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'S DATE
BIG PICTURE: Bias remains to the upside for risk assets as the S&P regains retraces Wednesday's gains and is forming a horizontal trading range. We wait to see if further earnings will again provide support after yesterday's drop. But Asian markets down on China tightening. S&P 500 and other major global stock indexes still in well established up trends, earnings data will be key over the next week. However, as noted above, when the S&P 500 starts to pull back from its upper Bollinger Band on its daily chart, it has usually forms a brief flat trading range, then tests support back down to around its 50 day moving average. Given the downbeat market reaction to US earnings thus far and a relatively light week for news, our bias for risk assets is to the downside in the coming days. See below for specifics on the S&P 500, CRUDE, GOLD, EURUSD, NZDUSD, USDCAD, USDCHF, and GBPUSD
Big name earnings reports are the likely key influence on sentiment. For any trades we try to select only those trades with resistance/ profit targets that are 2-3 times farther away 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: As noted above in Conclusions, given its tendency over the past 7 months to retreat back to around its 50 day moving average once it pulls back from its upper Bollinger band, and the dour market reaction to earnings thus far, especially those of the banks, bias to the short side. However, we're impressed that buyers stepped in yesterday with only a mild pullback, despite the numerous time bombs ticking under the global credit markets and data that suggests whatever recovery we have coming along very haltingly.
The safer move is to wait for a pullback, like we saw on the 12 preferably to some kind of support level (at least the 50 day EMA), and then jump in when that reverses, as happened yesterday. 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. In recent long term treasury bond auctions, the high percentage of awards to direct domestic bidders had many wondering if the Fed is in fact doing a major share of the buying via intermediaries. If so, that suggests flagging foreign demand and eventually falling bond prices and 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).
Yesterday's retracement of gains continues the flat trading range which so often has preceded a pullback, so our bias remains to short risk assets in the near term, though the longer term up trend is still intact for stocks, though gold may be losing its uptrend and oil is close too.
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.
S&P 500 Daily AVA FX Chart- Unchanged as of early Thursday (04 Jan 18)
** GOLD: Breaks through support on China, Europe news that suggests less inflation and growth, and also on USD strength. From a Technical perspective it is breaking down badly, violating multiple up trend lines and the 50% Fib level. Likely to move opposite the USD, which is moving opposite stocks and the euro.
Long: Conservative traders should avoid longs for now until it either retakes and holds near the the 50% Fib level at around $1125 (at which point advice from yesterday holds see 1/20 Daily Outlook), or support holds at the 61.8% level and it begins to move back up for a target exit around the 50%% Fib level. Stop loss should be just below the 61.8% Fib support, but close enough to allow better than a 2:1 gain when price hits the exit target just below $1125.
Short: We said yesterday that we do not recommend opening new shorts until gold breaches the 50% Fib support level with a stop just above your entry point (with then a target exit near 1103, the 61.8% Fib level, OR after gold tests and fails to break over the 38.2% level around 1148. Now we got that, and all who caught the move on time have a good chance for further gains as gold continues to fall in early Thursday trade, with a target just above the 61.8% Fib level at $1102 at least. This level has not provided strong resistance in the past, and thus could easily yield for bigger gains. We recommend opening new gold short positions only after this level is breached, with stop losses just above it.
Gold is moving opposite the dollar and with stocks and risk appetite, 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 (01 Jan 21)
Crude Oil: STILL Managed to breach and close below the 38.2% level.
SHORT: Currently around $77.50, still worth entering on the short side as long as the next meaningful support level at around $76 allows you a better than 2:1 gain compared to your potential loss if your stop, which should be around today's opening price per the below chart, is close enough to allow that. Crude is volatile, so best to accept being stopped out and then just jump on the trend in the other direction. Will move with risk appetite and the dollar, which for this week rests mostly with US earnings and other key events noted:
LONG: Wait until either crude retakes the 38.2% fib level around $78.05 or finds support at the 50% Fib level and begins reversing back up.
As correctly noted days ago, our bias for the coming days was, (and remains) to the downside as long as the US dollar is rallying and stocks struggle. Oil has been in a range of about $82-$69, so the short side has lots of room should risk sentiment make a longer pullback. From a technical perspective, note how oil appears to be amidst the latter part of its pullback when it begins to pull back from its upper Bollinger Band. It is also getting close to breaking its uptrend line from July. Fundamentals still show plenty of supply relative to demand, and guess what will be used to bail out Dubai? Oil production.
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 (02 Jan 21)
EURUSD: Sliding down on "Greeced" Rails: Down hard Wednesday vs. all majors as weak German PPI and ZEW data, PIIGS (Portugal, Italy, Ireland, Greece, Spain) debt concerns and a strong dollar combined to send the euro lower all day long, breaking strong support at 1.4270 after already falling through its 50 and 200 day SMA. With the 50 SMA looking to soon cross below the 200 SMA and form the "death cross" that suggests a longer term downtrend. As the chart below shows, the pair formed a bearish flag that suggests further downside.
The EUR/USD decisively breached the 1.4200 level Wednesday on heavy selling after attempting to stabilize there. Weak German PPI suggests that the EZ recovery is stalling along with that of the US, thus sentiment against the euro remains negative, as sellers are clearly aiming to test the psychologically important 1.4000 level, which confirmed the current rally that began in April of 2009.
Long: Wait until it either retakes the 76.4% Fibonacci retracement level near 1.4100, with stop loss just below , or at least close enough to allow a gain if you sell just before the 61.8% Fib level that is more than twice the loss if your stop is hit.
Short: Sell at or near a break below the 76.4%% Fib level around 1.4165. Currently at 1.4051, still time to get in as long as your stop loss point (ideally above the 61.8% Fib level) allows better than a 2/1 reward risk compared to your profit if you sell just above our target at the 100% retracement at about 1.3800. If that support breaks, nothing but air for support on the daily charts until about 1.3500
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.
EURUSD DAILY CHART (03 Jan 21) AVAFX CHART
NZDUSD: Down hard again yesterday and thus far today in morning trade (GMT time). It is testing the 0.7167 level, after breaching the 26.6% Fib level and its 50 day SMA. Together these formed very significant double support.
SHORT: As noted yesterday, that was a great entry point to go short, feel free to enter as long as the distance to just above the 38.2% Fib level at 0.7062 is better than 2:1 compared to your stop loss.
LONG: Wait until either the pair retakes the 23.6% Fib level, or the 38.2% Fib level holds, with stop loss just below it to allow at least a 3:1 reward risk with exit target just before the 23.6% level.
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 (04 Jan 21) AVAFX CHART
USD/CAD: Up hard on dollar strength and no countervailing CAD news, and oil is unchanged, thus providing no help for the Canadian dollar. Note that the recent move up broke the near term strong downtrend. As noted above, euro weakness appears to have caught a lot of US dollar shorts hitting stops in a "short squeeze."
As noted yesterday -- the 76.4% Fib level was a great entry point for a long trade with room to run, with target exit just before the 61.8% level around 1.0448, feel free to enter higher up as long as you've a bit better than 2:1 the distance to that level, which should provide some resistance. With price currently around 1.0497, the pair is in the middle between support and resistance.
LONG: Wait to enter at either a retest of the 61.8% level or a breach of the 38.2% Fib level with target to the 23.6% level, as long as you get in early enough to allow for placing a stop loss that is only a third the distance or less to this price target.
SHORT: Wait for the 50% level to hold and the move down to resume. Better still, safer to wait for a breach of the 61.8% level around 1.0445.
USDCAD DAILY AVA FX CHART (image: 05 Jan 21)
USD/CHF: Moving with US dollar strength as the euro sells off, and possible concerns about SNB intervention to keep the Swiss Franc from rising too much against the EZ currency, the main Swiss export market.
Long: After yesterday's big move up, wait to initiate new long positions until it breaches the 0% Fib level around 1.0500, target 1.0591, OR a successful retest of support at the 23.6% level
Short: Wait for a breach of the 23.6% Fib level and enter at any point at which the distance to the 61.8% level around 1.0225 is still better than twice the distance to your stop loss, which should be just above the 23.6 level.
USD/CHF DAILY AVA FX CHART (06 Jan 21)
GBP/USD: Still in the grip of the feared DEATH CROSS L
Long: wait until the 61.8% Fib level holds and the uptrend resumes, target just before the 50% level with stop loss just below the 61.8% Fib level, around 1.6156. BEWARE THE DEATH CROSS- the 50 day SMA (red line) has crossed below the 200 day SMA, suggesting a longer term downtrend is in the making. This suggests bias to the short side.
Short: We now have BREACHED the 61.8% level, currently at about 1.6157, great entry point around this level as long as the distance to the 76.4% Fib level is more than 3x the distance to your stop loss, which should ideally be above the 61.8% Fib level.
GBP/USD Daily AVAFX CHART (07 Jan 21)
DISCLOSURE: NO POSITIONS