Sunday, November 22, 2009


NB: This is a very abridged version. Those seeking details should refer to the full length version

Because global stocks tend to lead global asset markets, and these markets are so tightly integrated, a weekly preview of major forex pairs and commodities demands that we first look at equities.


As always, we begin our weekly preview of global markets with a look at the S&P 500 stock index. International forex and commodity markets tend to move according to stocks, and no single index provides a better single picture of overall market sentiment than the bellwether S&P 500. Just note how similar most other major international stock or commodity daily charts are to that of the S&P 500 in both trend direction and magnitude of moves, although there can be short term deviations and at times even longer term exceptions, such as gold's current burst higher (more on that below).

That the S&P 500 is arguably the best single snapshot of global risk sentiment is not news to experienced traders, but for the benefit of all others, this idea can't be repeated enough – it's truly the One Chart To Rule Them All.

Here is a daily chart of the S&P 500 as of last Sunday.


S&P 500 Daily Chart With Volume With 10 Day Moving Average for Volume

04 Nov 15

We said:

the key points to note about the chart:

  • The possible formation of a bearish double-top pattern forming around the 1100 level
  • The relatively low volume on the rallies to this level compared to the much higher volume at the tops and on the pullbacks since the beginning of September until now. The red line on the volume histogram is a 10 day Simple Moving Average of Volume that clarifies how volume is relatively low on the rallies and higher on the pullbacks.

For perspective on the significance of the 1100 level, we zoom back to a weekly chart of the S&P 500 for the past 5 years. Note how this level has served as minor multi-week support resistance. Thus if the past is any guide, the rally will need to pass the 1100 within the next few weeks or risk losing credibility. If that happens, then risk assets are likely to either consolidate in a horizontal range or stage a long awaited normal pullback. Note that a drop of 100-300 points would be a perfectly normal retracement and markets would still be in a firm overall uptrend.


S&P 500 5 Year Weekly Chart with 10 Week Moving Average for Volume

06 Nov 15

Again, note the declining overall volume of the rally since April, suggesting a lack of believers in this rally. The bright side is that there may be a lot of cash still available to fuel further rally if the recovery becomes more convincing. The downside of this low volume rally is that it suggests they buyers were short term hot money that will be inclined to sell if the recovery falters. That in turn will depend on whether economies can begin to hold up without massive new stimulus, and if they can't, whether governments will be able to continue providing it, and for how much longer.

Here's the update chart as of 11/22, with the past week's trading marked off by the cursor highlighting Monday 11/16.


Daily Chart S&P 500 as of 11/22 (image 01 Nov 22)

Monday's gains were wiped out by a combination of end of week profit taking and signs that the ECB is beginning to end its stimulus and moving closer to raising interest rates. The key point to note is that after moving decisively higher Monday on decent volume, the market turned indecisive for two days and pulled back to close the week with a slight loss. The 1100 resistance level bent but didn't break.

Meaning? We're back where we were last week, both literally and figuratively – waiting to see if the markets are going to range trade or begin a more serious drop to test support. While another move higher can't be ruled out, the extent of the rally since March, its questionable underlying fundamentals, and usual year end selling make for a clear flat to lower bias. Gold's meteoric rise over the past 3 weeks makes gold also vulnerable to at least some kind of support test which could push the USD higher and thus also weigh further on the S&P.

Do not be lulled into thinking that a Thanksgiving holiday induced low liquidity Wednesday-Friday means necessarily means quiet trading. Historically, the week is actually unusually volatile due to the lower liquidity.

KEY COMMODITIES: Oil Slipping & Red Hot Gold

Commodity prices rose across the board with Reuters/Jefferies CRB Index gaining +2% last week. However, while precious metals and certain base metals continued with strong upward momentum, rallies in other commodities began to lose steam, most notably crude oil. We believe it's because investors' risk appetite is declining. If the above S&P chart wasn't enough evidence of growing risk aversion, and it usually is, recent macroeconomic data displayed a mixed picture on global economic conditions. In fact, the VIX, an index measuring the stock market's degree of fear, fell for the third consecutive week, by -5%, to 22.19 last week, indicating investors have become risk- averse.


Crude Oil

WTI crude oil fell after recovering to 78.61 Friday. Price movements in recent weeks suggest that a temporary top was formed at 82 in mid-October. Look at the weekly chart, crude oil price rose and dropped on alternate weeks, with declines more than offsetting increases. In fact, crude began falling well before stocks started to sputter.

After breaking above the range of 65-75 in mid-October, crude oil appears to have formed a new trading range from $73 -- $82/bbl. Despite attempts to push price above 80, selling pressures appear to be quite strong there. Unless the S&P 500 moves higher we doubt there will be enough speculative bulls to push oil higher, and any move higher for now will be from shorter term traders. Supply/demand fundamentals show plenty of supply, arguably more than is being reported, for the near term.

OPEC members are satisfied with oil price at 75-78. Angolan oil minister even said that 80/bbl is 'not too high'. Some analysts have gone so far as to speculate that the Saudis are considering upping production and driving oil down in order to give Iran's economy and regime a not so gentle shove.

Precious Metals – Has Demand Truly Increased?

Buying remained strong in gold and other precious metals. 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.

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.



Range Trading Likely For the US Dollar


US Dollar: Bullish/Neutral

- Key Events: Monday-Existing Home Sales m/m, Tuesday-GDP q/q, Consumer Confidence, Personal Consumption, House Price Purchase Index q/q, Fed Minutes of Nov 3-4 Meeting, Wed. Personal Spending, Income, Durable Goods Orders, New Home Sales m/m

- Ben Bernanke calls for strong US Dollar, but Greenback fails to hold gains

- Crowd sentiment accurately calls for US Dollar bounce

- US Dollar surges as traders sell risk following Dell earnings report


Euro To Breakout Against the Dollar This Week?


Euro Outlook: Bearish

- Key Events: Monday PMI Mfg, Services, Composite, Tuesday-Industrial Orders m/m, German GDP q/q, Wednesday German Gfk Consumer Confidence, Thursday-CPI y/y, Fri. Consumer Confidence

- European Central Bank takes another small step in unwinding stimulus by upping collateral standards

- The pace of Euro Zone inflation improves, but the annual figure is still contracting

- Are technical indicators leaning towards a EURUSD breakout that spurs reversal or trend continuation?

- EUR/USD likely to follow equities, but news could play a role if no major risk sentiment shifts.


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.


Yen Breakout Threatens in Thin, Risk-Driven Trade, Quiet Event Calendar


Yen Outlook: Bullish

- Key Events: Tues. Merchandise Trade Balance, BoJ Monthly Report, Wed.-BoJ Monthly Policy Meeting Minutes, Thurs.-Jobless Rate, Unemployment, CPI y/y

- Japan’s Economy Expanded Most in Over Two Years in Q3

- BOJ Keeps Rates Unchanged, Conflict with MOF Continues

- Growing signs of deflation, which helped cause Japan's "lost decade", could undermine the yen

- Likely to continue inverse correlation with S&P 500


Pound Forecast Still Bearish Ahead of UK GDP Revisions


Pound Outlook: Bearish

- Key Events: Tues.-Total Business Investment q/q, Wed.-GDP q/q, CBI Distributive Trades q/q

- UK CPI rose more than expected in October to 1.5% from 1.1%

- The BOE’s meeting minutes showed that the MPC voted 7-1-1 to expand the APF by £25B

- The OECD suggested the BOE keep rates at a record low until 2011

- Threat of further QE, stock pullback could further pressure GBP


Swiss Franc Could Break Higher As Fear Rises Despite the SNB's Efforts


Swiss Franc Outlook: Neutral/Positive

- Key Events: UBS Consumption Indicator, Unemployment y/y, KOF Nov. Leading Indicator

- Swiss Monthly Retail Sales Down Again, By 1.6%

- October trade balance surplus up to 2.46 billion from 1.91 billion as exports gained 0.1%

- Moving with risk sentiment, if stock pullback deepens even SNB intervention my not prevent a rise


Canadian Dollar Tracking Oil & Stocks Lower


Canadian Dollar Outlook: Bearish

- Key Events: Mon.-Retail Sales m/m, Fri.-Current Account

- Consumer inflation turns positive, but BoC officials caution against calling an economic recovery

- The slowing pace in USDCAD matches a similar dip in crude, but is this still a tradable correlation?

- Can USDCAD continue its rise to a real reversal or will the pair flop back into a range?

- More risk downside than upside because it behaves as risk currency yet lacks the higher yield


Stalling With Risk Appetite, Vulnerable To Interest Rate Expectation Disappointments


Australian Dollar Outlook: Neutral/Bearish

- Key Events: Monday-Conference Bd. Leading Indicators, Tues.-DEWR Skilled Vacancies m/m, Construction Work Done Q3, Wed.-Private Capital Expenditure Q3

- RBA Policy Outlook Remains “Open Question”

- Westpac Leading Index Improves For Fourth Month

- Wage Growth Slows In Third Quarter

- Vulnerable to stock pullback, possible interest rate increase disappointment


New Zealand Dollar Vulnerable Due To RBNZ Independence Threats


New Zealand Dollar Outlook: Bearish

- Key Events: Wed.-NBNZ Business Confidence, Thurs. Trade Balance Survey

- New Zealand dollar tumbles, hobbled by interest rate expectations, waning risk appetite

- Debate over RBNZ mandates also pressure the NZD

- Worst performing G10 currency last week, vulnerable to stock market corrections, trade balance disappointment could fuel debate over central bank policy and further damage the NZD


  1. If the S&P 500 remains in a flat range, expect most other asset classes to behave likewise.
  2. If it dives, that will favor the safe haven JPY, USD, and CHF in that order, against the higher yielding and commodity currencies, as well as against the EUR, which typically moves opposite the USD. Short other risk assets like stocks, oil, and possibly gold. As always, wait for some confirmation of the downtrend.
  3. If it breaks past the 1100 resistance level, long risk assets and currencies, short the JPY, USD, and CHF.

Because the S&P remains at a possible trend reversal level given that it is still near 1100 resistance and still may be forming a bearish double top formation, traders and investors should be cautious about opening new positions until we have a clearer picture of overall market direction, and have stop loss orders in place to protect profits when not able to actively watch markets.

DISCLOSURE: The author has no open positions in the above instruments. Opinions expressed are not necessarily those of avafx.

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