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FOREX, COMMODITIES, STOCKS Brief 1/11: Key Events, Trends, Trades

NB: THE FOLLOWING IS AN ABRIDGED VERSION FOR FULL ANALYSIS AND CHART ILLUSTRATIONS OF RECOMMENDED TRADES GO TO http://fxmarketanalysis.wordpress.com/   AND SELECT "DAILY OUTLOOK" FOR TODAY

Stocks: Prior Day: Asia, Europe, USA 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], US Dollar down as jobs data defers stimulus exit, interest rate increases

- Main events MON: AUD-Job Ads m/m USD: FOMC Member Bullard Speaks, EUR: French Industrial Prod. m/m CHF: Retail Sales y/y CAD: Housing Starts, Building Permits m/m, BoC Business Outlook Survey NZD: NZIER Business Confidence US EARNINGS MON: Alcoa (most major names not announcing until next week TUES: GBP BRC Retail Sales, RICS House Price, Trade Balance, AUD: Home Loans m/m, CAD Trade Balance, USD: Trade Balance

- Big Theme: Dollar rally over for now, anti-USD trends prior to December reassert. Many at Good Entry Pts SEE – SEE RECOMMENDATIONS BELOW FOR THE COMING DAYS

STOCKS SEE OUTLOOK FOR FULL DETAILS ON ALL INSTRUMENTS

US: Stocks still managed to make their way higher despite the overall negative market response to the latest monthly payrolls report and a raft of analyst rating revisions, as participants chose to focus on the improving trend in jobs, which both kept growth hopes alive and deferred interest rate increases, which are bad for earnings and thus for stocks.

Asia: Japan markets closed, the rest of major Asian markets up following through on US rise.

European Stock Outlook: European shares rose in early trade on Monday, with energy companies and miners among the top performers, after strong trading data from China boosted sentiment.

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ASIA- UP N225I +1.09% HS +0.12% SSEC +0.10% FTSTI +0.29% AORD +0.24 %
EUROPE UP FTSE +0.14% DAX +0.30% CAC +0.51%  
US- UP S&P +0.29% DJIA +0.11% NASDAQ +0.74%    
THIS MORNING UP N225I +1.09% HS +0.51% SSEC +0.52% FTSTI +0.40% AORD +0.79 %
UP FTSE +1.03% DAX +0.83% CAC +0.94%  

Commodities Outlook: Commodities higher Friday and into early Monday on weakening USD, strong China data. SEE THE WEEKLY OUTLOOK FOR FULL DETAILS AT http://fxmarketanalysis.wordpress.com/

Crude Oil Outlook: SINGAPORE (NYSE:AP) -- Oil prices jumped above $83 a barrel Monday in Asia amid signs of strong Chinese demand for crude and rebel attacks on Nigerian supplies.Benchmark crude for February delivery was up 80 cents to $83.55 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange. On Friday, the contract rose 9 cents to settle at $82.75.

Gold Outlook : Spot gold rose to a five-week high early on Monday, jumping to as high as $1,158 an ounce, from as low as $1,119.45 on Friday. after data showed a sharp rise in China's commodity imports and the dollar dropped against other currencies. Trading was thin with the absence of Japanese speculators

FOREX Outlook: US dollar weakness from poor US jobs data, which reduced expectations for stimulus exit and interest rate increases, and continuing bias to risk appetite. FOR DETAILS ON ALL MAJOR FX PAIRS SEE: http://fxmarketanalysis.wordpress.com/ AND SELECT “WEEKLY OUTLOOK”- FULL VERSION, SHORT VERSION, OR CURRENCY SPECIFIC WEEKLY OUTLOOK

US Dollar Outlook: Bearish in the short term, as long as risk appetite remains and we don't see any of the "Key 4 USD Drivers" (fear event, improvement in USD jobs/spending data, anti-EUR news, rising Treasury Bond rates). Bullish over the coming weeks as risk factors favor the Dollar’s safe haven role and improving job trends boost dollar fundamentals. Any dollar trend changes in the near term depends on news concerning the 4 dollar drivers listed in the beginning of the below analysis. In sum, dollar rally over for now, awaiting one or more of the 4 dollar driver events.

Euro Outlook: Holding gains in early Monday trade. Euro Weekly Outlook: Range Trading For Now vs. the US Dollar, Risk Ahead of European Central Bank, EUR/USD Breakout Coming? Watch for developments on Portugal debtStill, jitters about more downgrades in the region could weigh on the euro. The Financial Times reported that Portugal has been warned about a threat to its ratings.

That is likely to compound worries already caused by Greece's credit battle and Iceland's row with the Netherlands and Britain over its banking collapse

Yen Daily Outlook Japanese Yen Weekly Outlook: Dropping Conflicting Yield Trends- we continue to prefer USDJPY upside on increasing yield differentials. NB Monday is Japan bank holiday.

British Pound Daily Outlook: British Pound Weekly Outlook: Limited Event Risk, 200 SMA Resistance

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Australian Dollar Daily Outlook: Early Monday: The Australian dollar rallied to a 26-month high versus the euro <AUDEUR=R>, rising to as high as 0.6442 Euros. The Aussie also struck a fresh five-week high of $0.9305 buoyed by strong Chinese export numbers . The Aussie was also bolstered by a rise in gold prices. Testing 2009 Highs on Rate Expectations: Australian Dollar Outlook: Bullish

New Zealand Dollar Daily Outlook: New Zealand Dollar Outlook: Tracking the Aussie, Risk Appetite holding gains from Friday in early Monday Trade

Canadian Dollar Outlook: Canadian Dollar’s Tight Link To Oil Still The Key. Holding gains in early Monday trade

Swiss Franc Daily Outlook: retreating slightly vs. the USD after strong gains Friday and over the weekend of about 150 pips, also retreating vs. the EUR

CONCLUSIONS: S&P 500 continuing slow steady rise over the past week along with other major indexes, now at or near new highs. Near term direction likely to be driven this week by regularly scheduled releases and the beginnings of Q4 US earnings, which begin in earnest next week. See below for specifics on the S&P 500, CRUDE, GOLD, EURUSD, NZDUSD, USDCAD, USDCHF, and GBPUSD

BIG PICTURE: Bias to Risk Appetite:The S&P 500 and other major stock indexes remain in up trends, thus our longer term ambivalent bias is long on risk assets like stock indexes, commodities, and higher yielding currencies, though as stimulus programs end in mid 2010 and mortgages reset higher we are skeptical about the rally's long term health. Meanwhile, play the uptrend. Because we suspect that the Euro-zone's debt travails are far from over, and that some key commodities are still overpriced, our longer term bias is to believe the USD trend up still has room to run. Friday's NFP deferred that for now, and the current trends are anti-USD, pro risk assets (stocks, commodities and high-yield currencies). Beware that the USD trend could resume upon news of any of the 4 "dollar driver" types: fear event, positive US jobs or spending data, anti-EUR data, or falling Treasury bond prices (increases US bond yields, interest rates.

For any trades so we try to select only those trades with resistance/ profit targets that are 2-3 times farther from the entry point than the stop loss, for a 2:1 or 3:1 reward/risk ratio.

SPECIFIC TRADE RECOMMENDATIONS:

S&P 500, Other Major Global Stock Indexes:

Advice: Earlier we recommended avoiding long plays until it hits stronger support or breaks decisively above 1120. It did that and continues its steady rise. Stocks still managed to rise despite disappointing US jobs reports, suggesting that risk appetite is both resilient and that the belief in growth and higher valuations is alive and well for now. Currently around 1145, and continuing to climb its upper Bollinger Band. As the chart below shows, that can be risky, so those going long should keep tight stop losses in place..

The safer move is to wait for a pullback, preferably to some kind of support level, and then jump in when that reverses. At that point we'll examine it to see if the reward/risk ratio is worthwhile. The fact that it's struggling to hold its uptrend line from August is another indication of the trend's weakening, though still bullish picture. Monday's retaking of its upper trend line means we're getting close to taking new long positions for the short term. We remain ambivalently bullish ONLY because that is the current trend. However, we urge those long on any risk assets to keep tight stop losses in place, given:

· The potential time bombs that continue ticking under the US banking and housing sectors, as well as in

· The Euro-zone sovereign debt default threat area –Update: Portugal received a warning about another downgrade from its current A+ rating following a downgrade January 21 2009.

· The Fed has now warned banks to get ready for rising rates and the certain increase in mortgage defaults. Stocks do not tend to do well in an environment of rising rates

· The very real falling demand for US Treasury bonds, which the US must keep issuing, and thus the very real incentive for Washington to allow stocks to crash a bit and drive up US T-bond demand (hat tip to Graham Summers for that observation).

Because the S&P 500 is so representative of overall risk sentiment, and thus the "One Chart to Rule Them All", always take a look at the daily chart (or other relevant timeframe to the style you trade) for a picture of overall risk appetite or aversion. The current picture is bullish/long but the move may be losing momentum and flattening out. This week's US jobs data is likely to set the near term direction.

S&P 500 Daily AVA FX Chart (01 Jan 11 )

** GOLD: Commentary: Breaking out higher on USD weakness, and risk appetite feeding potential inflation fears.

Trade Suggestion: Long: Currently around $1153, just above the 61.8% Fibonacci level, target near 1174, stop loss just below the 1145 level for better than 2:1 risk reward. There is more room for a move down, which could happen if US jobs data is very good. See the below chart. NB: News just broke about threatened credit downgrade to Portugal. If that weighs on the markets, gold could stall or reverse, so be watching news on this.

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 and news to see if risk appetite gets a lift from improving spending, jobs, or other data that ALSO boosts USD stimulus exit and interest rate expectations, thus supporting the dollar and driving down gold.

Gold Daily AVA FX Chart (03 Jan 11)

Updated Gold Forecast-

The key factors behind gold's recent rise were:

· Expected big purchases by central banks

· Declining USD

However, the last big central bank move concerning gold was from Russia, an announced SALE of about $1 bln to finance debt, so that picture is not as clear, especially if the dollar resumes its rise and causes gold to falter. That in turn will depend on whether we see further news concerning one or more of the 3 dollar drivers: a panic event, improvements in US jobs and spending, or news that undermines the EUR. Sovereign debt troubles in the Euro-zone combine two of the three.

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: Long only as a short term momentum play for those willing to take the risk of going long. Currently near $83.50: Has broken to new 12 month highs, and risk appetite is still on despite Friday's tepid US jobs reports. However, it has fundamentals against it - Inventory situation is improving, but there is still plenty of oil relative to supply. Technicals also not great. As the below chart shows, going long after this long an uptrend, when oil is climbing its upper Bollinger Band, is a high risk play. Given the ease with which oil price can and are manipulated, we don't recommend crude trades unless they show us very compelling reasons. None at this time, because it's too late to go long, and too early to go short – we wait for signs of reversal before entering. However if the current USD uptrend reasserts and oil stalls, consider shorting oil as close to one of the Fib or price levels as possible.

Short: Not yet, but wait for pro dollar or anti-growth news. Oil is volatile and can move down fast. It has neither fundamentals nor technicals on its side (other than momentum, which may be enough in the very near term. No meaningful support price support until around $80-82 when the time to short comes.

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

WTI Crude Oil Daily AVA FX Chart (04 Jan 11)

EURUSD: Like many of the anti-USD Forex plays, jumping higher in the wake of the weak US jobs report and weakening USD. Given the clear short term bias to risk assets shown in the S&P 500 chart above, current bias is long.

Long: Wait until it breaks the 1.4600 resistance level or retests the 1.4428 (50%) Fibonacci retracement level, with stop loss just below the recently broken resistance turned support.

Short: At or near a break below the 50% Fib level, this has been stubborn resistance lately.

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.


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