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  • S&P 500 Review

    Equity Indices are maintaining very weak order flows and low historical participation levels, leaving little sustainable price action in place over the last decade. If 10-year US Treasury note values break and hold above 132.50 the chances of strong equity trade diminish. The outlook is very mixed, given that S&P 500 trade – the global equity indices benchmark - has not been able to break and hold Dec 1998 valuations.

    For maximum forward momentum instigate new orders around the following times: Tokyo return from lunch @ 23:00-00:00 ET. European Open @ 02:00-03:00 ET. U.S. futures reaction to London bullion and Libor fixings @ 06:00-07:00 ET. European close @ 11:00 ET. US commodity market close @ 14:30 ET.

     

    4-Hour S&P 500 (<a href='http://seekingalpha.com/symbol/es' title='EnergySolutions, Inc.'>ES</a>) Chart

    4-Hour S&P 500 (ES) Chart

    Trend: Mixed Momentum: Mixed Sentiment: Mixed Daily Trading Range: High 35.90 (3.2%)              

    Daily Simple Moving Average Lines: Blue (20 SMA) Green (50 SMA) Orange (100 SMA) Red (200 SMA)

    Technical Wave: Testing both support and resistance in equal measure in a mid-term sideways chop that is moving around the Dec 2010 and Dec2 011 closing price points. The 200-day SMA 1250 area will be important through Earnings Season, as will the 50-day SMA support area just above the 1225 swing point. Overlapping and volatile price action is struggling to find fair value each day, outside of knee-jerk reactions to breaking headline news or regional markets opening and closing. 

    Buy Support: Bullish traders will be looking to potentially buy the short reversals to 1250 (around the 38% Fibonacci retracement of the move higher from 1145 to 1285), which could then target 1275 and 1295.

    Sell Resistance: Bearish traders will be looking to potentially sell any moves that fail to break the 1305 area (the price point created after the move higher from 1145), which could then target 1275 and possibly 1225 if financial outlooks decline into 2012.  





    Bull or Bear, trader or investor, the above content reviews both sides of any situation with impunity in an effort to create fair and balanced output. Reactive markets require reactive analysis and an ability to accept changes as they happen. A headstrong opinion may be an impediment in the new-generation roller-coaster global trading arena; however, a systematic process of balanced analysis will always be an asset. Information, analysis and methodologies provided are for informational purposes only, obtained from sources believed to be reliable, and should not be used as a replacement for research by an individual investor or licensed investment professional. In no event should the content of this correspondence be construed as an express or implied promise, guarantee, or implication that profits or losses can be made or limited in any manner whatsoever. No guarantee of any kind is implied or possible where projections of future conditions are attempted.

    Jan 15 4:55 PM | Link | Comment!
  • The Carry Trade: RIP

    The post-credit crisis rule book has been re-written, a new year begins with sovereign downgrades, and the ink dries on another central bank debt program, which has created plenty of nuances for inexperienced traders to learn, and an old habit to kick.

    One of the most vaulted terms used from 2005 through to 2009 was the Carry Trade, as in; “Traders unwound the carry trade today”, or “Positive trading saw the carry trade bought today”, referring to the use of spot currencies to earn/pay overnight swap interest in-line with equity market risk outlooks.

    The carry trade however has become a distant memory, unable to perform its core duty in light of reduced inter-bank liquidity, and impacted by the fear-of-loss that permeates through regional market open and closes. But what has happened to the carry trade and its JPY/S&P correlation?

    The interest rate differential between central banks, (the difference between the Bank of Japan overnight rate, compared to the Fed overnight rate) has always been something that pushed markets to sell JPY in risk tolerant trading (long-equity environment), and buy JPY in risk averse trading (long-bond environment).

    The value of the Japanese yen (JPY) strengthened from a low against the US dollar in June 2007, to a high in March 2011, because for the first time in decades it became as cheap to borrow USD based funds as it was to borrow in Japanese yen-based denominations. The strength of the yen’s move can be seen in the USD/JPY cross pair, that hit a high of 124.00 in June 2007 (USD strength), to a low around 75.50 in October 2011 (USD weakness).

    From March 2006 the Bank of Japan overnight interest rate moved from 0.0% (while the Federal Reserve rate was at 4.75%), to a peak of 0.5% in September 2008, (while the Federal Reserve rate was at 2.0%), to the current 0.1% rate (while the Federal Reserve rate held at 0.0-0.25%),

    After the global central banking community dropped rates towards Japanese levels over the last three years, the yen was valued on the strength of growth forecasts, rather than being dominated by interest rate differentials. After seeing global interest rates similarly aligned to Japan, the Carry Trade and JPY's inverse link to equity direction became a little tenuous, and that outlook will remain the same until global interest rates climb while Japan stays in a stagflationary economic cycle.

    The reality is, when central bank interest rates converge in a race to the bottom and offer little interest rate differential, the Carry Trade becomes inefficient, offering little upside when compared to the base cost. There is only one main economic region (Australia) that offers an interest rate differential at this time.

    A position that is long AUD Australian dollar and short JPY Japanese yen, (Long AUD/JPY), will earn interest each day at 17:00 ET when swap interest is rolled into the new trading day. A position that is Short AUD/JPY will pay interest to hold that position past 17:00 ET.

    As a high-level example, the Australian central bank interest rates at 4% compared to the Japanese interest rate at 0.1% creates a 3.9% annual interest rate differential.

    The 3.9% (annual rate) divided by 365 days a year equals 0.01% interest earned/paid on long/short AUD/JPY

    The smallest off-exchange currency denomination that pays interest is a mini-lot, which controls 10,000 units of the base currency

    A$10,000 x 0.01% = A$1 of swap interest earned/paid each day

    Compare the A$1 a day rate in AUD/JPY (which can be easily eaten up in spread and currency movement going against the position) to the EUR/JPY rate on the same trade, which would create a 0.20c differential. It becomes very clear that earning swap interest and creating a Carry Trade needs to be part of the cost of doing general business, rather than a stand-alone strategy.

    Understanding what makes up cross pair trading values on the Japanese yen offers another insight into what happened to the Carry Trade. The value of any JPY cross pair is determined by the percentage change in USD/JPY compared to the percentage change in the dollar-based major currency that is being traded against the JPY.

    For example; Eur/JPY (97.47) is made up of the value of EUR/USD (1.2675) multiplied by USD/JPY (76.90):

    1.2675 x 76.90 = E/J @ 97.47

    The USD/JPY valuation determines the overall market value on the Japanese yen in other cross-currencies. The Japanese Finance Ministry will be looking to address the strengthening yen, as seen recently with open market intervention that saw a 300-pip move in a matter of minutes, at a time that economic growth in Japan still has many questions to answer

    JPY cross-pair trading has unique traits that follow the moves in the main cross-currency moves against the USD. JPY cross pairs only move as a consequence of the moves in the USD based majors and as such the technical reads should be taken on two pairs; the JPY cross, and the USD major. A spot-currency pair that does not have the USD on one side or the other is referred to as synthetic pairs, as their value is derived from the movement in two other major currencies.

    If USD/JPY does not move, then the JPY cross-pairs will only be able to replicate the USD-based moves in the major currency. When USD/JPY  is stuck in tight ranges, JPY trading becomes volatile without being able to break and to some degree becomes pointless until  USD/JPY  starts to move in the same direction as the major pair.

    Sustainable moves in EUR/JPY will only happen when both USD/JPY and EUR/USD are moving in the same direction. If USD/JPY is going down (JPY strength), and EUR/USD is moving up (EUR strength), the moves in EUR/JPY will be negated, as both currencies are gaining on the USD at a similar rate. 

    The spreads are higher on JPY cross pairs and the volatility increases because of the price-average leverage across two pairs. When USD/JPY is stuck in a range it equates to trading JPY cross-pairs with 200% increased spreads, incurs increased volatility, and offers a lack of stability over and above a regular trade on a USD-based major currency.

    USD direction, USD/JPY sentiment, and overall major pair momentum has to be factored in at the time that a JPY/Cross-pair ticket is placed. The JPY cross pairs have their own nuances to work with and their own specifics of times to place, which are normally around the regional market opens and closes. Blanket JPY/Cross-pair trading will not be as reliable a trade when compared to choosing just one currency against the yen that is backed by strong momentum against the US dollar.

    Whether the JPY Carry Trade will ever be back in vogue will depend on whether global interest rates move higher en-block at the same time Japanese economic outlooks remain cloudy. Until that time any yen cross-pair trading needs to be selective, and with a defined plan, because JPY is called The Dragon for very good reason. 




    Bull or Bear, trader or investor, the above content reviews both sides of any situation with impunity in an effort to create fair and balanced output. Reactive markets require reactive analysis and an ability to accept changes as they happen. A headstrong opinion may be an impediment in the new-generation roller-coaster global trading arena; however, a systematic process of balanced analysis will always be an asset. Information, analysis and methodologies provided are for informational purposes only, obtained from sources believed to be reliable, and should not be used as a replacement for research by an individual investor or licensed investment professional. In no event should the content of this correspondence be construed as an express or implied promise, guarantee, or implication that profits or losses can be made or limited in any manner whatsoever. No guarantee of any kind is implied or possible where projections of future conditions are attempted.

    Jan 15 9:43 AM | Link | Comment!
  • Daily Global Market Review

    Daily Global Market Reviews focus on 4-Hour mid-term analysis covering price action, sentiment, momentum, participation, and overall asset correlations in any given session. The sections cover the current near-term outlook, a global market visual, and commodity, equity and currency reviews for the next 24-hour session.

    Current Outlook

    It is difficult to recall too many times when global asset class price action created such mixed near and mid-term outlooks on trend, momentum, and sustainable forward sentiment. Any that have been seen tended to be ahead of a major global move.

    In the midst of sovereign bond auction activity that is not generating adequate participation levels, a look at 10-year Treasury note and interest rate activity confirms that if the ZN (10-year Treasury) Futures contracts close a week above 131.50 the chances of an equity indices rally diminish substantially. 

    The table below indicates a very mixed outlook for correlated movement, which in turn will lead to increased volatility, and sporadic price action. If participation levels increase at this point in time a high-volume blow-out top in equity trade is possible, with 1295 on S&P 500 trade the top and 1250, 1225, and 1195 potential targets. 

    If high volume comes in at a time of weak Q4 Earning reports, the moves lower could turn into a rout. The long-equity outlook may only have one savior; the Federal Reserve implementing another stimulus. However, that looks highly unlikely with current market attention focused on how the previous easing programs will be unwound.

    Bottom Line; signals are here that all is not well across global asset classes. Cash is a position for those who prefer their daily moves with contained volatility. For those stepping into the breach; it will be hand-to-hand combat over the rest of January trade.

    Global View

    011312_GMR

    * See Table Notes below 


    Commodity Update

    Near-Term Support and Resistance: 

    Gold: Sup 1615 Res 1675 Neutral 1648. Silver: Sup 29.30 Res 31.05 Neutral 30.15. Oil: Sup 97.65 Res 102.30 Neutral 100.35. 

    Mixed Commodity trends with neutral near-term momentum reads are creating intra-day tests of resistance followed by consolidation and jagged price action, but seem unlikely to change the overall long outlook. The mid-term Commodity view remains bullish in light of heightened Middle Eastern tensions, and erratic Government bond auctions that are not allowing fair value to easily form. It will take a week of sustainable positive price action to create solid bases to make the next legs higher from, which could target 12-month high levels.

    Equity/Dollar Index Update

    Near-Term Support and Resistance:

    S&P500: Sup 1275 Res 1305 Neutral 1290. Dax: Sup 6120 Res 6260 Neutral 6210. DXY: Sup 80.30 Res 81.95. Neutral 81.25.

    Equity Indices are maintaining very weak order flows and low historical participation levels as the January Earnings Season unfolds. Recent bounces off oversold conditions have not been enough to change the mixed outlook and neutral view on equity valuations. The outlook is very mixed, and given that S&P 500 trade has not been able to break and hold Dec 1998 valuations things are likely to stay in the one-day-up, one-day-down pattern.

    Long Dollar Index trends that are over-bought may create short intra-day reversals, but seem unlikely to easily change the overall trend, unless equity trade can find buyers in large quantity. The USD long-term outlook is very mixed, but the dollar will be bought to support inter-bank liquidity if regional bond auctions fail. The US Administration will not want to see the greenback at these levels, preferring instead that the USD wins the race to the bottom of major currency devaluation.

    Currency Pair Update

    Near-Term Support and Resistance:

    EUR: Sup 1.2730 Res 1.2930 Neutral 1.2780. GBP: Sup 1.5270 Res 1.5475 Neutral 1.5335. JPY: Sup 76.35 Res 77.45 Neutral 76.80.

    Very mixed Currency trends that carry neutral momentum reads may create intra-day reversals against the USD, but seem unlikely to change the overall trend. The Currency outlook remains very cloudy, and in-line with 2011 trade that was unable to change major valuations over a tumultuous global 12-month period of trade. Eur, GBP, and CHF have looked weak in the near-term, while JPY is holding a bullish stance, as AUD and CAD appreciate in-line with bullion and oil buying.

     

    * Global View Table Notes

    When 4-hour chart trend and momentum reads are aligned across Equity Indices, Commodity, and Currency asset classes, a trending market is more easily achieved, and trade exposure and initial targets are generally increased. When trend and momentum reads are not aligned, a choppy and overlapping period of trade is more easily achieved, and trade exposure and initial targets are generally reduced. 

    A long trend that is over-sold generally sets up for a long reversal off support. A short trend that is over-bought generally sets up for a short reversal off resistance. Markets that are over-bought into a long trend, or over-sold into a short trend, can remain that way for a long time. Any positions that are taken against the 4-hour trend will have to absorb choppy and volatile price action.

     

     

    Bull or Bear, trader or investor, the above content reviews both sides of any situation with impunity in an effort to create fair and balanced output. Reactive markets require reactive analysis and an ability to accept changes as they happen. A headstrong opinion may be an impediment in the new-generation roller-coaster global trading arena; however, a systematic process of balanced analysis will be an asset in any environment. Information, analysis and methodologies provided are for informational purposes only, obtained from sources believed to be reliable, and should not be used as a replacement for research by an individual investor or licensed investment professional. In no event should the content of this correspondence be construed as an express or implied promise, guarantee, or implication that profits or losses can be made or limited in any manner whatsoever. No guarantee of any kind is implied or possible where projections of future conditions are attempted.

    Jan 13 7:51 AM | Link | Comment!
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