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WEEK AHEAD: POST EURO-PHORIA SELLOFF & OTHER POTENTIAL MARKET MOVERS

|Includes:AUNZ, BXDC, BZ, CEW, CNY, CORN, CYB, DBC, DBV, DIA, DRR, DUG, ERO, EUO, EWA, EWC, FUJHY, FXA, FXB, FXC, FXD, FXE, FXEN, FXF, FXY, GLD, GSG, HMC, Hitachi Ltd. ADR (HTHIY), ICI, ICN, IGOV, ISUZY, ITM, JYF, MZDAF, NBO, NSANY, OIL, RSW, SDS, SH, SLV, SNE, SPXU, SPY, SZR, TBT, TLT, TM, UDN, ULE, URR, USL, USO, VGK, XHB

 Likely market movers, trends, and how to play them for spot market, ETF, stock index, and binary options traders for forex,  stock indexes and oil

Prior Week Market Movers: Markets Ignore Crises Galore

Last week, fundamentals just didn’t matter. The situations in the EU, MENA region, and Japan all got worse, but apparently not enough to overcome the temptation to buy at relative dips as prices hit near term support levels.

For example, look at the weekly chart of the S&P 500 below.

ScreenHunter 01 Mar 27 02 34  Week Ahead: Post Euro-Phoria Selloff & Other Potential Market Movers

S&P 500 WEEKLY CHART COURTESY OF ANYOPTION.COM     01MAR 27 0234 D

The key points:

  • We had the psychologically important 1250 price level, which has been tested 4 times since January 2011 and held each time.
  • The 20 week (or 200 day) EMA was also in this zone around 1264, providing double layered support.

Note this support occurs in the context of entrenched upward momentum:

  • A rally dating back to the Spring of 2010, which is part of a longer one that began in March 2009
  • Bullish long term momentum indicators: The rising 20 week EMA (yellow) crossing over the rising 50 week EMA (blue), which itself had crossed above the rising 200 week EMA.

In sum we have an entrenched uptrend until proven otherwise, and the markets continue to see the above ongoing crises as short term selloffs and thus buying opportunities, as long as interest rates remain low (which they will be for the coming 12 months even after anticipated central bank tightening) and stimulus cash continues to flow into risk assets.

COMING WEEK LIKELY MARKET MOVERS

Here’s what to watch this week.

Beware Post- “Europhoria” Letdown, Second Annual EU Spring Break Down

Despite a deteriorating situation with the EU debt crises, the much anticipated EU summit late last week, which was supposed to at least make significant progress towards stabilizing the various default threats, accomplished virtually nothing. We predicted that, and continue to assert that there won’t be any progress until there is an imminent default threat. See 7 Stages of the EU Panic Cycle: Understanding and Profiting, Part I for details.

It remains to be seen how markets will respond to the EU’s repeated failure to act until after markets in general and the EUR in particular suffer a deep pullback. Thus far expectations for an April 7th rate hike announcement have helped the EUR hang on near 15 month highs around 1.4500, though this past week the EURUSD pulled back for the second time in 3 weeks.

Traders remember how the EU dithered, and played a great game of ‘chicken’ until markets started crashing.

EUR BULLS HAVE BOUGHT THE RUMOR, WILL THEY SELL THE NEWS?

Remember the old trader’s adage: “buy the rumor, sell the news?”

With last year’s experience behind them, and having already bought on the rumor of a rate hike, will traders now start to ‘sell the news,’ and start taking profits on the EURUSD and other EUR pairs ahead of the April 7th announcement?

There is a strong chance of that happening, here’s why.

  • Rising Chance Of USD Bounce
  • Expectations for the USD are so low that the USD could well bounce on any positive news, and there is plenty of potential for that in the coming week, with both US monthly jobs reports and the preliminary reports that hint at Friday’s result.
  • Fed QE Ending: All four central bank officials that spoke Friday implied they would support ending Quantitative Easing in June.
  • Overall Risk Appetite At Risk: With no less than 3 major active market crises, (Japan, MENA, EU) in addition lower probability crises (China slowdown accelerating, new Korean, Mideast tensions from Jordan, Syria, and stepped up terror attacks in Israel from Gaza Jihadists, deteriorating US housing and thus banking stability, etc), markets could easily face further pullbacks that would likely pressure the EUR, which tends to move up or down with risk appetite.

Time to take profits on EURUSD trades?

TRADING IMPLICATIONS

Until we get a decisive break above the 1.4500 resistance zone, be very cautious about new EUR longs, or binary option calls on this pair.  However no shorting the EURUSD, EURJPY, or EURCHF until we start to see near term support broken, as detailed below in THE COMING WEEK EURUSD: BEWARE POST- “EURO-PHORIA” LETDOWN . See this for full details on this week’s EUR outlook.

If the EURUSD starts to break down, short the pair as recommended in the above article via

Forex

Direct spot market sales of the pair

Forex ETFs

The EUR ETFs: These move either mostly or exclusively with the EURUSD

Long Euro: FXE (EUR index long), ERO (EURUSD long), or URR and ULE (2x EUR index long)

Short EUR: EUO (2x short EURUSD), DRR (2x short the EUR index)

Forex Binary Options

Buy puts on the EURUSD or EURCHF in your chosen time frame.

This Too From The EU: Sunday German Elections

Germans vote in the state of Baden-Wuerttemberg on March 27 in an election threatening to end almost six decades of control there by Merkel’s party. Her party has seen steady losses over the past year. Yet another would raise further doubts about Germany’s political will to continue to serve as primary funding nation of further bailouts, which would in turn add uncertainty to the future of the EZ and Euro. The entire bailout mechanism would be in jeopardy without firm German support. German taxpayers are far less committed to the EZ than their leaders.

We expect German voters to again use local elections as a protest against bailouts and EUR currency printing that risks making the EUR less like the former German Deutschmark and more like the Greek Drachma.

That would be bearish for the Euro, play it as noted above. However these developments do not have immediate implications for the EUR, so they would likely only be a factor if shorter term considerations like interest rate hike speculation and risk appetite are also shifting against the EUR.

Japan, MENA Could Impact Markets

Both crises are ongoing and threaten to resurface as bullish drivers on good news and bearish ones on bad news

JAPAN

With aftershock risk down, further damage can still come from 2 sources.

Radiation

On Friday Japan told residents within 18 miles (27 klm)  of the Fukushima plant to evacuate, and there is growing evidence that while some reactors have been stabilized others continue emitting radiation that will have this incident upgraded to level 6 – one notch below Chernobyl, and has raised damages to about $309 bln, double that of the Kobe quake.

Export Losses

While this may not pose health risks beyond Japan yet, it does suggest higher final damage costs, a larger drag on Japanese GDP, and higher risks of prolonged production shutdowns for Japanese exporters of steel, cars, parts of all kinds and silicon wafers that could affect production worldwide for their customers. Ramifications still unclear but of growing significance. For example:

  1. Ford will be shutting down its factory in Genk, Belgium for 5 days starting April 4 due to parts shortages.
  2. Toyota will resume production of 3 hybrid Models Monday, continued production will be contingent on an uncertain ability to obtain parts
  3. Global Car Production: Bloomberg.com reports here If parts plants affected by the earthquake don’t get back online within 6 weeks, world car output might drop by ~ 30%, or almost 100K vehicles/day, according to market research firm IHS Automotive. Already, 13% of production is down, and IHS doesn’t see the largest impact until the 3rd week in April.
Trading Ramifications

Bearish for the Nikkei index and stocks of  affected Japanese exporters, which have recovered pre-crisis prices on bargain hunting that assumed the crisis was largely over or bought sheer crisis fatigue.

See here for detailed table of quake related plant closings per Bloomberg.

MENA

The past week saw spreading unrest to new venues and no improvement in current turmoil.

Yemen and Libya: With leaders of both nations rumored to be negotiating safe passage to exile for themselves, their families, followers, and most importantly, their wealth. Crude oil remains near September 2008 highs of $115 for Brent crude, $105 for WTI crude, suggesting that oil markets see more turmoil and supply interruptions ahead.

Bahrain Unrest Breaks Out Again: Remember, this tiny island in the Persian Gulf is the scene of a low level proxy war between Sunni Saudi and Bahraini leaders and Iranian backed mostly Shiite protesters. That gives this conflict the potential to spiral into a broader conflict.

Syrian Protests Continue, Jordanian Unrests Re-starts. Outbreaks in both nations last week were violently suppressed, Thus far that hasn’t worked anywhere, especially while outside power brokers, Western or otherwise, don’t want to be seen supporting repressive regimes.

Terror Attacks In Israel: Rocket attacks from Gaza risk another Israeli military incursion against the Jihadist Hamas regime. Bus bombings and terrorists’ fatal knifings of sleeping children add to pressure on Israel to respond, beginning a new round of violence.

Trading Ramifications

The combined effect of the above should at minimum keep oil near current levels.

Escalations should be:

  • Bullish for oil. If not trading this directly or by futures or CFDs, they can be played via:
  • Long Oil ETFs: Brent Crude: USL, BNO
  • Oil Binary Options: Buy call options in your chosen time frame. We favor the longer weekly or monthly calendar expirations as safer ways to play the longer term uptrend, especially on any dips to recent support levels.
  • Bullish for safe haven currencies, especially the CHF and USD. We are wary of the JPY for anything beyond very short term technically based trades at this stage, with a longer term rising debt level and 7 central banks ready to intervene to keep it lower.
US Monthly Jobs Reports & Related Data

Typically the Friday US monthly NFP and Unemployment reports influence markets from early in ....

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