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GLOBAL OUTLOOK 11/20: S&P 500 Below 1100 Resistance, Bearish Chart Pattern Developing



 

SUMMARY

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

- 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:, 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 3rd 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 third day of losses in all major markets. Unlike Wednesday, these were more serious declines of typically over 1%. Does this growing string of 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. Similar indecisive candles followed by some "long reds." Those long risk assets should consider-strongly- placing or tightening stop loss orders on open long positions

Sellers were able to dog stocks for the entire session and hand the S&P 500 its worst single-session percentage loss of the month as buyers stepped to the sidelines amid a lack of positive catalysts. Buyers showed some mild interest late in the session and helped stocks make a couple of upward spurts, but the moves were quickly repressed.

Strength in the dollar kept many buyers at bay this session. The Dollar Index had been up as much as 0.7%, but settled with a gain of 0.3%. Though it settled off of session highs, its advance was enough to pressure both the equity market and commodities pits.

That blend of weakness proved troubling for energy stocks (-2.1%) and materials stocks (-1.5%). The two sectors traded with some of the worst losses of any major sector this session, but materials were able to improve their position late as gold prices rebounded to finish fractionally higher at $1141.90 per ounce.

Consumer staples stocks were able to maintain modest losses this session. The sector closed just 0.3% lower. Health care held up relatively well, too. The sector finished 0.5% lower following news that Senator Reid presented last evening a health care reform bill from the Senate.

Treasury Secretary Geithner appeared before the Joint Economic Committee on Financial Reform today. Geithner told Congress that the reform effort was essential for the health of the economy, but representatives were critical of Geithner.

Once again, data did little for stocks. Initial jobless claims for the week ending November 14 hit 505,000, which is in-line with what had been expected. The four-week moving average now stands at 514,000, down from 520,500. Meanwhile, continuing claims came in at 5.61 million, which is in step with what had been widely forecast.

In other economic news, leading economic indicators for October increased 0.3%, which is not as strong as the 0.4% that was expected. The Philadelphia Fed Survey for November came in at 16.7, which is better than the reading of 12.2 that had been widely forecast. Third quarter mortgage delinquencies hit 9.6%, which is up from the 9.2% that was registered in the second quarter.

On a similar note, the OECD said that U.S. GDP would likely grow 2.5% in 2010, while its collective 30-member nations would expand 1.9%. Asia is leading the global economy out of the deepest downturn in decades but the recovery will be marred by high unemployment and huge government debt across the industrialized countries, the OECD said on Thursday.

Many analysts have cautioned that the high jobless rate in the United States and Europe will keep global petroleum demand at anaemic levels for some time to come.

Advancing Sectors: (None)

Declining Sectors: Energy (-2.1%), Financials (-2.0%), Tech (-1.6%), Industrials (-1.5%), Materials (-1.5%), Utilities (-1.2%), Consumer Staples (-1.2%), Telecom (-0.7%), Health Care (-0.5%), Consumer Staples (-0.3%)DJ30 -93.87 NASDAQ -36.32 SP500 -14.90 NASDAQ Adv/Vol/Dec 549/2.27 bln/2127 NYSE Adv/Vol/Dec 572/1.08 bln/2480

Asia: Asia stock markets mostly retreated Friday following a glum session on Wall Street as evidence of a weak economic recovery continued to pile up. Chinese bank shares fell on a report that Beijing may increase reserve requirements, N225 has first 4-week losing streak this year

Europe: Financial bookmakers expected leading European benchmark stock indexes to rise on Friday, bouncing back after the previous session's sharp drop, as firmer commodity prices help boost resource-related shares. Full Article

GLOBAL
 

MARKETS Yesterday

         
ASIA- DOWN N225I -1.32% HS -0.86% SSEC +0.53% FTSTI -0.72% AORD +0.17 %
EUROPE DOWN FTSE -1.39% DAX -1.48% CAC -0.1.77%  
US- DOWN S&P -1.34% DJIA -0.90% NASDAQ -1.66%    
THIS MORNING        
ASIA DOWN        
N225I -0.54% HS -0.83% SSEC -0.37% FTSTI -0.72% AORD -1.28 %
EUROPE: OPEN UP        
FTSE +0.61% DAX +0.58% CAC +0.59%    

Oil: Following global stocks down Thursday and early Friday. Oil prices hovering below $78 a barrel Friday in Asia as traders watch a volatile U.S. dollar and mixed economic data.

Benchmark crude for December delivery was up 41 cents to $77.87 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract, which expires later on Friday, gave up $2.12 to settle at $77.46 on Thursday.

Oil has bounced between $76 a barrel and $82 for about a month as the dollar -- whose fall this year has help boost crude prices from $32 in December -- stabilized somewhat during the last few weeks. Investors often buy commodities such as oil as a hedge against a weaker dollar and inflation.

"We view this sideways pattern as sustainable going forward through the balance of this year," said one analyst

"But, bearish oil fundamentals that are showing negligible sign of improvement will accentuate downside price moves in response to a strengthening dollar while dampening upside reaction to a weakening dollar."

On Thursday, the U.S. Labor Department said employers are still shedding jobs, and the Mortgage Bankers Association reported a surge in foreclosures. However, some analysts expect Asian economic growth, led by China, to help offset a sluggish recovery in developed countries."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: Gold eased on Friday as the dollar's rise prompted investors to book profits after prices hit record highs above $1,150 earlier in the week, but bullion's appeal as an alternative asset kept support firm. At current market levels, gold was set for a weekly gain of about 2 percent, for a third straight week of rises.

Bullion rallied successively to record highs this month, underpinned by a number of central bank gold purchases earlier in the month, including India's acquisition of 200 tonnes of the precious metal from the International Monetary Fund.

Falling U.S. equities on growing caution about the U.S. economic outlook may also have helped highlight gold's safe-haven

appeal, adding to the bullish sentiment. "Underlying sentiment remains good in the gold market," said Ben Westmore, commodity economist at National Australia Bank.

"The financial crisis has caused a structural shift in investment behaviour, with market participants now holding a greater preference for less opaque assets where the underlying asset is well defined. This continues to buoy sentiment around gold," he said..

U.S. gold futures for December delivery were little changed at $1,141.2 per ounce compared to $1,141.90 an ounce on

the NYMEX. Futures hit a record high of $1,153.40 on Wednesday.

Traders have said prices also got a boost from the elevated levels of call options, or rights to buy, for U.S. December gold

futures.

Investors remained wary of substantial amounts of open positions remaining in call options with a strike price of $1,200 due to expire next Monday, which could sharply boost volatility

Gold's rally was bound to spur profit-taking, but losses are likely to be limited as investors have been eager to buy back gold as soon as prices ease, keeping the uptrend long-lasting regardless of the dollar's movements, some analysts said.

"Gold is moving on its own factors now, away from the currency, supported by improving supply and demand balances, including central bank purchases and less recycling despite high prices," said Koichiro Kamei, managing director at financial research firm Market Strategy Institute in Tokyo.

A World Gold Council report released on Thursday showed that supplies to the market of recycled gold rose 31 percent to 283

tonnes in the third quarter. But that was down from 314 tonnes in the second quarter and also a drop from 569 tonnes in the first

quarter of 2009.

The WGC also said on Thursday that only a "negligible" 1.5 tonnes of gold had been sold by signatories of the Central Bank

Gold Agreement in the year starting Sept. 27.

Traders said sentiment was also boosted by a report that billionaire hedge fund manager John Paulson was launching a new

gold fund using $250 million of his own money.

The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust < said its holdings stood at 1,117.493

tonnes as of Nov. 19, unchanged from the previous day.

The world's largest silver-backed exchange-traded fund, the iShares Silver Trust <SLV>, said its bullion holdings rose 94.73

tonnes or 1.05 percent from the previous day to a fresh record 9,116.04 tonnes as of Nov. 19. [ID:nT203475]

The greenback and yen kept rising against other currencies on Friday as investors took profits from gains made in the past

months in risk assets including higher-yielding currencies. Declines in equities are likely to reinforce such moves

CURRENCIES: After falling Wednesday on dovish Fed comments, bias to the USD and other safety currencies as stocks retreat, dollar, yen hold strength amid weak risk appetite. The dollar and yen kept their broad strength on Friday as investors continued to sell higher-yielding currencies and took profits from gains made in the past few months in risky assets.The dollar has been shifting on changing perceptions of the U.S. economy. The latest data came from the Conference Board's index of U.S. leading economic indicators <USLEAD=ECI>, which rose to its highest since September 2007, but fell short of Wall Street's expectations.Fresh data showing a record one in seven U.S. mortgages were in foreclosure or at least one payment was past due in the third quarter also added to investors worry that the housing market's recovery will be tepid at best.

USD: Mixed in early Friday trade, down against EUR, JPY, CAD, CHF, up against GBP, AUD, NZD

EUR: - The euro fell to $1.4912 from $1.4922 late Friday in New York. NB: Kathy Lien points out in a recent article that the EUR has tended to gain on the USD in December over the past 10 years

JPY - Gaining against all majors in early trade on stock market pullbacks the dollar slipped to 88.88 yen from 88.98.

GBP – continuing to gain against the EUR, and drop against the USD.

AUD: Falling for the third straight day as stocks and other risk assets pull back. NB: Kathy Lien points out in a recent article that the AUD has tended to gain on the USD in December over the past 10 years

NZD: Falling with stocks and other risk assets for the third straight day. NB: Kathy Lien points out in a recent article that the NZD has tended to gain on the USD in December over the past 10 years

CAD: Losing ground to most others as oil and stocks, its 2 prime drivers, both still falling

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: Fell below our Bollinger Band buy zone Thursday in its biggest daily drop in a month. Resistance holding 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 $1100 support level was also breached. 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. Volume was below average on this decline, suggesting calm profit taking & no signs of panic that the rally is over

S&P 500 Daily Chart

01 Nov 20

GOLD: Despite sinking stocks and other risk assets, gold continues to move more independently of movements in equities and has held steady near its all time highs, based 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

02 Nov 20

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. The score thus far: Rodgers 1, Roubini 0.

Crude Oil: Since mid October it's been drifting down into the middle of its 5 week trading range of $76.50-$82 range. Unlike stocks, crude never made much of a recovery from that October pullback. 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 or there is evidence of continued strong demand from China and other developing economies. If stocks continue to drop, oil is likely to follow and provide a shorting opportunity with support levels at around $76(at which both price and Fibonacci support converge), then $73 (at which price, Fibonacci, and the 50 day MA meet, then $70 (at which both Fibonacci and price support exist).

WTI Crude Oil Daily Chart

03 Nov 20

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 tried earlier 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

04 Nov 20

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."

GBP/USD Daily Chart. 05 Nov 09

Indeed it was-look what happened since then.

GBP/USD Daily chart 06 Nov 20

OTHER HEADLINES

From AP:

Japan warns that deflation can drag on recovery- AP

Taiwan firm uses recycled paper in shoemaking- AP

S. Korean minister nixes new US trade negotiations- AP

To lower interest rates, Citi customers must spend- AP

Dell's profit, stock drop on weak quarterly report- AP

Oil hovers below $78 as traders eye US dollar- AP

House moves to protect doctors from Medicare cuts- AP

Dollar gains as homeowners, job-seekers struggle- AP

Weak jobless claims, future economic activity data- AP

(Seekingalpha.com)

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