Buying The Dollar
The dollar index is holding in a 4-day sideways channel, at a price point that has been pivotal during most of 2011 trade. It has been noted, and is well worth while repeating, that as equity markets hit yearly highs, at the same time the Treasury notes hit yearly lows while interest rates continue to move higher, that the dollar index has not capitulated, and is still 10% off the equivalent lows when compared to correlated global markets.
The signal coming from dollar index trade confirms that whenever global equity markets fail to hold support, which history tells us they will, the dollar will likely be heavily bought. Be it by default, design, or manipulation, there are obviously good reasons why the global central banking community has not allowed the Federal Reserve to completely crush US dollar values in the near-term.
In general, history tells, there will be a bout of US dollar buying, that is in-line with the previous four months of trade. Over the last four months there have been long move from the current price point at 78.50 that subsequently moved to test 82.50 on the dollar index. If that move follows through again, it would equate to an average 400 pips of movement for the dollar against most of major currencies.
The next move of dollar buying has nothing to do with US economic outlooks, moreover it will be global markets realigning fair value, and rebuilding the historical inverse Safety/Risk correlations that have been tested since October 2010.
Long Equity Squeeze Still Unable To Form
Global equity trade saw very little movement of note on Wednesday, outside of the regular slow and steady buying of support whenever a Permanente Open Market Operation from the Federal Reserve is undertaken. The POMO auctions buy back Treasury notes and leave the Primary Dealers little choice but to buy risk, and as a result, to buy stocks. There have been very few POMO days that have not closed the S&P 500 in the green, albeit that over the last nine months the Federal Bank of New York, and the high frequency trading algorithms, have made up the bulk of the volume on any given day.
A gap higher in overnight Asian equity trade was really all that equity market participants were able to react to, following the regular pattern of trade that has most price action unfolding in the futures market. The Japanese Nikkei moved up and through 10750, a resistance breakout point that now draws in a potential test of 11000. The Nikkei is a long way from generating any kind of new signal now that the upside target of 10820 has been hit.
European markets are holding their bullish undertone, and have allowed the German DAX to test upside resistance at 7440, which could be a pivotal swing point to gauge price reactions and follow through. The current long signal on the Dax has hit its target at 7410, with no new signal close to being generated.
S&P futures found the energy to gap higher in overnight trade, in-line with Asian equity markets that made an initial long move. The test of 1335 will now be pivotal in regard to where the S&P can finish February trade. The short signal from 1320 did not trigger on Tuesday, and instead led to the formation of an intraday long move that went from 1328 to 1332 in quick time.
In general, traders are witnessing a sideways slog at yearly highs, with most equity markets containing 24 hours of price action in one or two 1-hour chart time frames. Those not already long may be wise to buy the next test of support, rather than purchasing an already extended market.
Profitable long equity positions that have been aided by positive earnings season headlines will soon start to be banked or profit-protected. The warning stays in place that the next high-volume move that fails to hold support on the S&P 500 could trigger a near-term long squeeze. Signals will follow, on whatever the market chooses to offer.
Snoozeville Commodity Trade
Global commodity markets held sideways in trade on Tuesday and Wednesday, with gold and silver holding the higher ground, at the same time that West Texas Intermediate oil trade held support. There are no new signals of note, and very little in the way of potential on an intraday basis at this point in time. Inflationary pressure in the global commodity market, which is being generated in part by the manipulation of the US dollar, has led to bursts of energy that tend to be contained in a very small time trading frames.
As discussed in the previous client note, commodity markets have moved outside of their historical role that hedge future commitments for delivery of goods and material, and have moved instead towards hard and soft commodities becoming as much of an investment asset class, as they are a necessity to skid the wheels of global trade.
In general, traders will be well advised to sit and watch this week's commodity trade unfold, rather than try to pick tops and bottoms in a market that is signaling that fair value has been found.