correction still to come, and also some hesitancy now that the SP500 has entered the consolidation zone from April of this year. (See chart below). I see three potential scenarios playing out here:

• The first one sees a very favourable reaction to the QE news, and a surge through the April highs over the remainder of November.
• The second scenario, is a 'buy the rumour, sell the fact' reaction. Possibly with the 'sell the fact' coming after Friday's payroll report and the following week. This sees a deeper correction possibly to 1130/40 maybe even lower on a spike, before basing then moving back towards the recent high, before eventually making a strong bull run in early 2011.
• Scenario three, would see the 'buy the rumour, sell the fact reaction', which is part of a major top, and is the start of a much deeper sell-off back to at least the summer lows. 

Scenario 3 is in my opinion the least likely, whilst I believe scenarios 1 and 2 are probably equally likely. Scenario 2 would be very interesting as it would see some mean price action which could at first trap some bulls and then create an even bigger trap for bears....