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Consolidation Ahead Of Major Economics

Economic releases have dominated sentiment towards equity risk valuations, and as highlighted last week, the completion of Q1 earnings reports now leaves attention focused on near-term economic releases.  


Equity valuations and economic fundamentals remain weak, with questions now being asked whether the Federal Reserve will instigate another round of quantitative easing programs.

It would seem that for QE3 to be launched the US equity markets would need to be 20% below current valuations. The catch-22 scenario of ramped-up equity values not being able to stimulate economic growth is now in front of the Federal Reserve, and there is no easy solution to the conundrum that the US central bank and Treasury have created. (Good luck with finding an easy answer to that one!)

The potential for new trade signals to form today is weak, and open equity and ETF positions should be closely monitored. Today is not the day to be looking for equity-based trades to easily follow through. The recent selling spree, which hit on increasing volume levels, needs to be absorbed before committing heavily to either direction.

Trade desk signals highlighted the potential in a weekly chart close below 1330 on the S&P 500 (1315), below 7150 on the German Dax (7150), and below 9500 on the Japanese Nikkei (9550), as being pivotal for equity outlooks going into June. Holding support on a weekly chart offers a near-term base to work higher from. The US markets have broken support, but as yet the Asian and European markets are holding. Detail will follow as that technical story unfolds.

Exchange Traded Fund:
SPY (131.90), the exchange traded fund (ETF) that tracks S&P 500 momentum looks set to continue its sideways mid-term trading pattern, in-line with global equity trade that has increasing daily volatility. There is very little support if 131.00 breaks on SPY, which will draw in targets of 129.50 and 127.50, but only if momentum builds in global equity selling.

Tests of 1340 resistance on S&P 500 and 134.00 on SPY, which have been highlighted as major resistance areas, now look a long way off. The next price action break of note will carry a lot of pent-up momentum, and will likely come as a consequence of breaking news headlines. The NFP numbers from the US on Friday will now be instrumental in setting equity fair value for June.

Alternate 24-Hour Trade:
Investors who do not want to wait for their regional cash market to open, or do not have 24-hour access to the market they have open positions in, are able to access the 24-hour currency market. There is potential to analyze and trade currencies in a high-volume market that is supported by the global inter-bank system.

Investors can trade currencies in-line with a rising global market, or trade ahead of a falling cash market open. Being able to use currencies offers the opportunity to be in a trade before the regional market opens.

Traders could trade the currency pair AUD/USD in-line with the potential seen in global equity movement. Buying the US dollar and selling the Australian dollar on days of major equity weakness is a simple process of placing a sell order on AUD/USD. That same position can then be managed in a similar way that equity trades would be bought and sold.

If global market trade favors the selling of S&P 500 below 1305 a potential trade signal will be issued on AUD/USD. Selling AUD/USD from 1.0630 draws in 1.0590 and 1.0550.

S&P 500 Price Action:
Strong buying activity was seen at 1330 on S&P 500 trade in April and May. The market has moved lower and broken this major swing point area, and will now be closely monitored. Market alerts and updates will be sent to subscribers when price action moves look to be able to break 1305, targeting 1295.

Main S&P500 support: 1295. Main S&P500 resistance: 1340.

Daily trading range on S&P 500 is 16 points, which is above the historical norm and indicates that volatility is increasing, in low-volume markets.

ETF Price Action:
SPY trade ran into a wall of resistance in April and May at 134.00, which will now be very difficult to break. The trade desk will pay close attention to price action around 131.00 support as the week unfolds. There is likely to be a lot of price gaps that form between each session's open and close. Volatility will build if the pattern of Asian and European trade moving S&P 500 futures valuations ahead of the Wall Street cash session continues.

Main SPY support: 131.00. Main SPY resistance: 134.00.

Technical Correlations:
S&P 500 100-day Simple Moving Average (NYSE:SMA) is at 1312. S&P 500 price action has a 36-month 75% correlation to crude oil moves, and a 90% correlation to the aussie (Aud/Usd) currency pair.

Recent Signals:
A trade signal was issued to clients recently on the S&P 500 with a break lower from 1340, which has now completed its course with a final move to 1319. The trade signal to sell SPY from 134.20, which targeted 133.20, went on to base out at 131.80. Clients will be notified when price action confirms further trade signal potential.

Sentiment and outlook towards equity trade remains weak, and favors consolidation, as recent selling activity is absorbed. Price action will likely continue the choppy and volatile intra-day patterns seen in equity and ETF prices during the month of May. Traders committing to long equity-based trades at these levels need to use caution in trade size and exposure.

Sector Review:
The main US ETF’s that track technology (NYSEARCA:XLK) (25.90), energy (NYSEARCA:XLE) (75.30), semi-conductors (NYSEARCA:SMH) (34.70), financials (NYSEARCA:XLF) (15.30), and emerging markets (NYSEARCA:EEM) (47.65), have all signaled short.  


Any existing long-ETF positions need to be closely monitored, as the trend and sentiment reads on the above sectors remain weak. Client notes and updates will track the ETF sector moves, and signals will follow if further sustainable trade patterns are seen. 

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