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Global Trade Desk- QE3 Or Not QE3- That Is The Question

Daily Client Note

Equity Indices Review Review


QE3 or not QE3- That is the question

Headlines:
Wall Street equity trade has suffered six sessions of negative trade, which is something not seen since February 13th 2009. Seeing five consecutive red sessions had not happened since August 2010, which reveals the power of the Federal Reserve’s policy to ramp markets higher and create a feel-good factor. It has to be noted that ramped-up markets crash hard when real players start to sell, and that very few investors have enjoyed a feel-good factor while watching twelve years of S&P 500 (1282) slog that has values back to 1275.

The downturn in overall equity sentiment, and the reversal in S&P 500 valuations off 1350 resistance, potentially on the way to yearly lows, is timed to perfection for those looking for drip-fed assistance from the money-printing Federal Reserve. This is a similar pattern of trade that pre-empted the launch of quantitative easing programs previously. It may be hard for market manipulators to get equity indices valuations much higher than their current levels in the mid-term.

Trade signals and market alerts sent to clients last week that highlighted S&P 500 (1282) reversing from 1340 have followed through, as have the signals to sell SPY (128.40) from 132.50. There are no indications at the moment that either of these signals are close to reversing their negative technical outlook.

Outlook:
The potential for new trade signals to form looks strong, and most trade signals will be continuations of last week’s set-ups that have held their short bias. Momentum, sentiment, price action, and participation, all continue to favor the short side of trade.  Trade signals will be issued once Wall Street markets confirm that the tone of negative global trade will be continued. S&P 500 trade has major support at 1275 which is likely to be a difficult price point to easily break lower from.

Exchange Traded Fund:
SPY , the exchange traded fund (ETF) that tracks S&P 500 momentum looks set to continue its short near-term trading pattern, in-line with global equity trade that is generating increasing daily volatility. Last week’s client notes highlighted that there was very little support if 131.00 broke on SPY, which has drawn in targets of 129.50 and 127.50.

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.

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

Global markets favor the selling of S&P 500 futures down to 1275 which would generate a trade signal on EUR/USD. Selling EUR/USD from 1.4550 targets 1.4530 and 1.4490. The next target will be 1.4450 if S&P 500 trade moves down and closes this week below 1275.

S&P 500 Price Action:
Strong selling activity was seen at 1285 on S&P 500 trade on Mar 15 11. The market has moved lower to test 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 1285, targeting the Mar 2011 low of 1240.

Main S&P500 support: 1275 and 1240 Main S&P500 resistance: 1310.

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 129.00 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: 127.00. Main SPY resistance: 131.00.

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:
The S&P 500 (1284) and SPY (129.00) trade signals issued last week to short both markets from 1340 and 132.80 paid out from a completed cycle lower. Full detail will be issued via trade signal and market alerts on equity momentum, and subsequent trade potential.

Trade desk signals issued in the Jul 02 11 client note to look for a break lower on AAPL (339.00) from 347.00, and on GOOG (520.00) from 527.00, have followed through. The INTC (21.80) from 22.00 and COL (59.20) from 59.70 signals are just starting to move lower.

Sentiment and outlook towards equity trade remains weak and recent selling activity is being 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) (25.00), energy (NYSEARCA:XLE) (73.70), semi-conductors (NYSEARCA:SMH) (33.60), financials (NYSEARCA:XLF) (14.80), and emerging markets (NYSEARCA:EEM) (47.10), all signaled short, and were highlighted in last week’s client notes.
 
Any existing long-ETF positions need to be closely monitored, as the trend and sentiment reads on the above sectors remain very weak. Client notes and updates will track the ETF sector moves, and signals will follow if further sustainable trade patterns are seen.