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World Markets Brief 12/22: Illiquidity, Multi-Week Trends Continue on Minimal News


Stocks: Prior Day: Asia down, Europe, US up, Today: Asia, Europe up.

- FX: 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], USD, continues up vs. all majors Thursday, steady early Friday on rising fear from EZ debt woes

- Main events: Mon: JPY: BoJ Monthly Report, Trade Balance+ CAD: Core Retail Sales m/m, NZD: Current Account, AUD: CB Leading Index, Tues: GBP Current Account, USD: Existing Home Sales, NZD: GDP q/q, WED: GBP: MPC meeting minutes, CAD: GDP m/m, USD: New Home Sales

- Big Theme: USD Rally continues, Thin Xmas liquidity + potential Debt Threat announcements SEE RECOMMENDED TRADES


US: Early buying stoked strong, broad-based gains among stocks. Little news of note except for a less damaging than expected Health Care Bill advancing in the US Senate, but in illiquid markets not much is needed to get movement. However, action quickly steadied so that the broader market spent the session moving sideways in a narrow range.

Asia: Japan's Nikkei average rose 1.9 %to a three-month high on Tuesday as a weaker yen lifted exporters

Europe: European shares advanced for a second straight session on Tuesday, tracking sharp gains on Wall Street and in Asia, with banks featuring among the top gainers. The index is up 57 percent since reaching a record low in early March and is up 22 percent for the year. At 0811 GMT, the FTSEurofirst 300 .FTEU3 index of top European shares was up 0.4 percent at 1,032.09 points after gaining 1.5 percent in te previous session. The benchmark index is up 24 percent this year and has surged 60 percent since hitting a record low in early March.

ASIA- DOWN N225I +0.41% HS -0.98% SSEC +0.29% FTSTI -0.35% AORD -0.27 %
EUROPE UP FTSE -0.40% DAX +0.83% CAC +2.05%%  
US- UP S&P +1.05% DJIA +0.20 NASDAQ +1.17%    
THIS MORNING UP N225I -1.91% HS -0.69% SSEC -2.32% FTSTI +1.22% AORD +1.39 %
UP FTSE +0.56% DAX +0.28% CAC +0.58%  

Commodities: Dollar index closed Monday with a 0.4% gain, the fifth straight advance for the Dollar Index. The move undercut commodities considerably, sending the CRB Commodity Index from a 0.6% gain to a 0.5% loss,

Oil: Steady on Tuesday ahead of an OPEC meeting, with the firmer dollar countering an expected fall in crude and distillate inventories in the United States along with the sustained strong demand in China. Inventories remain above levels of this time last year.

Gold: After falling hard Monday from $1103 to around $1090, gold prices inched up on Tuesday in a technical bounce after hitting a 6-1/2-week low, but the dollar's firmness limited the metal's gains amid light trading ahead of the Christmas holidays. The lower trend line of its descending channel held as support. See below for trade idea.

CURRENCIES: Continued bias to safe havens (JPY, USD,CHF) USD higher or steady against all, though the JPY and CHF are retracing. The USD backed off highs for the day as of the close on Friday. SEE WEEKLY OUTLOOK FOR LIKELY MOVES IN INDIVIDUAL CURRENCIES AND PAIRS AND FORCES BEHIND THEM. In sum, low liquidity and risk of further sovereign debt threat are the biggest potential market movers

USD: Early Tuesday: The dollar rose further against everything Monday as shorts continue to, hitting a two-month high and keeping pressure on all majors, as year-end unwinding of short positions supported it along with higher Treasury yields. Yields on U.S. Treasury debt have climbed this week and expectations of a stronger growth outlook for the world's largest economy helped push the benchmark 10-year note yield to its highest in four months at about 3.70 percent on Tuesday.

EUR: The euro hovered at $1.4293 just above a 3-½ month low of $1.4262 set late last week. Note, however, that short term technicals suggest a possible bounce, as we're seeing thus far early Tuesday across most major pairs against the USD. Rising treasury yields further bolster the USD to the EUR's detriment, along with sovereign debt concerns in the EZ and improving US employment, spending.

JPY: It rose above its 100-day moving average vs. the yen on Monday, a bullish sign after it hit a 14-year low of 84.82 yen

at the end of November. Japanese exporters had been expected to sell into dollar rallies but sales had not been as strong as thought.

GBP- Continued lower vs. the USD, EUR Monday, steady early Tuesday. More GBP Downside Likely, As Retail Spending Contracts in November, along with Public Sector Borrowing Rising at Record Pace, and expected dovish MPC Meeting Minutes. Also, GBP/USD is about 13% of all FX so GBP is pressured by rising USD

AUD: - Down vs. the USD Monday along with most FX, as the relatively more hawkish US interest rate prospects continue to hold sway. Slight reversal/steady as of early Tuesday

NZD: - Mimicking the AUD down again Monday despite positive current account and credit card spending data, , stabilizing early Tuesday.

CAD: Despite disappointing retail sales data and a pullback in oil prices, continuing to regain lost ground on the USD.

CHF: Continuing to fall vs. the USD and EUR, apparently on SNB intervention concerns.

CONCLUSIONS: S&P 500 remains in tight range continuing its consolidation around 1100. It's been in a horizontal trading range of 1090-1112 since early Nov. later Liquidity and low rates support stocks and other risk assets as cash seeks a parking spot, but questions on valuations and still poor fundamentals weigh against stocks, and have many believing the rally is in trouble and that a bearish double or triple top is forming. Dubai again reminds markets of real risk of sovereign debt default from Greece, Spain, and now Austrian banks. However, recent good jobs and spending figures in the US, along with continued China growth, suggests valuations may not be so overdone, upping the chance that the S&P may be able to avoid a major pullback for now. 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, USDCAD, USDCHF

SPECIFIC TRADE IDEAS: Unchanged since prior report Thursday. Next move likely on US retail figures at 1:30 GMT. Flight to safety has stopped for now, slight reversal back to risk assets, thus a good time for traders awaiting resumption of long positions in risk assets and higher yielding currencies to consider opening positions. Note however, that sovereign debt remains very much a concern, with Dubai in possible default as of Dec. 14th

S&P 500 & Risk Assets In General: Still in Long Term Uptrend, but in a flat trading range since mid November. Up over 1% from yesterday. Horizontal range trading between 1080-1112. Down slightly, continuing consolidation around 1100 despite Dubai bailout, improving US jobs, spending, though markets cautious ahead of Fed meeting Per the S&P 500, likely continuing higher for now as we get Dubai bailout and confirmation of improving US recovery. Implication: Despite struggles and concerns ahead, uptrend line clearly intact, suggesting we retain our ambivalent long bias until the trend tells us otherwise, though the trend is flattening out.

The overall bullish picture of risk assets as per the S&P 500 suggests flat consolidation range trading into year-end: The S&P 500 back near 12 mo highs of 1112 after great consumer data Friday, and has also regained the middle of its rising channel, suggesting more upside coming for risk assets if it can hold above 1100. It's been in a horizontal trading range of 1090-1112 since early November. We need to see if it can make a sustained break above 1100, Dubai bailout news, along with good jobs and spending data may do the trick. Liquidity and low rates support stocks and other risk assets as cash seeks a parking spot, but questions on valuations and still poor fundamentals weigh against stocks, and have many believing the rally is in trouble and that a bearish double or triple top is forming. Dubai again reminds markets of real risk of sovereign debt default from Greece and others. However, recent good jobs and spending figures in the US, along with continued China growth, suggests valuations may not be so overdone, upping the chance that the S&P may be able to avoid a major pullback for now.

Because the S&P 500 is so representative of overall risk sentiment, and thus the "One Chart to Rule Them All", this indecisive picture suggest traders should make long or short moves when the S&P hits support levels at around the1091 (23.6% Fib retracement +20 day MA + some price support from mid-October + rising trend line) and at 1080 (38.2% Fib retracement + rising channel line + lower Bollinger Band + 50 day MA) or a decisive break over 1100. Given the fear reflected in the S&P, traders should be very cautious opening long positions in ANY risk assets at this time, and employ tight trailing stops or monitor positions closely on existing open long risk asset positions. They should also have some short positions planned, complete with initial and confirming indicators, and planned entry/ exit points.

S&P 500 Daily Chart as of Dec 1 08:47 GMT (03 Dec 22) AVAFX CHART

GOLD: After falling hard Monday from $1103 to around $1090, gold prices inched up on Tuesday in a technical bounce after hitting a 6-1/2-week low, but the dollar's firmness limited the metal's gains amid light trading ahead of the Christmas holidays. The lower trend line of its descending channel held as support, though it violated another up-trend line from August (see chart below or in full version). $1085.86, its 76.4% Fibonacci retracement is its next likely support level.

Trade Suggestion:

As noted recently, any decisive break below around 1103 suggests a good short entry we got that Monday. Ideally, we'd like to see a bounce up to the upper line of the descending channel to establish new short positions. Caution with any attempts to go long, given the narrow range allowed by the sharp descending channel, growing establishment of the USD uptrend and gold downtrend. At this point, gold is moving opposite the dollar, so watch the EURUSD and S&P 500 for indications of gold's near term moves. Also watch the S&P 500 and other major stock indexes to see if risk appetite gets a lift from the Dubai bailout. If so, that suggests upward movement for gold.

Gold Daily Chart (01 Dec 22) AVAFX CHART

Updated Gold Forecast-

Gold's meteoric rise meant it had no time to build up any nearby support levels, which made it ripe for shorting should anything interfere with the forces pushing it up. Very positive US jobs, spending, and now Fed Policy statement, along with continued sovereign debt problems in Dubai and the EZ, which have hurt the EUR and thus helped the NZD, have sent gold reeling down as is anti-dollar status made it a victim of the current USD rally, which many expect to continue for at least a few more weeks. Failed to establish support around $1125, the 50% Fib retracement. Likely to continue moving opposite and sustained strength in the USD, though it has held up well over the past days despite further USD rally. As noted above, any break below 1103 might be good time to take a new short position given EZ debt concerns, rising fear and USD.

The Long Term Bullish Gold Argument: Makes sense as long as the USD Doesn't Make a Sustained Move Higher. Depends how much new data comes in supporting US jobs, spending, and inflation growth. May well test further support, but as long as markets believe that big central banks and funds are buyers, gold will find support, many believe around $1000. Given the doubts most have about central banks abilities to reign in money supply as the recovery develops, many believe gold still has plenty of room to run higher over the coming years, despite its already multi-year rally. The debate remains heated, though most still seem to like it over the long term given the huge expansion of money supply and widespread belief in coming inflation.

Crude Oil: Failed to regain its rising trend line from July. Beware, however, that oil has shown itself to be especially subject to exceptional market manipulation by large traders. As noted in the his excellent article, Why Oil Is Not Safe for the Individual Investor , Graham Summers notes that demand is falling, supply is up, yet over last year yet price is about 40% higher. Due to technicalities in oil trading rules (introduced by Goldman Sachs) large traders can cheaply store oil in tankers or tanks and pretend to be suppliers, releasing or withholding oil from the market to manipulate prices. For a better picture of true energy demand, look at a daily chart of natural gas, which cannot be cheaply stored for manipulation purposes like oil and is thus a better reflection of real energy demand. Thus individual traders should take care to enter trades only at clear support/resistance points, preferably in the earlier stages of moves within current trading ranges. While the market is big enough to be difficult for one or a few to control, still, consider yourself forewarned. Again, use conservative stop losses.

Trade Idea: If crude can rise despite a strongly rising USD, then support may have been established, suggesting new longs can be entered in the very near term, because its still at the lower end of its trading range noted above. However, do so with tight stops, as many expect more USD rally, especially if sovereign debt troubles in the EZ bolster the USD as both safe-haven and anti-EUR play and continuing US economic improvements bolster the USD on rising rate expectations. A sustained USD rise is likely to further pressure oil, unless US growth and oil inventory data can overcome USD strength. Near term we suspect the USD will win out, making oil a more likely short over the coming weeks. Longer term may be another story. ALSO, DECLINING GOLD MEANS DECLINING SUPPORT FROM THE HISTORICAL OIL/GOLD RATIO, WHICH AT THE MOST CONSERVATIVE 15:1 SUGGESTS OIL AS LOW AS $73.53, VERY CLOSE TO ITS CURRENT LEVEL.

NB: Crude has been among the weaker risk assets over the past month despite the USD's weakness. A crude peaked week before stocks did, and has been behaving relatively weaker than stocks. For example, yesterday's action showed that stocks were still able to retain some of their gains when momentum reversed, but crude could not, and closed lower. Not surprising, since crude tends to exaggerate the S&P 500's trends for better and for worse. Range bound for the near term, will likely follow stocks higher to its upper range near $82 if stocks can rally, but poor fundamentals and an extended rally for both oil and the S&P 500 that it tracks suggest more downside risk at this time. USD strength has clearly exacerbated this trend, as has the stalling out of the S&P 500 and other risk assets at current resistance levels.

Certainly seems unwise to consider new longs until oil stabilizes, likely around the $73-$60 range, if not lower. An additional outcome of the Dubai crisis may be increased production as the UAE may need to produce more oil in order if it decides to fund a bailout or related assistance to stabilize the Dubai situation. Watch the S&P 500 to lead oil.

Watch the EUR/USD chart for USD movements, and the S&P 500 chart for overall risk sentiment.

WTI Crude Oil Daily Chart (02 Dec 18) AVAFX CHART

EURUSD: Continuing to fall on negative sentiment relative to the USD from debt downgrades and after hawkish Fed comments about stimulus exit, . Fell again Tuesday, recovery some ground early Tuesday. Currently around 1.4315, the 61.8% Fibonacci retracement at the $1.4275 level is still holding. As the prime counterpart of the USD, it has been crashing through support levels as recent Fed moves towards stimulus exit and improved rate increase expectations boost the USD and thus weaken the EUR, which is further weakened by EZ sovereign debt worries.

June uptrend line shattered, need to go back to April to find a place to start another uptrend line once the pair stabilizes.

Watch the S&P for overall risk appetite, and the EURUSD for a quick gauge of the USD to judge if oil is ready to stabilize.



NZDUSD: Trade Suggestion: BROKE 0.7100 SUPPORT DECISEVLY. Consider waiting for current bounce up to subside (look for it around Monday's high), then consider entering new short positions. As suggested recently, strong support around 0.7100, made a good entry point for those playing the long side, IF there is a halt in the USD rally. Similarly, a decisive move below makes good entry for more short positions Now Retreating back into its declining channel, as hawkish Fed comments and credit woes and concerns about a today pressure the EUR and bolster the USD. Dovish RBA comments Wednesday didnt help, as the NZD tends to rise or fall with the economically stronger AUD. Note, however, that the pair is approaching the 38.6% Fib retracement at 0.7061, which has held repeatedly since October. Of course, there was no clear downtrend then. Likely to move with overall risk sentiment and the USD, so

Watch the S&P 500 and EURUSD to gauge risk appetite and USD strength. Much will depend on further news on US economic fundamentals and Euro zone sovereign debt issues.

NZDUSD Daily Chart (05 Dec 22) AVAFX CHART

USDCAD: Moving down to retest its up-trend line from October, despite otherwise market-wide USD strength. Officially and decisively broken out of its descending trend line resistance and has a rising channel as hawkish Fed comments push the dollar higher despite rising oil prices. Officially starting an uptrend, likely to follow the USD for now more than stocks or oil. Thats unusual, but thats whats happening, perhaps as USD momentum is taking over for now.

Trading Idea: If more good USD news, no strong resistance until the 1.0850 level. Watch for a reversal higher somewhere near the rising trend line barring any anti-USD news.

As we've noted before, the CAD is perhaps the most vulnerable of the commodity dollars to a USD rise because it lacks the yield appeal of the NZD and AUD.



USD recovering most of its losses from last week's retest of support at 1.0400, Currently steady, ideally look to open new longs as any further tests of support reverse back up, though trend is strong enough to consider entry even at current levels shown below, given that the pair is at the lower end of our Bollinger Band Buy Zone (upper 2 lines) which suggest exceptional trend strength.

Trade Idea: We are skeptical about getting into trends this strong before a test of support, we got one Thursday, which is already proving itself as the pair is reversing back up. A time to consider entering long. Watch S&P 500 for overall risk aversion good for the USD and the EURUSD for a quick gauge of the USD. Still, this pair has come up hard and fast, so keep stop losses tight.




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