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GLOBAL OUTLOOK 11/19: S&P 500 Struggling at 1100 Resistance, Bearish Chart Pattern Threatens



SUMMARY

- Stocks: Prior Day: Asia, Europe, US down, this morning Asia, Europe down

- FX: Lower equities, ST bias to safety currencies [JPY, USD, CHF in order of safety
appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite
appeal], S&P 500 showing signs of stalling at 1100 for possible pullback

- Main events today: GBP: Retail Sales m/m, USD: Unemployment, Friday: JPY: BoJ Press Conference, CAD: BoC Gov. speaks, EUR: ECB Bank Pres. Trichet speaks, CHF: SNB Pres. Roth speaks

- Big Theme: Stocks, Risk Appetite Taking a Break or Reversing?-See Conclusions below for trading opportunities. TRADERS SHOULD HAVE TRADING PLANS READY FOR MOVES IN EITHER DIRECTION, still unclear if markets have fully digested the US jobs data, and news this week is light, suggesting trading with ranges

STOCKS

US: A 2nd day of light but negative news combined with the ever-present weight of an extended rally (which needs steady support of good news to hold or increase gains) lead to a second day of losses in all major markets. These were mostly modest. Are these small losses suggest a still resilient market undergoing normal consolidation or is this the beginning of a long anticipated deeper pullback with a bearish double or triple top chart pattern forming with ominous doji stars? Per our analysis of the S&P (see below) we are still long with the trend but very cautious about new long positions. Look at S&P daily, compare 3 most recent candles to those of 9/15-9/21, 8/23-8/28.

Despite weakness in the U.S. dollar, stocks spent nearly the entire session mired in weakness. Losses remained contained, however.

Participants showed indifference to renewed selling against the greenback, which took the Dollar Index back toward the 52-week lows that it set earlier this week. It settled with a 0.4% loss.

Though the dollar spent the entire session in the red, the broader market struggled to shake free from its own spell of weakness. Large-cap tech issues were among the primary laggards; that caused the Nasdaq to trail the other headline indices.

Financials helped lead the broader market on a late charge back toward the neutral line, though. The sector had outperformed for the entire session and was able to finish with a 0.9% gain. Its strength was rooted in banking issues. As such, the KBW Banking Index advanced 1.4%.

Zimmer Holdings (ZMH 58.03, +1.28) helped the health care sector put together a solid 0.4% gain. Shares of the medical equipment and supplies company were upgraded by analysts at UBS.

Several consumer staples stocks ripped higher late in the session amid news from Daily Telegraph that Reckitt Benckiser is close to announcing a cross-border transaction that is suspected to involve a consumer staples play. The consumer staples sector settled flat, though.

The latest dose of economic data indicated that consumer prices for October increased 0.3%, which is a bit stronger than the 0.2% increase that had been widely expected. Core prices increased 0.2%, which is also bit stronger than the 0.1% monthly increase that had been widely forecast.

Housing starts for October came in at an annualized rate of 529,000, which is below the rate of 600,000 that had been widely expected. Meanwhile, building permits came in at an annualized rate of 552,000, which is a slower pace than the annualized rate of 580,000 that economists, on average, had forecast.

Advancing Sectors: Financials (+0.9%), Health Care (+0.4%), Telecom (+0.2%)

Declining Sectors: Tech (-0.5%), Utilities (-0.5%), Industrials (-0.4%), Energy (-0.3%), Consumer Discretionary (-0.3%), Materials (-0.1%)

Unchanged: Consumer StaplesDJ30 -11.11 NASDAQ -10.64 NQ100 -0.6% R2K -0.4% SP400 -0.5% SP500 -0.52 NASDAQ Adv/Vol/Dec 1045/2.00 bln/1629 NYSE Adv/Vol/Dec 1381/1.06 bln/1640

Asia: Asian stock markets turned in a mixed performance Thursday as signs of weakness in the U.S. economy aggravated worries about the strength of the global recovery. It was the second day of middling trade in Asia and followed modest losses on Wall Street. Oil and gold prices were little changed, while the dollar fell against the yen and rose against the euro.

Europe: LONDON, Nov 5 (Reuters) - European shares dragged down at the open by US and Asian markets, lackluster data

GLOBAL
 

MARKETS Yesterday

         
ASIA- DOWN N225I -0.-55% HS -0.32 % SSEC +0.62 FTSTI -0.72% AORD +0.17 %
EUROPE DOWN/FLAT FTSE -0.07% DAX +0.6% CAC -0.02%  
US- DOWN S&P -0.05% DJIA -0.11% NASDAQ -0.48%    
THIS MORNING        
ASIA DOWN/MIXED        
N225I -1.32% HS -0.86% SSEC +0.53% FTSTI -0.72% AORD +0.17 %
EUROPE: OPEN DOWN        
FTSE -0.20% DAX -0.12% CAC -0.34%    

Oil: Wednesday: Oil prices oscillated. Bullish inventory data drove oil prices up more than 1% in midmorning trade, but it then rolled over in mid-afternoon trade. Crude managed to rebound and close up 0.5% at $79.52 per barrel. The US Energy information Administration (NYSEMKT:EIA) reported a drop of -0.9M bbl inventories vs. a forecasted increase of 0.8M.Thursday morning GMT oil remains above $79/bbl amid mixed signals about the strength of the global recovery

Prices were underpinned by U.S. data showing lower crude inventories last week and auto club AAA reporting that more drivers are expected on America's highways over the upcoming Thanksgiving weekend, suggesting that consumers are more confident in the economy.

Gains, however, were offset by poor economic news stemming from an unexpected drop in U.S. home construction and disappointing forecasts from technology companies.

"The resistance to oil sustaining above the $80 level is very strong. There are signs of economic recovery but so far, the signals have been mixed and the sustainability of the recovery is uncertain," said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore.

Barclays expects oil prices to average $76 a barrel in the fourth quarter and $85 next year.

Gold: Though the dollar's drop did little for stocks, it helped prop up precious metals prices. Gold futures hit another new all-time high of $1153.40 per ounce, but settled fractionally higher at $1141.20 per ounce. "The fundamental outlook for gold remains favorable. We expect a renewed test of the $1,100 mark for gold prices this week," Credit Suisse said in a research report.

CURRENCIES: After falling Wednesday on dovish Fed comments, in early Thursday GMT clear bias to safety currencies as stocks retreat, USD gains against all majors except for the JPY

USD: Wednesday: The US dollar fell against the euro and Swiss franc on Wednesday amidst indications that inflation remains within the Federal Reserve’s comfort level, housing conditions deteriorated, and amidst dovish comments from a central bank official. Gaining against all except the JPY early Thursday

EUR: - Yesterday failed in an attempt to regain most of its losses, Thursday continuing its downtrend this week against the USD Thursday morning

JPY - Gaining against all majors in early Thursday trade on stock market pullbacks

GBP – The MPC also discussed a reduction in the remuneration rate for bank reserves to spur lending, but agreed that now was not the time to implement the step but a tool in the future. Sterling initially fell on the back of the news but subsequently rebounded as many details were viewed as positive for the economy while not destabilizing for the pound. The Bank of England are clearly keeping all options open but the vast majority of members did not see the need for a drastic easing in conditions despite the Q3 GDP decline. Overall the MPC is still dovish but our economists believe the November expansion marked the end of the QE programme, especially if the economy recovers as we expect. The MPC may choose could do a little more in Feb but the purchases will target private sector assets rather than gilts. M4 data ahead may also influence the MPC as any signs of sustainable broad money growth would diminish the need for further QE.

AUD: Falling for the third straight day as stocks and other risk assets pull back.

NZD: Falling with stocks and other risk assets for the third straight day

CAD: Losing ground to most others as oil and stocks, its 2 prime drivers, both stall out Wednesday and Thursday morning.

The headline annual inflation rate climbed back into positive territory for the first time in five months, rising to 0.1% y/y from -0.9% in September, while core price inflation rose to 1.8% y/y from 1.5% a month earlier. The inflation figures will not likely affect the BoC's decision to leave the official rate as is until the end of Q2 2010. We maintain our 1m USDCAD forecast of 1.05. BoC Governor Carney speaks at 2250 GMT on Nov. 19.

CHF: narrow range trading vs. both USD and EUR

CONCLUSIONS: S&P 500 falls modestly, but the small down move revives questions about the rally and whether a bearish double or triple top is forming. See Trading Opportunities section below. Traders should consider going with the current trend but be ready for pullbacks. See below for specific opportunities with the S&P 500, CRUDE, GOLD, EURUSD, NZDUSD, and AUDUSD.

Trading Opportunities: Near term has favored risk currencies, shorting safe-haven assets. Today's news is quiet, indeed, the week is fairly quiet, suggesting range trading. Given that markets remain very high despite mixed earnings and negative US jobs reports, vulnerable to a pullback: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil breaches key $74 resistance, implying more upside unless stocks pull back on earnings disappointments. Always use sell stop orders.

S&P 500: While in a long established uptrend and still in our buy zone (top 2 Bollinger Bands), there may be resistance at 1110 where there is a convergence of both the upper Bollinger Band and a bearish doji candlestick from Nov. 18th, surrounded by equally indecisive spinning top candlesticks. Also of concern, the price level is currently in the middle of its rising channel, and the current $1100 level is itself a price resistance level. Thus we believe traders should be wary of opening new positions on this index and on all other assets until we get a decisive move above or below 1100.

S&P 500 Daily Chart

08 Nov 19

GOLD: Until yesterday, gold appears to be moving largely independent of movements in equities, moving instead purely on speculation (or a new fundamental outlook of greater demand?) that other central banks and other large buyers may do the same. The Mauritius purchase of two tons yesterday of the 200 remaining bullion available from the IMF reinforced this belief. After hitting new all-time highs yesterday, pulling back as the $1140 level is providing some resistance over the past 2 days. Long term trend remains bullish as long as the stocks keep rising and the dollar keeps falling, though given the steep slope of gold's rise over the past 3 weeks of almost 10%, some kind of pullback is likely, though the rise has been so hard and fast that no price levels have established as likely support resistance before 1060. Likely near term pullback points to use as shorting targets or for opening new long positions, per Fibonacci retracements, are shown on the chart below.

Gold Daily Chart

01 Nov 19

It is difficult to predict the extent or duration of such a sentiment driven move into new territory. Inflation is not be seen as a threat, but continuing USD downtrend encourages large USD holders to diversify into gold, especially as long as interest rates remain low and thus reduce the opportunity cost of holding gold. Famed NYU Economics Professor Nuriel Roubini, credited for calling the current crisis years ago, believes the run in gold is an unsustainable bubble, while famed commodity trader Jim Rodgers holds gold is going much higher. So far, Rodgers 1, Roubini 0.

Crude Oil: Following gold, stocks higher towards the upper end of its 5 week trading range of $76.50-$82 range. The historical range of the oil/gold price ratio is between 12:1 and 15:1. With gold at $1100 that suggested oil should be between $91 (if 12:1), and $73 (if 15:1,) which would imply oil should be at $73. With gold having moved up within 5 sessions to around $1145 this now suggests oil as high as $95.41 (12:1 ratio) and no less than $76.40 (15:1). Thus while crude remains range bound, if gold can continue breaking to new highs, as many expect it to do, then crude could follow it sharply higher over time, especially if other risk assets can avoid a sharp correction (which they are doing nicely, as shown by the S&P 500 breaching resistance at $1100) or there is evidence of continued strong demand from China and other developing economies.

WTI Crude Oil Daily Chart

02 Nov 19

EURUSD: Still sitting in the middle of its 8 week horizontal trading range. Up trend is still firmly in place, though 1.500 resistance holding for now. We expect the 1.500-1.4500 range to hold for the near term barring any changes in fundamentals. Both Bernanke & Trichet try to talk up the USD, but no one will take this talk seriously until one or more fundamental shifts occur, as we discussed in out last weekly outlook regarding the USD. Most importantly, there will need to be enough improvement in certain fundamentals in the US economy that will allow the US to start exiting QE and raising short term interest rates. The pair could be a good short play if the S&P 500 starts to pull back. In that case, note the Fibonacci retracement and major price support levels as targets for short plays, particularly the 1.4750 and then 1.4568 levels

EURUSD DAILY CHART

04 Nov 19

NZDUSD: New Shorting Opportunity? On Nov. 9th we noted this was a good long play if stocks continued to rise because it was still low enough within its recent trading range to allow for likely gains if the S&P 500 broke over 1100 for a new run higher. The pair did rise with stocks, but has now pulled back with them. As noted in our Weekly Outlook, this pair will be one of the best shorting plays when stocks do drop back to retest support, because the pair has risen in tandem with the AUDUSD but the NZD lacks the strong underlying economic fundamentals of the AUD and is thus a better shorting candidate.

NB: See a daily chart of the AUDUSD, and note the similarity. Those seeking to trade this pair could apply the above mentioned indicators and comments.

NZDUSD Daily Chart

07 Nov 19

GBPUSD: On Nov. 9th, we wrote: "One of the strongest currencies last week against the USD and EUR as it gained on less than expected expansion of QE, but nearing the top of its trading range since mid July and at the top of its Bollinger Band Range and recent high of $1.700. Could be a good short trade if markets pull back." They haven't, but the pair has range traded since and is currently up a bit from its 1.6772 level to around 1.6820

GBP/USD Daily Chart.

05 Nov 09

OTHER HEADLINES

One last hurrah-Reuters

Risky assets such as equities and emerging markets may have scope for another rally before the year is out as policymakers renew pledges to keep economic boosters in place. Full Article

(Seekingalpha.com)

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DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.