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Low Risk, High Reward Trades Tuesday 2/9: Stocks, Commodities, Forex

Note: the below is an abridged version of our full daily outlook, and focuses solely on selected trades.

Big Picture

As of early Tuesday in Europe, most risk assets attempting oversold bounce begun Monday into early Tuesday despite Euro debt concerns. EUR, AUD, CAD rising on oversold bounce vs. the US dollar. Watch the S&P 500 and EURUSD to gauge risk appetite and USD strength. Scheduled news events very light this week, so barring new anxiety over the Euro debt crisis, could be a consolidation or risk asset oversold bounce kind of week.

Short Term Bias Down/Neutral

With little scheduled risk events this week, there is a good chance for either consolidation or a short term oversold bounce in risk assets. Once the S&P 500 ( or chief barometer of risk appetite)starts to pull away from its lower Bollinger Band, it tends to rise to the middle—upper range of these bands, between 1112 -1140. Euro debt concerns have pushed the S&P 500 to test near strong support around 1040, a price level, 38.2% Fibonacci retracement level, and also has the 200 day simple moving average close by. Should this give way, 1007 is the next likely support.



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.

S&P 500 Daily AVA FX Chart- Unchanged as of early Thursday (04 Feb 08 ava)

S&P 500, Other Major Global Stock Indexes: The current picture is bearish, with strong support at 1040 with both the 61.8% Fib Level AND 200 Day SMA. Given the minimal scheduled risk event for this week, it's more likely that we get some consolidation or even another attempt at an oversold reaction bounce, barring any new squealing out of the PIIGS pen. EU sovereign debt crisis is worsening by the day as media latches onto this and fear metastasizes into rapidly rising borrowing costs that endanger PIIGS solvency, which in turn could again shake and freeze up credit markets. Last time, it only took the Lehman Brothers' failure. An EU member default, especially if it leads to spiking borrowing costs for the other PIIGS, could do it again.

Trade Ideas: Sitting between support and resistance levels – wait until:

LONG: Enter on breach of 23.6% fib level at 1081or test and hold of the 38.2% fib level and 200 day SMA at 1040. Stop loss should be less than1/4th the distance to your target exit point, the next Fib level or other major resistance like the 50 day SMA

SHORT: Enter on a failure to breach the 23.6% Fib level or penetration below the 1040 level, which has both the 38.2% Fib level AND the 200 day SMA>

Lots of potential downside risk for risk assets like the S&P 500, commodities, and risk currencies.

· The potential time bombs ticking under the US banking and housing sectors from coming wave of mortgage rate resets higher. As noted in the most recent Weekly Outlook, the last time a wave of this size hit caused the subprime crisis that ultimately sent the world into the current Great Recession.

· The Euro-zone sovereign debt default threat area –Update: Greek bond sale was successful but didn't move markets. Portugal's failed, and borrowing costs for the weaker Southern European economies will be rising (barring some sort of bailout or bond guarantee from the EU or others). That in turn makes their solvency that much more questionable.

· 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.

· Foreign demand was absent from one of the most recent US Treasury bond auctions

· Japan credit rating recently downgraded (though Yen continues to be best performer in recent weeks due to risk aversion alone).

GOLD: A typical commodity chart. Like the S&P 500, sitting between support and resistance levels, and has both a Fibonacci level and 200 day SMA as support just below it.

Trade Ideas: Wait to enter until:

Long: Penetrates the 38.2% Fib level at 1086, or retests and starts to bounce higher off the 50% level.

Short: Fails to penetrate the 38.2% Fib level and starts to head lower, or breaches the 50% Fib level at 1043

As always, stop loss should be at least 1/3rd the distance from your entry point compared to the distance to your profit target for at least a better than 2/1 reward/risk ratio.

Following risk appetite down, also pressured by USD strength. From a Technical perspective it is breaking down badly, violating multiple up trend lines and supports, including the 50 day SMA. Stabilized Friday, attempting to retake the 38.2% Fib level and price level around 1102, reflecting the overall modest bounce in risk assets and looking ready to test the support of the next Fib level and then lower down trending channel. Likely to move opposite the USD, which is moving opposite stocks and the euro. Fell hard with dollar strength last Thursday, currently attempting a modest rise on modest dollar weakness in early Europe trade.

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. Like the rest of the market, likely to move with further news on the EU debt crisis.

Gold Daily AVA FX Chart (05 Feb 08)

USD/NZD: A typical risk currency chart for today, similar to many others you could find.


Currently at 0.6889, up from the 0.6918 level seen yesterday, just above the 50% Fib level. NB THIS ONE IS GETTING CLOSE TO A TEST OF THE 50% LEVEL, FOR A GOOD ENTRY LONG OR SHORT. Our bias remains short until there is progress on the Euro debt mess, though oversold bounce is always a possibility.

Long: Beginning to breach the 50% Fib level as risk assets attempt an oversold bounce in early Trade in Europe. Enter at current levels or higher as long as the stop loss, placed just below the 50% level, is close enough to allow a gain if you exited near the 38.2% level that is more than twice as large as your loss if your stop were hit. Note also that the 50 day SMA (red) is the next likely resistance, as it proved to be temporary support last week.

Short: Wait for it to retreat back under the 50% Fib level with target exit just above the 61.8% Fib level. Same stop loss rules apply as above.

EUR/USD: Like the S&P and so many other risk asset charts, sitting between major support and resistance levels, thus wait until:

Long: Enter at breach above the 50% Fib Level or bounce higher off of the 61.8% Fib level. NB Tight stops since the trend is still strongly downward

Short: Enter on a test and bounce lower off of the 50% Fib level or penetration of the 61.8% Fib level.


NB: Most other charts we viewed showed this same status of being in between major support and resistance levels