Tuesday, November 24, 2009

BEST INTERNATIONALTRADES PER DAILY CHARTS 11/24: S&P 500 Stalled at Resistance, Ditto Other Risk Assets

S&P 500: Resistance holding at 1110 where there is a convergence of both the upper Bollinger Band and a bearish doji candlestick from Nov. 18th, surrounded by equally indecisive spinning top candlesticks. Also of concern, the price level is currently in the middle of its rising channel, and the current $1100 level is itself a price resistance level. Thus we believe traders should be wary of opening new positions on this index and on all other assets until we get a decisive move above or below 1100. As noted above, it’s a struggle between liquidity pushing stocks up vs. concerns over the underlying fundamentals and high valuations that suggest selling. Unclear how it will play out. 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 1076 (Fib retracement +20 day MA + some price support from mid-October + rising trend line) or a decisive break over 1100. Traders should be very cautious opening long positions in risk assets at this time, and employ tight trailing stops or monitor positions closely on existing open long risk asset positions.

S&P 500 Daily Chart as of Nov 24 (01 Nov 24)

GOLD: Continues moving largely independent of movements in equities, moving instead on speculation (or a new fundamental outlook of greater demand?) that other central banks and other large buyers may do the same, and breaking to new highs despite the struggles of stocks and energy commodities with which it has typically moved. The below chart shows possible retracement points if/when the move makes normal retest of support. Making a very grudging retreat, far less than most other risk assets, in early Tuesday trade

NB: Yesterday's candle shows an indecisive spinning top. No major deal by itself, but taken together with

• it's being perched atop such a steep, fast rally and

• the coming a low liquidity thanksgiving weekend

Traders have to be wondering if the next day or so might be a time to book profits. Those with open longs should have some kind of stop loss to protect profits.

Gold Daily Chart (02 Nov 24)

As noted in our Global Markets Outlook 11/23-11/27:

Last week, gold rallied +2.75 to 1146.8 and the new record high was set Wednesday at 1153.4.

There's a growing belief in a new fundamental factor -- that underlying demand for gold has increased due to central bank buying. After the Reserve Bank of India, the Bank of Mauritius bought 2 metric tons of gold from the IMF at market price on November 11. Compared with India's 200 metric tons, Mauritius' purchase was insignificant. However, same as the deal with India, the implications radiate far beyond the size of the deal itself.

Earlier this year, the IMF announced its plan to sell a total of 403.3 metric tons of gold to bolster its finances. The news weighed on market sentiment as investors worried about at how much and to whom the gold would be sold. Now, more than half of the planned amount has been sold to official sectors at market prices, sentiment appears to have shifted from concern over overhanging supply to disappearing supply as large exporter central banks and sovereign wealth funds seek to convert depreciating dollar holdings into gold. Right or wrong, that is the sentiment at this time, and it's been strong enough to send gold soaring while crude and stocks have been stalling out. Impressive relative strength that has won many believers and convinced markets that any pullback will not be pronounced or long.


• In April, China, the biggest gold producer in the world, increased reserves by +76% to 154 metric tons since 2003. The market anticipates China will be another big buyer of IMF's gold.

• Since the beginning of 2009, gold price has rallied almost +30%. Also, after breaching 2008-high at 1033.9, the yellow metal's rise has accelerated, jumping more than 100 dollars in a month. The long-term uptrend is not likely to end soon.

• Apart from government buying, new private gold funds should give a further boost to robust investment demands. John Paulson announced his plan to launch a new gold fund next year with as much as $250M of his money. Large gold ETFs or funds usually have holdings that are comparable to central banks. For instance, SPDR Gold Shares, the world's largest gold ETF, is the world's 5th largest bullion owner just below France and above China.

In short, it's not just increasing gold demand, but demand from big buyers.

In coming weeks, gold price should continue to be very much directed by USD's movement. However, the inverse relationship between gold and the dollar should not be taken for granted. For instance, in the 90s, the yellow metal's supply was so abundant that its price plummeted. In 2005, gold price surged due to tightness in the market. Therefore, some analysts hold that gold price may continue to rise given the reduction in gold production and increase in central bank demand, despite a possible rebound in USD early next year. Famed NYU Economics Professor Nuriel Roubini, credited for calling the current crisis years ago, believes the run in gold is an unsustainable bubble, while famed commodity trader Jim Rodgers holds gold is going much higher. As long as the central bank/sovereign wealth/momentum story holds up, Rogers looks correct.

Crude Oil: Following stocks lower early Tuesday. Range trading between $82-$76/bbl since mid October, moving more or less with stocks as the S&P struggles at the $1100 resistance level and oil at $82, neither to move higher until further positive news on the recovery. However, with gold having continued higher in utter disconnect from stocks and oil, the historic gold ratio now justifies oil as high as around $97.25 (12:1 ratio) and no less than $77.80 (15:1). Thus while crude remains range bound, if gold can continue breaking to new highs, as many expect it to do, then crude could follow it sharply higher over time, especially if other risk assets can avoid a sharp correction (which they are doing nicely, as shown by the S&P 500 breaching resistance at $1100) or there is evidence of continued strong demand from China and other developing economies.

NB: Crude has been among the weaker risk assets over the past month despite the USD's weakness. Crude peaked weeks before stocks did, and is behaving relatively worse than stocks. For example, yesterday's action showed that stocks were still able to retain some of their gains when momentum reversed, but crude could not, and closed lower. Not surprising, since crude tends to exaggerate the S&P 500's trends for better and for worse. Range bound for the near term, will likely follow stocks higher to its upper range near $82 if stocks can rally, but poor fundamentals and an extended rally for both oil and the S&P 500 that it tracks suggest more downside risk at this time.

Certainly seems unwise to consider new longs until oil hits at least the $73-6 range, if not lower. Watch the S&P 500 to lead oil.

WTI Crude Oil Daily Chart (03 Nov 24)

EURUSD: Like the S&P 500 and Oil, has been range trading since mid October and is closely mimicking the S&P 500's action yesterday and early Tuesday as of this writing. Expect it to continue to do so. It's primary advantage as a trading vehicle over the S&P 500 is that as a forex pair, traders can use 200:1 leverage, thus increasing profit potential dramatically, as a 1% move becomes a 200% change in profit or loss, thus making it an excellent vehicle for those with familiar with technical analysis and risk management tools, and the discipline to follow them. These aren't hard to acquire, and forex sites like avafx.com provide plenty of free material on the topic. For all others, forex is a great way to lose money really fast.


As noted in our Global Outlook for 11/23-11/27:

For the coming weeks euro traders need to consider the following developments.

• In the background, stimulus reduction that is starting to build momentum, developing both interest rate expectations and concerns that the Euro-zone economy will falter as government spending slows and exposes a weaker economy.

• Of more immediate concern, there's a series of weighty economic indicators that will offer some volatility.

• However, the main threat of an impending break in recent trends comes from intangible fundamental dynamics like liquidity and the influence of a domineering US dollar.

Risk appetite is the main catalyst and fuel for the financial markets. After an eight-month trend founded based on the need to reinvest funds and take advantage of an historical rally; confidence may now be turning into a hesitation that will be well reflected in the EURUSD.

While the overall rising trend of higher lows from March remains; the past few weeks have turned to chop that is starting to develop an ominous bias, similar to that of the S&P 500. Given the unusual market conditions that back this liquid pair up, the possibility of a reversal in trend shift is more pronounced. The US markets, the single largest source of liquidity in the world, begin an extended holiday weekend starting Thursday, and in turn, a full-week of notable economic releases gets condensed into just a few days. A combination of event risk and shallow market depth may be the final ingredients for a breakout.

NZDUSD: More room to short?

NZDUSD Daily Chart (05 Nov 24)

As Monday and Tuesday morning action shows, this pair is also mimicking stocks, like the EURUSD. Still has room to run in either direction within Fibonacci, Bollinger Bands, moving average and price level support/resistance levels.

We noted in our prior Weekly Outlook of 11/16 – 11/20 that this pair was likely to be one of the best shorting plays when stocks dropped back to retest support, because the pair had risen in tandem with the AUDUSD but the NZD lacked the strong underlying economic fundamentals of the AUD and was thus a better shorting candidate. Almost on cue, the pair fell about 282 basis points, 3.76%, a potentially almost 800% profit for currency traders typically using 200:1 leverage, of which they could easily net over 400% even if using a relatively conservative trading plan to minimize risk and get in only once a trend is established. Now in the middle of its $0.7562 - $0.7073 range since late October, the pair moves with the S&P, and this range has enough room to be played in either direction WHEN the S&P 500 decisively breaks though $1100 or drops to retest support

NB: See a daily chart of the AUDUSD, and note the similarity. Those seeking to trade this pair could apply the above mentioned indicators and comments.

GBPUSD: Another risk appetite play, especially as short opportunity if stocks continue to pull back?

On Nov. 9th, we wrote: "One of the strongest currencies last week against the USD and EUR as it gained on less than expected expansion of QE, but nearing the top of its trading range since mid July and at the top of its Bollinger Band Range and recent high of $1.700. Could be a good short trade if markets pull back." Like the NZDUSD above, has room to run in either direction if a trend resumes

GBP/USD Daily Chart. (05 Nov 09)

Look what happened.

GBP/USD Daily Chart (08 Nov 23)

The GBP/USD did just that the following week on evidence of new dovishness from the BOE and made a nice 2% move down, a potentially 400% profit for currency traders typically using 200:1 leverage, of which one could take a 200%+ profit if using a sound trading plan that minimizes risks by triggering entries only on confirmed trends and uses trailing stop losses to lock in gains. As the chart above shows, it's following the S&P 500 and has room to play in either direction once the S&P trend is clear. The pair also has enough support/resistance points to provide entry points for long or short plays if the S&P settles into a range for a while. The 1.6300, 1.6400, 1.6500 and 1.6800 levels provide both Fibonacci and price support/resistance.

Given the broken trend line, slight bias to the downside, though again, this pair should continue to follow the S&P 500.


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