Monday, October 5, 2009


Introduction: In General, Stocks Lead, Commodities and FX Follow

Global stock markets continue to set the overall direction for commodities and currencies markets, though gold was a notable exception which we'll discuss below.

In the below chart of the S&P 500 index, an experienced market observer can see the overall direction for most other major global asset markets.

Typically, global stock markets move in the same overall direction, though not always on a daily basis. The same goes for commodities, as well as their related "risk currencies" the AUD, NZD, CAD, and EUR These are currencies that tend to move up against the safe haven currencies (JPY, USD, and CHF) when market sentiment is upbeat and anticipates growth, and move down against these when stocks and commodities are dropping due to market pessimism about future growth.

Market Diary: What Happened Since Our Last Newsletter

Global Stock Markets

Because most major international stock indexes move with the S&P 500 Index, the chart below of the S&P 500 Index Futures Contracts gives us an overview of all major global stock indexes since our last Newsletter of 9/21.

The S&P 500 Futures 09/21—10/05

While historically, September has been a losing one for stocks, the S&P managed to close the month higher, and is still above August levels despite the first two consecutive losing weeks in many months.

Despite the past two weeks, technical damage is minimal. While the index has broken support of its rising trend line from July 12, it remains at its 50 day simple moving average (red) and still above the rising trend line from March 2nd and July 12, leaving the March rally still intact.

Most of the retreat came from a 3% drop from Tuesday-Friday as markets correctly anticipated worse than expected US unemployment data, and had already priced in most of the results on Thursday Oct 1, as shown in the very minor dip in stocks after the actual release the next day.

Using 100:1 leverage, those playing this drop had the potential to make 300% profit within 4 days.

One could argue that the relatively small dip on Friday showed that the market has continued to show resilience, for the job numbers were truly awful. Highlights include:

• Nonfarm Payrolls showed -263K jobs vs.-175K expected, a 50% greater decline than expected.

• The unemployment rate rose from 9.7% to 9.8%, the highest in 26 years, and official statistics are widely assumed to underestimate true unemployment.

• Average hourly earnings and weekly hours also fell, meaning Americans are working less and earning less. Not promising for an economy driven by consumer spending.

• The worst part of all was the Bureau of Labor Statistics’ announcement that they revised down job losses between March 2008 and March 2009 by 824k. This means that on average, there was approximately 70k more job losses each month during that period than initially reported. Note that these official statistics are widely believed to underestimate true unemployment due to technical flaws in how they are calculated.

The main implication is that the US recovery story takes a big hit, reducing the prospects for the Fed raising rates or exiting stimulus programs. Thus despite the decline in stocks, the USD dropped against most of the higher yielding currencies, and is increasingly likely to do so barring a major drop in equities.

Commodities: Edging Down Within Multi-Week Ranges, Providing Solid Range Trading Opportunities

Crude Oil

While maintaining its overall uptrend since March, crude has broken beneath support of its rising trend line from July, and has been down-trending since its August highs.

Crude Oil 09/21—10/05

Note also that while crude has remained within a roughly $72-$65 price range, it has spanned this range once for a 10% move within 5 days, and then retraced from $65-$70 for a 9% move within another 5 days. Using 100:1 leverage, that's 1000% and 900% potential profits in 2 separate 5 day periods, 1900% total. True, most of us wouldn't catch the whole move, but who wouldn't be happy with even half of these returns in so short a time? Moreover, both were steady moves with little chance of getting stopped out as long as your stop loss order wasn't too tight.


Made a 3% move down from 9/23-25, then retraced up over 2% 9/28-30. Using 100:1 leverage, these were potentially 300% and 500% profit opportunities.

Gold 09/21—10/05

A traditional buy and hold investor with no leverage would have made little since 9/21. However, a trader doesn't need large sustained moves. By identifying the swing points or resistance and support levels, and by using 100:1 leverage, simple range trading in a relatively modest 3%-5% range can yield outsized gains for even those with very modest trading capital.

Interested in reading more about gold and crude? Check out our latest special report: What Pro Traders Think of Gold & Crude . Go to the, under resources, select Market Review, and find the report under the daily analysis for October 5th.


While risk currencies also followed the overall direction of stocks and commodities down against the safe haven JPY, USD, and CHF, this predictable move does not mean currencies haven't also had their share of drama.

For example, the EURGBP, jumped over 2.5% in 3 days (9/24-7Using 200:1 leverage, that's a potentially 500% move in 10 days, that could turn a mere $500 stake into $1250. See our latest weekly outlook for a detailed look at this week's prospects for all major currencies. Go to>Resources>Market Review and scroll down to the Weekly Analysis Archive. At the top of the list, choose the issue for October 5th .

Also of note, after this past Friday's horrific US employment reports, while stocks dropped, so did the USD. This is unusual given that the USD has a strong tendency to rise when stocks fall because traders buy it as a safe-haven bet or in the course of taking profits on carry trades that used the USD as a funding currency.

Why the strange behavior? Many believe that the report undermined the US recovery story enough to further delay USD interest rate increases.


As we noted in our last biweekly review, with many risk assets like the S&P and crude oil at 10 month highs, we continue to suspect that traders would be wise to plan for playing a pullback in risk assets. Some of the reasons we believe this could happen are discussed in the weekly analysis.

However, even if markets continue to trade in reasonably tight ranges, the above recap of the prior 2 weeks shows that there are always opportunities of outsized profits for alert, serious traders who do their homework and use leverage properly.

This is exactly why AVA FX strives to provide such a diverse range of trading instruments. While other markets are struggling, our clients can always find a bull market somewhere

Disclaimer and Disclosure: The opinions expressed do not necessarily reflect those of AVAFX. The author holds no positions in the above instruments.

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