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World Markets Brief 12/23: Best Forex, Commodity, Stock Trades And Overview-Dollar, Euro, Yen, Pound Outlook


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

- FX: bias against safety currencies [JPY, USD, CHF in order of safety appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], BUT BIG EXCEPTION: USD, continues up vs. all majors Wed (except for CAD),

- Main events: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 ALONGSIDE STOCKS RALLY (UNUSUAL), Thin Xmas liquidity + potential Debt Threat announcements SEE RECOMMENDED TRADES


US: More broad-based buying on follow through from prior session and earlier European market gains, better than expected housing data, and a refusal to be discouraged by a surprise downward revision to third quarter GDP sent the S&P 500.

Asia: Asian stock markets were mostly higher Wednesday after a jump in U.S. housing starts suggested the world's biggest economy is picking up speed.Shanghai, Seoul and Sydney all rose after major U.S. indexes gained Tuesday on news that November home resales jumped 7.4 percent, above a forecast 2.5 percent.

Europe: European shares rose in early trade on Wednesday, the last full trading day before the Christmas holiday, extending a recent rally, with banks leading.

ASIA- DOWN N225I -1.91% HS -0.69% SSEC -2.32% FTSTI +1.33% AORD +1.39 %
EUROPE UP FTSE +0.65% DAX +0.26% CAC +0.68%  
US- UP S&P +0.36% DJIA +0.49% NASDAQ +0.67%    
THIS MORNING UP N225I +1.91% HS +1.12% SSEC +0.76% FTSTI +0.61% AORD +0.67 %
UP FTSE +0.66% DAX +0.57% CAC +0.63%  

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: SINGAPORE (NYSE:AP) -- Oil prices held above $74 a barrel Wednesday in Asia after OPEC left output levels unchanged and a report showed U.S. crude inventories fell last week.

Gold: After falling hard Monday from $1103 to around $1090, gold prices inched up early Tuesday in a technical bounce after hitting a 6-1/2-week low, but the dollar's firmness drove it down to close at $1186 amid light trading ahead of the Christmas holidays. See trade recommendation below for details

CURRENCIES: Continued bias to safe havens (JPY, USD,CHF) despite rising stocks as USD higher or steady against all, though the JPY and CHF are retracing recent gains or consolidating. SEE TRADE RECOMMENDATIONS BELOW FOR BEST TRADES

USD: Tuesday the USD rose against all majors except for the CAD, putting the USD index at 3 month highs. with buyers enticed by U.S. yields at four-month highs and the steepest yield curve on record.Tuesday New York close: Dollar index Up 0.4%, its fifth straight advance. The move undercut commodities considerably, sending the CRB Commodity Index from a 0.6% gain to a 0.5% loss, but it didn't disrupt the gains made by stocks.


EUR: The EUR/USD opened the Asian session around 1.4250 after getting sold off during the US session when US Treasury yields moved higher following stronger than expected US Existing Home Sales data. Holding steady there in early Wednesday trade. Sentiment towards the EUR/USD is decidedly bearish. Analysts say that US investors are looking to repatriate large foreign investments back to the US to take advantage of the steepening Treasury yield curve and opportunities in US equities amid upbeat US economic prospects. there isn't any EZ data of note and the market will look to US data that includes U of Mich and New Home Sales.

JPY: Hit a 2 month low vs the USD. USD/JPY opened the Asian session around 91.80 after feeling the brunt of the USD rally during the US session - as US yields continued to rise. Sentiment towards the USD/JPY is decidedly bullish - as US Treasury yields are on the rise and risk aversion in on the wane. Meanwhile the BOJ has pledged to maintain extremely easy monetary policy

GBP-With Japan out for the day the JPY crosses did little with GBP/JPY confined to an uncharacteristically narrow 146.25/65 range after starting the day at 146.54.We could see a reaction when London comes in to a story Reuters is reporting in the Wednesday Daily Mail saying that the BOE is prepared to expand their QE program some time in 2010.

AUD: - AUD/USD opened in Sydney at 0.8755 and has traded a modest 0.8744-83 range so far; last at 0.8758. It has been a rather messy session as one would expect this time of year. The AUD has been pushed around by Kiwi moves (weak NZ GDP); Euro moves (ran out of steam on the topside at 1.4275) and a slight dip in GBP/USD-on possible more QE.

NZD: - The Kiwi dipped from an open at 0.7017 in Wellington to a session and new trend low of 0.6972 in response to the softer than expected Q3 GDP data, which came in at 0.2% against 0.3% forecast. Gentle broad based USD selling provided a base in the morning and the price recovered to test 0.7004, only to slip back in the afternoon for a typical Asian range trading session.

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. Breaking above yesterday but on very light volume, so we are not yet convinced of a breakout. 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, & GBPUSD, USDCAD, USDCHF

Specific Trade Ideas:

S&P 500 & Risk Assets In General: Still in Long Term Uptrend, 4 straight up days take it to new 12 month highs around 1116, but only on light holiday week volume, so still unclear if a new leg of the uptrend is starting. 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 early Tuesday in a technical bounce after hitting a 6-1/2-week low, but the dollar's firmness drove it down to close at $1186 amid light trading ahead of the Christmas holidays. The lower trend line of its descending channel continues to hold as support, though it violated another up-trend line from August on Monday. (see chart below or in full version). Currently sitting at $1085.86, its 76.4% Fibonacci retracement, its next likely support level, after which the next supports are the lower descending channel line and the 100% retracement from its last pullback at around $1130.

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. Continuing to move down the channel below as long as the USD is rising, despite rising stock, optimism, inflation expectations – suggesting gold has been more of an anti-dollar hedge than an inflation hedge, its usual role

Gold Daily Chart (0 Dec 23) 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: Moving up despite the rise in USD and overall oversupply. The Organization of Petroleum Exporting Countries said Tuesday that the 12-nation cartel won't change production quotas, a move widely expected by investors. OPEC leaders called on group members to adhere more closely to current quotas and reduce cheating.

Prices were boosted by signs U.S. oil demand may be picking up. U.S. crude inventories fell more than expected last week, the American Petroleum Institute said late Tuesday. Crude stocks fell 3.7 million barrels while analysts had expected a drop of 2.0 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Here's an analysis we posted recently about why we like oil as a near term short trade, ideally if it gets back to the strong resistance of the upper line of the declining channel AND 38.2% Fibonacci retracement level. Looking ahead to the new year, it remains to be seen which forces will dominate oil prices – either the current rising risk appetite which should increase expectations for rising demand and prices, OR the rising USD IF US jobs and spending data continue to improve.

Profitable trading is not about being right all the time. It's about keeping losses small enough and winning trades profitable enough so that you can profit even with about 50% or less of your trades succeeding.

The daily chart below for crude oil offers a short trade that is a classic case of a high probability and low risk trade using both fundamental and technical evidence to put the probabilities in our favor. Here's why.

Crude Oil AVA FX Daily Chart (04 dec 23)

From a Fundamental Perspective

1. Crude supply is higher than this time last year, yet demand is lower :While inventory draw downs recently have exceeded forecast, there is still a glut of supply per official figures, never mind the tankers sitting full and idle that are not officially on the market as large speculators attempt to minimize supply.

2. Crude Tends to Move Opposite the USD, Which is Rising: Because commodities like crude are priced in dollars, a dollar rally pressures them, including crude.

3. The USD Is In A Rally That Could Last For Months: The factors driving this USD rally, which also should be present for the coming months, include:

4. Rising USD Interest Rate Expectations: Improving US jobs and spending, which together makes it more likely that the Fed will raise interest rates in mid-2010. While USD interest rate prospects are exceeding expectations, the central banks of most other currency groups (JPY, AUD, EUR, CHF, and GBP) are sounding more dovish, giving the dollar a relative boost.

5. A Weakening EUR, Which Boosts the USD: Euro-zone sovereign debt troubles in Greece and Spain are not yet resolved, and Ireland, Italy, Portugal, and Latvia are widely considered to be at risk for debt service troubles as well. This weakens the EUR. Because the EUR/USD comprises about 30% of all FX trade, and weakness in the EUR automatically boosts the USD (and vice versa, a major reason for the EUR's rise this year).

6. Stalling Optimism/Risk Appetite: Global stock indexes, the most comprehensive picture we have about market optimism about global recovery, have been consolidating. Ominous signs that credit markets are due for additional shocks, from both:

7. Risk of euro-zone sovereign debt default

8. Risk of rising US residential and commercial real estate defaults as mortgage rates reset in 2010-11, during which time some kind of interest rate increases are more likely than ever.

9. Possible Central Bank Gold Sales Support the USD: Neighboring Russia just announced its intention to sell $1 bln of gold in order to finance its deficit. The likely net short term (multi-month) effect is bullish for the dollar. Central banks were expected to be net gold buyers, now we're seeing some sell gold as well.

10. The Historic Gold/Oil Ratio: Assuming gold remains at about $1100, the most conservative 15:1 gold/oil ratio suggests oil should be at $73.33, almost exactly its current price. This provides another fundamental ceiling on oil

In sum, fundamentals for oil suggest a weaker price, both due to near term oversupply, a rising USD in the coming months, and the historic gold/oil ratio.

From a Technical Perspective

Acceptable Reward/Risk ratio, Small Loss With Properly Chosen Stop Losses and Targets.

• The long term rising up trend line from July, former-support-turned-resistance held on the 21st of December. It provides resistance at $74.68. A stop loss could be placed slightly above $75. If one entered at the current price of $73.20, maximum loss should be about $1.48.

• The 50% Fibonacci level is in the process of being breached, by itself suggesting a move down to at least the 61.8% Fibonacci retracement level at $71.65 for a gain of (73.20-71.65) %1.55, only slightly better than 1:1 risk reward level – not tempting from a purely risk/reward perspective, but acceptable given the context of the other technical and fundamental factors in the trade's favor. So this might be a place to take a partial position, to get you paying attention, and saving the rest of your intended stake for after the $71.65 level is breached. We suspect it would be, given the below fundamental factors.

• After $71.65, here is no real technical support until the 76.4% retracement level at $69.31. Thus if one entered at the current price of $73.20, likely gain if oil continues down would be until at least about there, for a gain of about $3.00, slightly better than 2:1 reward: risk. Not ideal (we prefer 3:1) but acceptable when considering the additional fundamental of oil, which favor more downside. After that support level, there is nothing of note until around $66, for another $3, which would be a 4:1 reward risk level.

• Worst Case Scenario Acceptable: Even if oil should turn back up and break through the rising trend line at around $74.68, and you incur the $1.48 loss mentioned above, there's another strong resistance level at $75.40 with the 38.2% Fibonacci Retracement that has proven itself repeatedly in November as support. Thus, given the underlying fundamentals of oil, it would be reasonable to expect it could offer notable resistance. One could quickly get back in on the short side, again with a small risk using a stop loss a bit above $76, risking just about $0.60 cents/bbl compared to a likely gain of around $2.5/bbl if using a conservative target price of the $73.58 level, the 50% Fibonacci level. That gives you a 0.60/2.5 risk/reward ratio of better than 4:1.


Will I be right? Who knows. The point is that the trade has low loss risk if we're wrong (assuming stop losses used as suggested above), and likely much higher reward if we're right, which the odds – given the fundamentals and technicals -- appear to suggest we will be.

Few if any really know how markets will play out. That's why we stick to trades that offer small loss risk and high probability of gains that are 2-4 times greater than the likely loss.

Manage your probabilities of success and risk, and profits should follow.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, broke under the the 61.8% Fibonacci retracement at the $1.4275 level, currently holding around 1.4245. As the prime counterpart of the USD, it has been crashing through support levels as recent Fed moves towards stimulus exit and rising US treasury yields continue to improve rate increase expectations boost the USD and thus weaken the EUR, which is further weakened by EZ sovereign debt worries.

Note how steep and narrow the EUR declining channel is, as low volume trade appear to be exaggerating moves and triggering more sell orders.

Trade Idea: While such a steep drop suggests a strong likelihood of some kind of bounce, go with trend until around1.4101, the 76.4% level, unless a bounce begins or some pro EUR news comes along.

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 didn’t 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 (06 Dec 23) 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. That’s unusual, but that’s what’s 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/CHF: As the tight, steep rising channel shows, this pair is mirroring the EUR/USD. 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.


GBP/USD TRADE IDEA: Also mirroring the EUR/USD. Not surprising, because this pair is tied for second most popular FX pair with the USD/JPY, thus USD strength pressures the GBP. The pair is further pressured by improving USD fundamentals and deteriorating GBP fundamentals, as the UK openly considers another 25 bln of QE. Thus this is a good short trade, especially if one can catch the pair bouncing back off of the upper channel line and 76.4% Fib retracement. Given the strength of the trend and illiquidity of the next few days, even entries at current levels could be considered, because illiquidity could trigger further sell stops and more declines.




eaking News

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Today in Commodities: The Theme Is Indecisiveness

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12/14 – 12/18 CAD Outlook: Hit By Low Yields, Stocks, Oil, USD

2/14 – 12/18 Euro Outlook: Burdened By PIGS, and Its USD Connection

12/14 – 12/18 U.S. Dollar Outlook: Pieces Falling Into Place For Bullish Reversal

12/14 – 12/18 Global Market Outlook: Must-Know Dominant Forces & Implications - Short Version

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