Trader's Diary: A Dow Short Gone Bad, A Potential NZD/USD Long

Here's an analysis I wrote for a VIP client. It contains some lessons we all should review.


Hi Mr. X,

Here's the analysis as per our conversation.



A Dow Short Gone Bad

Here's the chart of the Dow that we discussed:

Dow 30 Daily Chart (image:11 dec 01)



You had the right idea getting on an established downtrend on November 2nd. You were very close to strong resistance at 9750, where there was a QUADRUPLE combination of

• Price support as shown by repeated closes/opens, ( I count about 14 since August)showing that this level was a price support level

• A 50 day moving average

• A 23.6% Fibonacci retracement

• The lower trend line of a long established rising channel



This was indeed a great "QUAD" combination of strong support indicators. A great place to go short because if this support at 9750 didn't hold, it was a strong signal that the uptrend was not yet dead.

Clearly we're not the only ones who thought so. When price broke through it decisively the next day on 11/5 ( the third candlestick to the right, the big blue one), the market decided there was more upside. The fact that 11/5 shattered it decisively (along with a series of further Fibonacci retracements and Bollinger Bands was your big warning that the lower line of the rising channel was holding nicely as support.

If you still had doubts, the next day showed broke through the next Fibonacci level, and on 11/9 the entire downtrend was retraced and a new high set. It's understandable to believe there might be a reversal/retest at the new high, but we never try to anticipate reversals, we wait for them, as you did when you got into this short.



My only criticism/reservation is that you were trying to trade against a long established channel, as shown in the chart below. That can be very dangerous because

• The DJIA needn't have even dropped, it could have just stayed flat for a while until the bottom trend line caught up to it. Even if YOU don't believe this channel has validity, many others do, and there are computerized systems that may choose this line as a buy point given the uptrend that was in place since March. Remember, trading isn't about understanding what's true, but understanding what most other traders are thinking.

• You needed to identify the channel (not too hard, though slight variations possible and legitimate) and THEN be careful to place a stop loss after you have some kind of confirmation that the support (in this case, lower) channel line is holding. You got that loud and clear on 11/5. The big blue candle on 11/5 was the third day that the lower channel line had held, AND that candle smashed through the combined 3 support types at 9750 and closed far above it, AND the move was confirmed the next day when price opened higher still and closed even higher.





Of course, at the start of ANY reversal of a long trend, you'd be doing something like this. Thus the need for the stop loss in case you're wrong.



In sum your key mistake was not to look for support points which, if violated, would be your signal that you were wrong. For reasons noted above, the big ones were:

around 9750, where there was a combination of

o Price support as shown by repeated closes/opens, ( I count about 14 since August)showing that this level was a price support level

o A 50 day moving average

o A 23.6% Fibonacci retracement

o The lower /support line of a rising channel

Consider exiting the position and wait for the next move down.



A Potential Long on the NZD/USD







IF markets continue up (watch for a rising S&P 500 and have criteria chosen to tell you there is more room for the uptrend, like a strong break about 1100, etc), the NZDUSD has room to run higher. Consider the following chart.

NZD/USD Daily Chart (12 Dec 01)

This is an intriguing long at current levels because it's at the lower end of its horizontal trading range, and has already broken through the following resistance:

• Downward trend line

• 23.6% Fibonacci retracement

• 0.7265 price level

Beware, however, that this pair has long broken below its rising channel, AND has broken below its 50 day moving average (red line)

FYI if the S&P 500 does pull back (my preferred indicator of overall risk sentiment) AND the NZDUSD breaks below the 0.7100 level (has both price support and the 38.2% Fibonacci retracement support, THEN the pair might make a worthwhile short once it looks like it will close under the 0.7100 level. Once it does, if you go short, consider placing a stop loss not too far ABOVE that 0.7100 level, perhaps near 0.7288, at which point there is both price and another Fibonacci level



Cheers & Good Luck, Cliff

DISCLOSURE: NO POSITIONS IN THE ABOVE INSTRUMENTS

GLOBAL OUTLOOK 12/01 Cheat Sheet: Markets Rise As Dubai Fears Ease, Yet USD Up on Fed Moves

NB: The following is an abridged version-those seeking full details should refer to the full version at http://fxmarketanalysis.wordpress.com/

FX: higher equities, today bias against safety currencies [JPY, USD, CHF in order of safety appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD up on Fed moves, Black Fri Monday, losing ground Tuesday morning.


- Main events today: NZD: Building Consents m/m+, CAD: GDP m/m= USD: Chicago PMI+, Tues.AUD Building Approvals-, Cash Rate-, RBA Statement, CNY: Mfg. PMI+, GBP Nationwide HPI m/m+, Halifax HPI m/m, Mfg. PMI, USD: Mfg PMI, Pending Home Sales m/m, Wed: GBP Halifax HPI m/m, USD: ADP NFP, Fed Beige Book

- Big Theme: Stocks, Risk Stabilizing after Dubai Crisis Appears Contained For Now-See Conclusions below for trading opportunities. TRADERS SHOULD HAVE TRADING PLANS READY FOR MOVES IN EITHER DIRECTION, still unclear if markets have fully digested the US jobs data, and news this week is light, suggesting trading with ranges

STOCKS

US: Stocks spent the afternoon trading with modest losses after rolling over in the early going, but they managed to make a late push into positive ground during the final hour of trade. The move was led by the financial sector, which actually had been unable to provide a lift to the broader market for most of the session, as fears about Dubai eased and Chicago PMI showed manufacturing improving. The Week Ahead: Dubai, Holiday Sales, NFP & Employment to Dominate Trading – See Weekly Outlook, Full Version



Asia: HONG KONG (AP) -- Asian stock markets rebounded Monday from their steep fall last week after the United Arab Emirates moved to contain the fallout from Dubai's debt crisis. Most indexes up over 2%



Europe: European shares rose early on Tuesday, bouncing back from falls in the previous session, as fears about the fallout from Dubai's debt problems eased and investors' appetite for relatively risky equities increased

ASIA- UP N225I +2.91% HS +3.25% SSEC +3.20% FTSTI -1.10% AORD +2.57 %

EUROPE DOWN FTSE -1.05% DAX -1.05% CAC -1.11%

US- UP S&P +0.77% DJIA +0.34% NASDAQ +0.29%

ASIA CLOSING UP N225I +2.43% HS +1.34% SSEC +1.25% FTSTI +0.92% AORD +0.37 %

EUROPE OPEN UP FTSE +1.47% DAX +1.46% CAC +1.51%



Oil: PERTH, Dec 1 (Reuters) - Oil rose above $77 a barrel on Tuesday, after a rebound of 1.6 percent in the previous session, as Dubai debt default fears eased and cautious investors cast about for fresh clues to the pace of global economic recovery.

With a series of key economic indicators due out in the United States later in the day, as well as a preliminary snapshot of the weekly U.S. fuel inventory report, traders are expected to stay on the sidelines until they get a clearer picture on the state of energy demand.

US NFP report from related data like the employment portion of the PMI non-manufacturing report and the ADP nonfarms payrolls.



Gold: Steadied Monday morning around $1178, and has resumed climbing early Tuesday to around $1185 as Asian markets close higher and European markets look to open higher. 1200 level should be an important psychological level in the near term and some correction should be seen to keep gold below 1200 for a while, with some risks of a break of 1100 level if there are any major shifts in risk sentiment.

Reports of new IMF sales to Sri Lanka (10 tons) and possible additional purchases by India & China added support.



CURRENCIES: Surprising USD rebound on a mixed but overall up day for global stocks



USD: Gained Monday against the EUR, JPY, GBP, AUD as hawkish Fed moves and a disappointing black Friday cast even more doubt on the critical holiday consumer spending season .While this data supported the USD as a safe-haven asset, there was also positive fundamental news as the Fed began testing was to drain liquidity and exit its stimulus program, though it said it had no plans to do so at this time.



EUR: After breaking back above 1.500 resistance to 1.5071m the EUR dropped back yesterday to close lower at 1.5010, despite positive CPI data that makes interest rate increases more likely. Eurozone CPI rose to 0.6% y/y versus consensus 0.4%.



JPY: Down vs. USD on intervention threats from BoJ, new stimulus measures. National Strategy Minister Kan announced that the Japanese government has agreed on measures to stop the JPY's rise. Financial Services Minister Kamei also put pressure on the BOJ and suggested the BOJ has to consider ways to ease monetary policy further.



GBP Down vs USD, GBP: European banks have 72% exposure to the $26 billion of Dubai debt under restructure. UK banks have about 41% of that, making the UK banking system the most exposed to Dubai's crisis.PMI disappoints Tuesday



AUD: Raises interest rates 25 bps to 3.75%, yet down today against the USD and JPY on profit taking, as the RBA gave no timetable for further increases, and the move was largely expected given recent official statements by RBA Deputy Governor Battelino,



NZD: Fell yesterday vs. the USD, rising in early Tuesday trade. Rising dairy prices should provide support for both the economy and NZD, as these push interest rate rises closer. Likely to move with overall risk appetite, the overall direction of which remains up, though vulnerable



CAD: Moving up against the USD w/ rising oil, stocks



CHF: Monday it gained against EUR, dropped against the USD, these trends are reversing early Tuesday. Q3 GDP as forecasted at 0.3%



CONCLUSIONS: S&P 500 still struggling around 1100 resistance, still unclear if stocks and other risk assets are going to stay flat, pullback, or make a yearend run. Liquidity and low rates support stocks and other risk assets as cash seeks a parking spot, but questions on valuations and still poor fundamentals weigh against stocks, and have many believing the rally is in trouble and that a bearish double or triple top is forming. See Trading Opportunities section below. Traders should consider going with the current trend but be ready for pullbacks. See below for specific opportunities with the S&P 500, CRUDE, GOLD, EURUSD, and NZDUSD.



Trading Opportunities: Near term has favored risk currencies, shorting safe-haven assets. Today's news provides potential volatility for r the EUR/USD and USD/CAD in particular. Given that markets remain very high despite mixed earnings and negative US jobs reports, they're vulnerable to a pullback at this 1100 resistance level for the S&P 500: 1. Be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil breaches key $74 resistance, implying more upside unless stocks pull back on earnings disappointments. Always use sell stop orders.













S&P 500: After dropping hard on Dubai news, continues regaining about half of losses in early Monday trade. Resistance 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. Add to that brew the unresolved Dubai crisis, a disappointing Black Friday, Fed preparations to reduce liquidity, and the added uncertainty of US Non Farms Payrolls and unemployment this Friday makes for a potentially volatile week. 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 ANY risk assets at this time, and employ tight trailing stops or monitor positions closely on existing open long risk asset positions. They should also have some short positions planned, complete with initial and confirming indicators, and planned entry/ exit points.

S&P 500 Daily Chart as of Dec 1 08:47 GMT (03 Dec 01) (chart courtesy of avafx.com)





GOLD: Showing renewed strength on a combination of rising risk appetite Monday and news of new gold purchases from Sri Lanka and possible new ones coming from China and India. While the dollar seems stuck in a long term downtrend as well, this combination of fundamentals suggests a long term uptrend for gold. Look to purchase on pullbacks.

Gold Daily Chart (04 Dec 01) (chart courtesy of avafx.com)



From a technical perspective, the below chart shows possible retracement points if/when the move makes normal retest of support. Note how gold tested to the 23.6% and 38.2% Fibonacci retracement drawn from its last pullback to its recent high, exactly as one would expect. It appears that this 1130-60 level is some kind of mild support level, given the convergence of both Fibonacci and mild price support.



Also, recent price action suggests near term the rally still has strength, as gold's decline was quite muted on a daily basis, though on shorter term charts it appeared more dramatic. This is why we prefer the perspective of the daily timeframe vs. intraday timeframes when analyzing the big picture of a trend.





As noted in our Global Markets Outlook 11/23-11/27, the belief that there are large buyers like central banks seeking to buy gold may have caused a new fundamental upward shift in price based on this perceived demand. While gold was not immune from the Dubai induced panic late last week, it has recovered those losses already, and is close to recovering its steep upward trend line. This relative strength suggest that if markets truly calm down, gold could resume its climb, even if global equity markets remain pressured by the weight of the extended rally, valuation concerns, and year-end tax selling.





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.



Consider:

• 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: Still in a 5 week downward channel. 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 to $1194 as of this writing, the historic gold ratio now justifies oil as high as around $99.50 (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 has been 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 stabilizes, likely around the $73-$60 range, if not lower. An additional outcome of the Dubai crisis may be increased production as the UAE may need to produce more oil in order if it decides to fund a bailout or related assistance to stabilize the Dubai situation. Watch the S&P 500 to lead oil.

WTI Crude Oil Daily Chart (05 Dec 01)  (chart courtesy of avafx.com)







EURUSD: Breaking above 1.5000 resistance again to after dropping on Dubai fears, approaching new annual highs. Still at the lower end of its rising channel, abundant support points below it for low risk stop loss setting if going long should risk sentiment continues.

EURUSD DAILY CHART (06 Dec 01) (chart courtesy of avafx.com)



As noted in our Global Outlook for 11/30-12/04:



The Euro finished the week only marginally higher against the US Dollar, but the modest week-to-week change belies impressive volatility in recent trading. The EUR/USD moved to a fresh 2009 peak near the 1.5150 mark as the USD dropped market-wide. As discussed above, the credit scare out of Dubai sent the safe-haven US dollar and Japanese Yen substantially higher through Asian and European market hours. The nasty surprise came as a sharp reminder that financial market risk sentiment remains skittish and the USD extremely shorted, making it ripe for sharp moves higher if the USD-short herd stampedes to the exits. The week ahead could prove similarly eventful on strong economic event risk out of Europe and the US. Thus use caution going long the EUR.



However, Friday's session suggests the EUR may well maintain it's near term trend against the USD barring new bad news from Dubai. Although dollars were bought aggressively throughout the Asian and European trading session, the correction in the U.S. session suggests that the overall trend for the dollar is still down.



However, this pair is closely correlated with risk appetite and thus the S&P 500, which is struggling at resistance, and will have end of year tax selling and a likely bleak retail season to cope with. Given the factors working against risk appetite over the coming weeks, we urge caution (and tight stop losses) for new long positions, and plans for some short positions should markets turn, with planned entry/exit points.







NZDUSD: Unclear for now, stand aside and wait for overall market direction (aka S&P 500 or other preferred major stock index). Moving with risk appetite, which could go either way in the coming days depending on various news events and the continuing resolution of the Dubai crisis. As noted above, firming dairy prices should be supportive of the NZD, though local events tend to be overwhelmed by overall risk sentiment. Near strong support around 0.7100, which would make a good entry point for those playing the long or short side, depending on one's' read on the direction of global stocks and risk appetite.

NZDUSD Daily Chart (08 Dec 01) (chart courtesy of avafx.com)











OTHER HEADLINES

Bloomberg.com



Global Stocks Rally on BOJ Emergency Lending, China Economy; Yen Declines

•Japan's Central Bank to Pump Cash Into Economy on Lower Prices, Higher Yen

•China Manufacturing Grows at Faster Pace, Helping Asia Lead World Recovery

•Dubai World Starts Talks With Banks on Restructuring $26 Billion of Debt

•Australia Raises Interest Rates for Third Straight Month as Economy Grows

•GM May Sell Some Saab Unit Assets to Beijing Automotive, Discontinue Brand

•Manufacturing in U.S. Probably Grew in November, Taking Lead in Recovery

•Obama's Troop Increase Means He Now `Owns' Unpopular Afghanistan Conflict

•Iran Holds Five-Member Crew of British Racing Yacht, U.K. Government Says

•Spanish Bullrings, Fake Eiffel Towers Can't Prevent 20% Unemployment Rate







(Seekingalpha.com)



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Apple's AT&T Deal: Setting the Record Straight

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DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.

Dubai Crisis For Dummies: Basics & Implications For Stocks & Global Markets

NB: The below is a basic quick review of the Dubai Crisis and Its Meaning For Stocks

Key Points to Note

The biggest near term influence on the direction of risk appetite and global markets appears likely to be the Dubai debt crisis, so we need to evaluate the importance of this past week’s credit scare.
The request to delay repayment on its loans by Nakheel (a real estate development arm of Dubai's development fund Dubai World) confronts markets with what is potentially the largest sovereign default since the 2001/2002 when Argentina stopped payments on its government bonds. The Dubai default threat does not have the same fundamental complexities as its Argentina's did, however, context and timing can be everything.

Given that markets are:

• Sitting atop an extended rally on questionable fundamentals and valuations
• Nervously remembering how two years ago, a supposedly containable US real estate default crisis metastasized into a near worldwide financial and economic collapse from which they are still trying to recover

a far more dramatic response from the dollar and nearly every other asset class is quite conceivable, thank you.

Market concerns include:

• There could be “contagion”-type effects that could affect the creditworthiness of related entities, particularly those that have lent to Dubai World. Most of those are either UAE-related or European banks. This isn’t a huge issue, unless it becomes a big European issue — unlikely, but remember that European banks are even more levered than US banks. It's believed that UK's RBS, HSBC, Barclays, Lloyds and Stand Chartered are having large exposures in case of defaults. Who would be affected if these were undermined?

• Secondary aftershocks to would be entities similar to Dubai — other places in the world that have borrowed a lot (Greece, Ireland, Iceland, parts of Eastern Europe, etc). Thus many emerging markets are getting hit in this mini-crisis by rising borrowing costs.

• More borrowing to solve the Dubai crisis makes another one more likely.

• What investors should remember is that in ordinary circumstances (peace, absence of famine, plague, or rampant socialism), the economies tend to grow at about 2%/year. One can try to increase that by borrowing, and at the right opportunity that can be a winner. But most of the time, huge increases in debt levels are eventually associated with default. In a highly leveraged financial system where lenders are themselves indebted, defaults can cascade. As markets get more risk averse and credit tightens (i.e. rates rise to compensate for perceived increased risk) various government ministers/bureaucrats come forth and say, “There is nothing fundamentally wrong here. All we need is to restore confidence. This is not a solvency issue, it is a liquidity issue!” They answer by taking on more debt to free up liquidity.

• Risk that an isolated default can spread then rises, as an increasingly leveraged financial system comes more and more to resemble a massive arrangement of dominoes. The more leverage on any entity, the taller that domino. The more leverage in the system, the more tightly the dominoes are spaced. That arrangement collapses when someone knocks over a key domino.

Now, most analysts believe that this situation is contained, and after falling hard for the two prior days, European markets are rallying today, including financials. Values for debts closely related to Dubai World have fallen hard, and S&P and Moody’s have downgraded them, and may declare the payment delay to be a default. (Also, with credit to Moody’s — they did downgrade many Dubai-related entities earlier this month. Remember, with rating agencies, smart investors ignore the ratings, and look at what the analyst says. The Moody’s analyst highlighted the lack of any explicit guarantees from Dubai.)
In the week ahead, the key to gauging price action for the broader financial markets and the USD will lie with the market’s ultimate response to the Dubai crisis. There hasn't been enough time to see market’s true response to the threat. The incredible volatility through the end of last week was certainly leveraged by the thin liquidity from the US holiday.
Indeed, the timing of Dubai World's announcement coincidentally (?) allowed an incredible short term profit opportunity for anyone with advanced notice, and to minimize the time markets had for panicking before taking a weekend break to calm down and perhaps minimize the chances of an even more extreme reaction. Liquidity was extremely low at the time of the Nov 25^th-26^th announcement, with both the US and Islamic World their respective Thanksgiving and Eid holidays. Thus the volatility generated by this market moving news was exaggerated by the small number of traders available.
The demand for safe-haven dollar shorts unwound was so strong that the euro hit an intraday low of 1.4829 when the European markets opened. The price action in USD/JPY tells us that risk aversion was the primary driver of the forex markets as USD/JPY dropped to a 14 year low when the Asian markets opened last night.
Perhaps very significantly for the coming week, the selling did not continue into the U.S. trading session. The limited number of U.S. traders Friday actually sold rather than bought dollars which suggests that not everyone believes that the Dubai news will have immediate global ramifications, because the first reaction to a major surprise announcement like this one is always sell first and ask questions later. As a result, the USD and JPY were the biggest winners. That USD buying didn't continue into Friday suggests markets might open Monday on a more positive note.
Indeed, when the deep pockets return to the market after having had a weekend evaluate things, it will be easier to establish true trends as there will be a source for momentum.
While we can't say for certain whether this is the beginning of a longer term reversal in risk assets, some tentative conclusions can be drawn.

Additional Points to Consider

As noted above, a major surprise risk event like the Dubai news is one of the few things that might set a near term bottom in the U.S. dollar as its safe haven status overrides its still poor fundamentals. On the eve of November 25th, the Thanksgiving Holiday in the U.S. and the Eid Holiday in the Middle East, Dubai World shocked the markets by saying that its property developer Nakheel has requested to delay its Dec 14 debt payments. While Dubai World is not technically owned by the Dubai government, its liabilities of US$59 billion is a significant amount of the total estimated US$80-100 billion in Dubai's liabilities.
As a result, investors fear that this could mean an outright default on Nakheel's debt, because delinquency is usually the precursor default. Although the market believes that this is a major development for the global economy, it is important to realize that Nakheel's debt is only $3.52 billion, a fraction of Dubai World's overall debt. Also, U.S. and European banks have very small exposure to Nakheel’s debt, though it's not fully clear who has what exposure, and how well they can absorb possible losses.
However, markets heard the same kind of talk at the start of the US sub-prime lending crisis, and realize that these things can quickly snowball into far bigger problems.
Granted a default may entitle investors to some of Dubai World's assets, H.H Sheikh Ahmed bin Saeed Al-Maktoum, Chairman of the Supreme Fiscal Committee, has already issued a statement confirming the Dubai Government's intention to directly intervene and manage the restructuring of Dubai World commercial operations and its debt obligations. Although some people are afraid that this could turn into an Argentina style debt default or a repeat of volatility of Q4 2008, what is more worrisome is the fact that this may be indicative of the health of the entire property sector in the Middle East. Which global banks are deeply exposed there?

STOCKS

Analysis: Apart From Dubai, Pullback Potential Was Already Present & Watch for Black Friday Results
Even before Dubai threatened markets with the largest sovereign credit default since Argentina in 2001, a larger underlying shift in global capital markets likely already began in October. In addition to Dubai, consider the already extant pressures on risk appetite.

• Morgan Stanley index of world stock prices fell the most in eight months while
• The VIX Index, a stand-by measure of investors’ fear, rose the most in a year.
• The S&P 500 remains unable to sustain a break above multi-week resistance at 1100, and any failure by world leaders to calm markets soon will harden that resistance.

• The financial system's resistance to further crises has been weakened by the crisis of the past two years, with central banks already burdened with debt. Relative equity valuations have looked excessive for some time now with prices trading at the highest levels relative to earnings in seven years.

• Further, the market’s mood seems to be in transition, with the relief that collapse had been averted, which produced the risk rally of recent months, giving way to concerns about valuations and what happens when interest rates invariably reverse course higher and the flow of government cash dries up.

• Companies’ “better than expected” earnings of the past several quarters have relied heavily on, cost cuts, usually from firing workers. Ultimately this means lost consumer demand.

Commodities

If the crisis appears to spread (and this could take time to play out, similar to the US subprime crisis), most will drop back. This includes gold, unless fear of another threatened global collapse occurs, which could favor gold.

Currencies

If the crisis lingers on, or markets pull back for some other reason (there are potentially many), the JPY, USD, and CHF will be the big likely winners. The AUD, NZD, CAD, and EUR would retreat against these.
DISCLOSURE: NO POSITIONS IN THE ABOVE

The Dubai Crisis For Idiots: Basics & Implications For Stocks & Global Markets

NB: The below is a basic quick review of the Dubai Crisis and Its Meaning For Stocks. Those seeking full details should visit: http://fxmarketanalysis.wordpress.com  or http://worldmarketsguide.blogspot.com

Key Points to Note

The biggest near term influence on the direction of risk appetite and global markets appears likely to be the Dubai debt crisis, so we need to evaluate the importance of this past week’s credit scare.

The request to delay repayment on its loans by Nakheel (a real estate development arm of Dubai's development fund Dubai World) confronts markets with what is potentially the largest sovereign default since the 2001/2002 when Argentina stopped payments on its government bonds. The Dubai default threat does not have the same fundamental complexities as its Argentina's did, however, context and timing can be everything.

Given that markets are:

• Sitting atop an extended rally on questionable fundamentals and valuations
• Nervously remembering how two years ago, a supposedly containable US real estate default crisis metastasized into a near worldwide financial and economic collapse from which they are still trying to recover

a far more dramatic response from the dollar and nearly every other asset class is quite conceivable, thank you.

Market concerns include:

• There could be “contagion”-type effects that could affect the creditworthiness of related entities, particularly those that have lent to Dubai World. Most of those are either UAE-related or European banks. This isn’t a huge issue, unless it becomes a big European issue — unlikely, but remember that European banks are even more levered than US banks. It's believed that UK's RBS, HSBC, Barclays, Lloyds and Stand Chartered are having large exposures in case of defaults. Who would be affected if these were undermined?

• Secondary aftershocks to would be entities similar to Dubai — other places in the world that have borrowed a lot (Greece, Ireland, Iceland, parts of Eastern Europe, etc). Thus many emerging markets are getting hit in this mini-crisis by rising borrowing costs.

• More borrowing to solve the Dubai crisis makes another one more likely.

• What investors should remember is that in ordinary circumstances (peace, absence of famine, plague, or rampant socialism), the economies tend to grow at about 2%/year. One can try to increase that by borrowing, and at the right opportunity that can be a winner. But most of the time, huge increases in debt levels are eventually associated with default. In a highly leveraged financial system where lenders are themselves indebted, defaults can cascade. As markets get more risk averse and credit tightens (i.e. rates rise to compensate for perceived increased risk) various government ministers/bureaucrats come forth and say, “There is nothing fundamentally wrong here. All we need is to restore confidence. This is not a solvency issue, it is a liquidity issue!” They answer by taking on more debt to free up liquidity.

• Risk that an isolated default can spread then rises, as an increasingly leveraged financial system comes more and more to resemble a massive arrangement of dominoes. The more leverage on any entity, the taller that domino. The more leverage in the system, the more tightly the dominoes are spaced. That arrangement collapses when someone knocks over a key domino.

Now, most analysts believe that this situation is contained, and after falling hard for the two prior days, European markets are rallying today, including financials. Values for debts closely related to Dubai World have fallen hard, and S&P and Moody’s have downgraded them, and may declare the payment delay to be a default. (Also, with credit to Moody’s — they did downgrade many Dubai-related entities earlier this month. Remember, with rating agencies, smart investors ignore the ratings, and look at what the analyst says. The Moody’s analyst highlighted the lack of any explicit guarantees from Dubai.)

In the week ahead, the key to gauging price action for the broader financial markets and the USD will lie with the market’s ultimate response to the Dubai crisis. There hasn't been enough time to see market’s true response to the threat. The incredible volatility through the end of last week was certainly leveraged by the thin liquidity from the US holiday.

Indeed, the timing of Dubai World's announcement coincidentally (?) allowed an incredible short term profit opportunity for anyone with advanced notice, and to minimize the time markets had for panicking before taking a weekend break to calm down and perhaps minimize the chances of an even more extreme reaction. Liquidity was extremely low at the time of the Nov 25^th-26^th announcement, with both the US and Islamic World their respective Thanksgiving and Eid holidays. Thus the volatility generated by this market moving news was exaggerated by the small number of traders available.

The demand for safe-haven dollar shorts unwound was so strong that the euro hit an intraday low of 1.4829 when the European markets opened. The price action in USD/JPY tells us that risk aversion was the primary driver of the forex markets as USD/JPY dropped to a 14 year low when the Asian markets opened last night.

Perhaps very significantly for the coming week, the selling did not continue into the U.S. trading session. The limited number of U.S. traders Friday actually sold rather than bought dollars which suggests that not everyone believes that the Dubai news will have immediate global ramifications, because the first reaction to a major surprise announcement like this one is always sell first and ask questions later. As a result, the USD and JPY were the biggest winners. That USD buying didn't continue into Friday suggests markets might open Monday on a more positive note.

Indeed, when the deep pockets return to the market after having had a weekend evaluate things, it will be easier to establish true trends as there will be a source for momentum.

While we can't say for certain whether this is the beginning of a longer term reversal in risk assets, some tentative conclusions can be drawn.

Additional Points to Consider

As noted above, a major surprise risk event like the Dubai news is one of the few things that might set a near term bottom in the U.S. dollar as its safe haven status overrides its still poor fundamentals. On the eve of November 25th, the Thanksgiving Holiday in the U.S. and the Eid Holiday in the Middle East, Dubai World shocked the markets by saying that its property developer Nakheel has requested to delay its Dec 14 debt payments. While Dubai World is not technically owned by the Dubai government, its liabilities of US$59 billion is a significant amount of the total estimated US$80-100 billion in Dubai's liabilities.

As a result, investors fear that this could mean an outright default on Nakheel's debt, because delinquency is usually the precursor default. Although the market believes that this is a major development for the global economy, it is important to realize that Nakheel's debt is only $3.52 billion, a fraction of Dubai World's overall debt. Also, U.S. and European banks have very small exposure to Nakheel’s debt, though it's not fully clear who has what exposure, and how well they can absorb possible losses.

However, markets heard the same kind of talk at the start of the US sub-prime lending crisis, and realize that these things can quickly snowball into far bigger problems.

Granted a default may entitle investors to some of Dubai World's assets, H.H Sheikh Ahmed bin Saeed Al-Maktoum, Chairman of the Supreme Fiscal Committee, has already issued a statement confirming the Dubai Government's intention to directly intervene and manage the restructuring of Dubai World commercial operations and its debt obligations. Although some people are afraid that this could turn into an Argentina style debt default or a repeat of volatility of Q4 2008, what is more worrisome is the fact that this may be indicative of the health of the entire property sector in the Middle East. Which global banks are deeply exposed there?

STOCKS

Analysis: Apart From Dubai, Pullback Potential Was Already Present & Watch for Black Friday Results

Even before Dubai threatened markets with the largest sovereign credit default since Argentina in 2001, a larger underlying shift in global capital markets likely already began in October. In addition to Dubai, consider the already extant pressures on risk appetite.

• Morgan Stanley index of world stock prices fell the most in eight months while
• The VIX Index, a stand-by measure of investors’ fear, rose the most in a year.
• The S&P 500 remains unable to sustain a break above multi-week resistance at 1100, and any failure by world leaders to calm markets soon will harden that resistance.

• The financial system's resistance to further crises has been weakened by the crisis of the past two years, with central banks already burdened with debt. Relative equity valuations have looked excessive for some time now with prices trading at the highest levels relative to earnings in seven years.

• Further, the market’s mood seems to be in transition, with the relief that collapse had been averted, which produced the risk rally of recent months, giving way to concerns about valuations and what happens when interest rates invariably reverse course higher and the flow of government cash dries up.

• Companies’ “better than expected” earnings of the past several quarters have relied heavily on, cost cuts, usually from firing workers. Ultimately this means lost consumer demand.

Commodities

If the crisis appears to spread (and this could take time to play out, similar to the US subprime crisis), most will drop back. This includes gold, unless fear of another threatened global collapse occurs, which could favor gold.

Currencies

If the crisis lingers on, or markets pull back for some other reason (there are potentially many), the JPY, USD, and CHF will be the big likely winners. The AUD, NZD, CAD, and EUR would retreat against these.

DISCLOSURE: NO POSITIONS IN THE ABOVE

Global Markets Outlook 11/30 – 12/04 Short Version: Dubai, Other Key Events, Implications

NB: THE BELOW IS A HIGHLY ABRIDGED VERSION. THOSE SEEKING FULL DETAILS ON EACH SECTION SHOULD VISIT http://fxmarketanalysis.wordpress.com or http://worldmarketsguide.com

SPECIAL SECTION: The Threat of Dubai Debt Crisis Spreading Hangs Over All Global Asset Markets

Key Points to Note

The biggest near term influence on the direction of risk appetite and global markets appears likely to be the Dubai debt crisis, so we need to evaluate the importance of this past week’s credit scare.

The request to delay repayment on its loans by Nakheel (a real estate development arm of Dubai's development fund Dubai World) confronts markets with what is potentially the largest sovereign default since the 2001/2002 when Argentina stopped payments on its government bonds. The Dubai default threat does not have the same fundamental complexities as its Argentina's did, however, context and timing can be everything.

Given that markets are:

• Sitting atop an extended rally on questionable fundamentals and valuations
• Nervously remembering how two years ago, a supposedly containable US real estate default crisis metastasized into a near worldwide financial and economic collapse from which they are still trying to recover

a far more dramatic response from the dollar and nearly every other asset class is quite conceivable, thank you.

Market concerns include:

• Rising risk aversion lowers the creditworthiness of related entities, particularly those that have lent to Dubai World. Most of those are either UAE-related or European banks. This isn’t a huge issue, unless it becomes a big European issue — unlikely, but note that European banks are even more levered than US banks. It's believed that UK's RBS, HSBC, Barclays, Lloyds and Stand Chartered are having large exposures in case of defaults. Who would be affected if these were undermined?

• Secondary aftershocks to entities similar to Dubai — other places in the world that have borrowed a lot (Greece, Ireland, Iceland, parts of Eastern Europe, etc). Thus many emerging markets are getting hit in this mini-crisis by rising borrowing costs, which brings them closer to defaults of their own.

• More borrowing to solve the Dubai crisis makes another one more likely.

o What investors should remember is that in ordinary circumstances (peace, absence of famine, plague, or rampant socialism), the economies tend to grow at about 2%/year. One can try to increase that by borrowing, and at the right opportunity that can be a winner. But most of the time, huge increases in debt levels are eventually associated with default. In a highly leveraged financial system where lenders are themselves indebted, defaults can cascade. As markets get more risk averse and credit tightens (i.e. rates rise to compensate for perceived increased risk) various government ministers/bureaucrats come forth and say, “There is nothing fundamentally wrong here. All we need is to restore confidence. This is not a solvency issue, it is a liquidity issue!” They answer by taking on more debt to free up liquidity.

o Risk that an isolated default can spread then rises, as an increasingly leveraged financial system comes more and more to resemble a massive arrangement of dominoes. The more leverage on any entity, the taller that domino. The more leverage in the system, the more tightly the dominoes are spaced. That arrangement collapses when someone knocks over a key domino.

In the week ahead, the key to gauging price action for the broader financial markets and the USD will lie with the market’s ultimate response to the Dubai crisis. There hasn't been enough time to see market’s true response to the threat. The incredible volatility through the end of last week was certainly leveraged by the thin liquidity from the US holiday.

Indeed, the timing of Dubai World's announcement coincidentally (?) allowed an incredible short term profit opportunity for anyone with advanced notice, and to minimize the time markets had for panicking before taking a weekend break to calm down and perhaps minimize the chances of an even more extreme reaction. Liquidity was extremely low at the time of the Nov 25^th-26^th announcement, with both the US and Islamic World their respective Thanksgiving and Eid holidays. Thus the volatility generated by this market moving news was exaggerated by the small number of traders available.

The demand for safe-haven dollar shorts unwound was so strong that the euro hit an intraday low of 1.4829 when the European markets opened. The price action in USD/JPY tells us that risk aversion was the primary driver of the forex markets as USD/JPY dropped to a 14 year low when the Asian markets opened last night.

Ray Of Hope From Friday's End of Session Action?

Perhaps very significantly for the coming week, the selling did not continue into the U.S. trading session. The limited number of U.S. traders Friday actually sold rather than bought dollars which suggests that not everyone believes that the Dubai news will have immediate global ramifications, because the first reaction to a major surprise announcement like this one is always sell first and ask questions later. As a result, the USD and JPY were the biggest winners. That USD buying didn't continue into Friday suggests markets might open Monday on a more positive note.

Indeed, when the deep pockets return to the market after having had a weekend evaluate things, it will be easier to establish true trends as there will be a source for momentum.

While we can't say for certain whether this is the beginning of a longer term reversal in risk assets, some tentative conclusions can be drawn.

Additional Points to Consider

As noted above, a major surprise risk event like the Dubai news is one of the few things that might set a near term bottom in the U.S. dollar as its safe haven status overrides its still poor fundamentals.

Investors fear that this could mean an outright default on Nakheel's debt, because delinquency is usually the precursor default.

While U.S. and European banks have very small exposure to Nakheel’s debt, it's not fully clear who has what exposure, and how well they can absorb possible losses. Many believe the crisis is quite containable

However, markets heard the same kind of talk at the start of the US sub-prime lending crisis, and realize that these things can quickly snowball into far bigger problems.

Granted a default may entitle investors to some of Dubai World's assets, H.H Sheikh Ahmed bin Saeed Al-Maktoum, Chairman of the Supreme Fiscal Committee, has already issued a statement confirming the Dubai Government's intention to directly intervene and manage the restructuring of Dubai World commercial operations and its debt obligations. Although some people are afraid that this could turn into an Argentina style debt default or a repeat of volatility of Q4 2008, what is more worrisome is the fact that this may be indicative of the health of the entire property sector in the Middle East. Which global banks are deeply exposed there?

STOCKS

Analysis: Apart From Dubai, Pullback Potential Was Already Present & Watch for Black Friday Results

Even before Dubai threatened markets with the largest sovereign credit default since Argentina in 2001, a larger underlying shift in global capital markets likely already began in October. In addition to Dubai, consider the already extant pressures on risk appetite.

• Morgan Stanley index of world stock prices fell the most in eight months while
• The VIX Index, a stand-by measure of investors’ fear, rose the most in a year.
• The S&P 500 remains unable to sustain a break above multi-week resistance at 1100, and any failure by world leaders to calm markets soon will harden that resistance.

• The financial system's resistance to further crises has been weakened by the crisis of the past two years, with central banks already burdened with debt. Relative equity valuations have looked excessive for some time now with prices trading at the highest levels relative to earnings in seven years.

• Further, the market’s mood seems to be in transition, with the relief that collapse had been averted, which produced the risk rally of recent months, giving way to concerns about valuations and what happens when interest rates invariably reverse course higher and the flow of government cash dries up.

• Companies’ “better than expected” earnings of the past several quarters have relied heavily on, cost cuts, usually from firing workers. Ultimately this means lost consumer demand.

Black Friday Results Due Early This Week

In addition to the reverberations from Dubai, another critical event played out on Friday- Black Friday, named because it's the official opening of the US holiday gift buying season that essentially extends until after the New Year. Results should be out early this week and give some hint at how this make-or-break period for retailers plays out. A bad season could mean more layoffs and commercial loan defaults from the retail sector.

Weekly Recap Nov. 23-7

A surprising sell-off in overseas markets triggered by Dubai debt concerns led to sharp losses in U.S. equity markets on Friday, wiping out the gains made earlier in the week.
The market's only notable move higher this week came at the open on Monday, when a weaker U.S. dollar and much better-than-expected Existing Home Sales report helped stocks surge. 

Stocks held those gains through Monday's session, and into Tuesday and Wednesday as volume slowed ahead of the Thanksgiving Day holiday.  But one headline from Wednesday, that the UAE government was restructuring Dubai World, didn't initially receive much of a reaction.
But on Thursday, with U.S. markets closed, European markets plunged as concerns grew, helping to change investors' risk appetite.  The Dubai government asked creditors, which reportedly include many European banks, particularly in the United Kingdom, to defer payments on some $20 billion in debt coming due over the next 18 months.
Asian markets, which had traded lower on Thursday, plunged overnight on Friday, and the weakness carried over to U.S. markets, with the S&P 500 losing 1.7%. 
Even if Dubai crisis is contained, it may still serve as warning for those seeking to book profits ahead of yearend tax selling to do so soon.

MAJOR COMMODITIES

Commodities dropped sharply around the world along with risk sentiment from fear of contagion effect from Dubai debt payment delay request, which could trigger second wave in the credit crisis. Gold has a better chance of stabilizing and recovering if Dubai crisis is contained, because it has shown it can rise while the other markets struggle. Oil to follow stocks, then fundamentals. Both of these bearish for now.

CURRENCIES

USD

On Temporary "Dubai High" or Reversing Trend?

Summary

US Dollar Outlook: Bullish

- Key Events: Monday: Preliminary Black Friday Sales Results, Tuesday ISM Manufacturing PMI, Pending Home Sales m/m, Construction Spending m/m, Wed. Fed Beige Book, Thurs. ISM Non-Mfg. PMI, Fri. Non-Farms Payrolls, Unemployment Rate

- Fear of Dubai debt default contagion reminds traders of the dollar’s value

- US recovery more measured than initially expected, confidence uncertain

- Is the USD's recent bounce the start of a true technical reversal?

EUR

Critical ECB Decision, US NFP Bring EUR Volatility -Euro Drops on Dubai World Credit Scare

Summary

EUR Outlook: Bearish/Neutral – Moving Opposite USD

- Key Events: Mon. Eurozone (EZ)CPI y/y, Tues. German Unemployment Change, Rate, EZ Unemployment Rate, Wed. EZ PPI m/m, Thurs. EZ GDP q/q, Retail Sales m/m, ECB Interest Rates

- Bargain-hunters still maintain Euro bid through week’s end, suggest EUR resilience or USD weakness in the face of all but most dire crises, suggesting EUR/USD downtrend tough to break barring real pullback in stocks.

- ECB Decision to reduce QE could boost EUR, but could be outweighed by big moves in stocks

- EURUSD double top still forming?

GBP

Diminishing Risk Appetite To Support the Pound?

Summary

GBP Outlook: Bearish

- Key Events: Sun. Gfk Consumer Confidence, Hometrack Housing m/m Mon. Net Consumer Credit, Mtg Approvals, Tues. Nationwide House Prices, PMI Mfg., Thurs. PMI Services

- The second reading of U.K. 3Q GDP was revised higher to 0.3% from 0.4%, as Private consumption improved, but still shows UK in recession

- The BBA reported that loans for house purchase rose to 42,238 from 42,073, highest in over a year

- The CBI Quarterly Distributive trades reading improved to 13 from 8

- Lies in the middle of risk appetite spectrum, will move with risk appetite, USD

JPY

Probable Drop In Risk Appetite & Improving Fundamentals Likely to Outweigh BoJ Intervention Threats

Summary

Yen Outlook: Bullish

- Key Events: Mfg. PMI, Industrial Production y/y, Mon. Housing Starts, BoJ. Gov. Speaks

- Trade Surplus Swells as Unemployment Weighs on Imports

- BOJ May Resume Buying Corporate Debt, Meeting Minutes Show, to weaken the yen

- Jobless Rate Declines For the Third Month as Workers Exit Labor Force

- Officials Step Up Currency Intervention Threats as Yen Pushes Higher

- The key to restoring yen weakness lies with stabilizing risk appetite than with the BoJ

- BoJ should consider US examples of how to weaken a currency via stimulus increase

CHF

Moving With Risk Appetite, And That's Good For the CHF

Summary

CHF Outlook: Bullish/Neutral

- Key Events: Mon. SNB Chairman Roth Speaks, Tues. SVME PMI, Friday CPI m/m

- Safe Haven Status Helps in Dubai Scare

- SNB intervention looms if big pullback in risk assets pushes CHF higher against the EUR

- Gaining against USD, EUR

CAD

CURRENT ACCOUNT DEFICIT HITS RECORD HIGH-Likely to Continue Following Oil, Stocks, News In That Order.

Summary

CAD Outlook: Bearish

- Key Events: Mon. GDP m/m, Fri. Unemployment Change, Rate, Ivey PMI

- Losing ground to the USD since mid October, trend could continue

AUD

Riding Risk Appetite Down, But Could Be Least Hurt Of All The Risk Currencies

Summary

AUD Outlook: Bearish

- Key Events: Tues. Building Approvals, Cash Rate, RBA st., Thurs. Retail Sales m/m

- Moving with Risk Appetite, But May Drop Least if Markets Pull Back

NZD

Moving With Risk Appetite And Thus Vulnerable to Pullback

Summary

NZD Outlook: Bearish

- Key Events: Mon. Building Consent

- Like the CAD, has risen with the AUD yet lacks the fundamentals to justify the rise

- Little major NZD news means it will go with risk appetite, which is likely to be flat to down

- Down trending against the USD since early Nov

CONCLUSIONS

The beginning of the week will be dominated by further reactions and news related to Dubai, we expect some attempts to calm markets from Dubai and other world leaders. Black Friday results may also figure strongly. After that ECB announcements about reducing QE and events leading up to and including US employment reports Friday should be the dominant market movers.

Traders should keep watch on these events and as always, on the major stock indices, especially the S&P 500.

DISCLOSURE – NO POSITIONS IN ABOVE MENTIONED INSTRUMENTS

The Must-Know Truth About Stocks and the USD

Want a solid grasp of inter-market relationships in 10 seconds? Here it is:


Just follow the S&P 500 Chart, in whatever time frame you trade or invest.



A Brief Explanation & Executive Summary of this Article

In general:

• Most asset markets follow the moves of global stocks, either moving in the same or opposite direction, but deriving that direction from global equities. That's because equities are the best overall picture of global risk appetite (so much so that the movements of global stocks and risk appetite are virtually one and the same)

• The S&P 500, as the most representative index of the US stock market, still the world's single largest stock market, is the one chart that best summarizes the prevailing sentiment, be it positive (aka risk appetite or optimism) or negative (aka risk aversion or pessimism).

• In general, in the short term the S&P 500 also drives the direction of currency value, especially that of the most liquid one of all, the USD. In sum, it is truly the One Chart to Rule Them All (yes, yes, of course there are exceptions, qualifications etc. Please, I'm trying to keep this simple for the lay-traders).

• Many commentators wrongly believe the opposite, that a weak USD drives stocks higher, due to cheaper US exports and inflated US multinational earnings from foreign revenues, and a strong dollar drags them lower. By the same logic underpinning this belief, European and Asian stocks should behave in the opposite manner, as a weak USD hurts their exports and earnings. In fact European and Asian stock markets move in the same direction as the S&P 500 relative to the USD. That is, when they rise, the USD falls, and vice versa. So what is the real relationship between the USD and stocks?

• Risk appetite/optimism about economic recovery and growth is best reflected in stocks. When there is optimism, i.e. rising stock markets, that causes traders to buy higher yielding currencies and sell/borrow the low yield USD (and a few others, but especially the USD) to fund these purchases at low interest, hoping to profit on the interest rate differential. In effect they are "shorting" the USD. When fear aka risk aversion rises, traders unwind these trades and buy back the USD, causing the USD to rise like a shorted stock. THUS STOCKS USUALLY DRIVE THE USD AND OTHER FOREX PAIRS, NOT VICE VERSA





The One Chart That Rules Them All Rules the USD Too-Though Many US Stock Commentators Don't Get It



In other words: Equities Generally Drive the USD and Other Currencies , Not Vice Versa.

Many US stock pundits still don't get it. Many believe the USD is a primary cause of movements in the S&P 500 and other major stock indexes.

For example, look at the US stock market summary of the November 25th US stock market action published on Yahoo! Finance from Briefing.com, which opened with the following statements.

A new 52-week low for the Dollar Index [emphasis mine] and a generally pleasing batch of economic data helped stocks make their way higher….



Renewed pressure against the U.S. dollar sent the Dollar Index to a 1.1% loss, its worst single-session percentage drop in nearly four months. The drop also put the Dollar Index at a fresh 12-month low, but gave a broad lift to the equity market.

In other words, a weak dollar lifts stocks, and vice versa. In general, the opposite is in fact the case, stocks drive the USD and other forex, not the other way around.

This confusion is somewhat understandable if one considers the perspective US based, US-centric stock commentators who don't fully do their homework. Why?

What Confuses Many US Stock Pundits



• If one focuses ONLY on US stock market movements and USD movements during US stock market hours, the negative correlation (tendency to move in opposite directions) occurs simultaneously, so the real cause/effect relationship isn't clear on a superficial level.

• Forex Does Affect Equities Over the Longer Term: It's true that forex does affect equity markets, however this influence is usually over the longer term. One reason for this is that longer term forex trends influence interest rates over a longer term, which in turn influences demand for equities. Conversely, stock market movements tend to have immediate impact on currency markets. Much of the reason for this is that 80% of currency trading is speculative, mostly very short term from minutes to a few days. A much larger proportion of equities tend to be held for longer periods.

There ARE reasons a weak USD might move stocks in the short term. This reasoning is seductively simple:

• A rising dollar makes US exports more expensive and less competitive, lowering earnings expectations. This is correct. Forget for a moment that it makes US imports, and America IS a net importer, cheaper and key imported imputs like oil cheaper, at least in theory.

• A rising dollar makes US multi-national earnings in foreign currency worth less, thus also lowering earnings expectations. This is also correct. Again, suspend any thoughts that a stronger dollar makes foreign currency denominated expenses cheaper.

While we're being easy on poor stock market pundits, please also put aside any thoughts about the potentially disastrous effects of a long term decline in the US dollar on the US economy (and US corporate earnings, because 70% of US GDP is domestic consumer spending), how it will ultimately drive up the interest rates that the US government must pay to finance itself, interest rates in general (goodbye housing market, bank credit risk, banks, housing related jobs, etc), and the effects of the dollar ultimately losing its reserve currency status (far less demand still for the USD). What the heck.



WHY THE ABOVE REASONING IS WRONG

However, if a weak dollar is good for US stocks for the above reasons, it should be bad for Asian and European stocks for the same reasons. That is:

• A weak US dollar makes exports from these regions more expensive and less competitive, and should thus lower earnings expectations seriously. The US is still one of, if not the, largest customers for these regions.

• A weak US dollar makes the dollar denominated earnings from sales in the US, (again, often the biggest single customer they have) from these exports worth less, again lowering earnings expectations. In the case of commodity exporters, this is an especially serious problem unless commodity prices rise (and they don't do so easily when the growth picture gets negative and stocks fall) because their commodities are typically priced in dollars.



Thus by the same reasoning that says a weak dollar is good for US stocks and a strong dollar is bad for them, then Asian and European stocks should be falling when the US dollar falls and rising when it rises. In other words, they should correlate positively with the USD. Rising when the USD rises, and falling when it falls.

Indeed, the positive effects of a weak USD should be more pronounced, because most economies in Asia and many Europe depend on exports for a far larger portion of their GDP than the US, which derives most of its GDP from domestic consumer spending.

As an analyst who lives seven hours ahead of EST, and watches all major global stock, forex, and commodity markets, especially during the hours in which Asian and European equities markets are open, I see things many miss.

Here's a key observation that anyone in the markets must understand:

In fact, major Asian and European stock markets share the same multi-day (and longer) trends that US stocks show, moving in the opposite direction of the USD. That is, when Asian and European stocks are rising, the USD is falling, just like is does with US stocks.

That all global stocks in general are rising while the USD falls suggests that the reasoning behind the "dollar as a major mover of stocks" is wrong, because a weak USD should be hurting non-US stock markets by the same reasoning used by those who claim it helps US stock markets.



THE USD HAS BEEN IN A DOWN TREND SINCE MARCH 2009



Let's examine the below charts and how the USD and Global Stocks have moved over the same periods.

Here’s a chart of the UUP, an ETF that rises with a rising USD and falls with a falling USD

UUP Daily Chart : Note how it's been falling since the March Rally in Global Equities Began (08 Nov 25)

Note how the USD has been falling since early March, the same time that Global stocks began rallying.

For another example of the USD's fortunes, here's a daily chart over the same period of the EURUSD, perhaps the forex trading pair most representative of the USD's fortunes, because this pair alone comprises about one third of all forex trades. Thus every third forex trade is this pair, and for every 3 Euros bought or sold, a USD is used, and vice versa.

Here too, note how the EUR has gained over the USD, meaning the USD has been weakening during this period against other pairs. Check any major forex pair you want, the trend is indeed the same – weakening USD.

EURUSD Daily Chart 3/09—11/09 (06 Nov 26)  Chart Courtesy of AVAFX.com

Thus for those not aware of it, since March, the USD has been losing value and in a steady down trend against other major currencies.

EXAMPLES OF INTERNATIONAL STOCK MARKETS RISING WHILE THE USD FALLS

Meanwhile, not only has the S&P has been in a strong uptrend, but so have most other major international stock indexes.

European Stock Indexes

For example, look at a daily chart of the DAX, the main German stock market index.

Daily Chart DAX 3/09—11/09 (07 Nov 26)    Chart Courtesy of AVAFX.com



Here's a daily chart for the CAC, the main French stock index

Daily Chart CAC 3/09—11/09 ( 08 Nov 26)     Chart Courtesy of AVAFX.com



Here's a chart for the FTSE, the main UK stock index

Daily Chart FTSE 3/09—11/09 (09 Nov 26)      Chart Courtesy of AVAFX.com

Note how all have similar up trends to that of the S&P 500



Asian Stock Indexes

The same trends have held for the Asian markets, for example this chart of Hong Kong's Hang Seng. Considering the negative effects of a weak dollar on Chinese export earnings, this chart should not be showing such a strong uptrend if in fact the reasoning applied by US stock pundits held true. If the dollar was driving stocks, this and other charts of Asian export economies should be more of a mirror image of the S&P 500 rather than a similar and sometimes more strongly up-trending version

Daily Chart Hang Seng Index 3/09—11/09 (10 Nov 26)



THE TRUE RELATIONSHIP REVEALED - WHY STOCKS IN FACT USUALLY PROVIDE DIRECTION THE USD AND FOREX TRADE IN GENERAL

When Asset Markets Are Optimistic, Currency Traders Sell Dollars

Global stocks, arguably best represented by the S&P 500, are widely believed to be the best barometer of optimism about growth prospects, aka risk appetite, or pessimism, aka risk aversion.

When there is risk appetite, traders buy currencies that tend to rise when there is growth (for a variety of reasons, but mostly because these offer the highest short term yields). These are referred to as risk currencies, because they tend to rise with risk appetite. The main ones being the AUD, NZD, EUR, and CAD).

When Stocks Markets Retreat, Currency Traders Buy Back Dollars (also JPY and CHF), Thus Misleadingly Labeling these "Safe-Haven" Currencies

When there is fear or risk aversion, the risk currencies are sold and traders buy back the low yielding currencies used to fund these purchases, thus these low yielders tend to rise in times of fear. Thus this group is known as the safe-haven currencies. The USD has, over the past few years, generally been the #2 most in-demand safe haven currency, after the #1 JPY, though recently it has arguably become #1 currency bought in times of fear.

These Labels Refer to Market Behavior Only, Not Fundamental Store of Value Safety

Understand that these labels do NOT at all mean that one currency is actually a better or less reliable store of value than another, indeed some of the "risk" currencies have much better fundamentals than the safe havens, and are backed by far healthier banking systems that are largely unburdened with bad debt, unlike the USD.

Rather this nomenclature simply refers to how the currencies behave in times of optimism of pessimism.

Because risk and safety assets tend to move in opposite directions at the same, which asset influences which is not always clear to casual observers. To further complicate matters the roles do at times briefly shift, and the primary forces that drive a given currency price can and do change over time.



Conclusion: Short Term Movements In Stocks Drive Daily Currency Movements , Whereas Currencies Generally Influence Stocks Over a Longer Period

Short term currency moves thus generally have little short term influence on stocks, whereas short term stock market movements have immediate influence on currency pair prices.

This is true for all economies to varying degrees, though in fact ironically far less so for the USD, since most of US GDP is from consumer spending, NOT exports. As a net importer, when the US economy is healthy and importing, the US economy reaps benefits, especially in the short term, from a strong USD because the imports become cheaper.

However, about 80% of currency trade is from very short term speculative traders, and in the short run, they look to the direction of stocks to decide whether to go long or short on the risk currencies or safety currencies.

The above article has attempted to present a complex topic in simple terms, and thus inherently suffers from certain oversimplifications. Historically, currencies trade based on the same fundamentals that influence their local stock markets, and thus have often move in the same direction.

That has not been the case since the current crisis began. Until there are deep improvements in the fundamentals of the US economy that will allow the Fed to raise interest rates, the USD is likely to continue to move in the opposite direction of stocks, as are other low yielding currencies like the JPY and CHF (the CAD has fundamental underlying differences from these that allow it to trade in the same direction as risk appetite / stocks despite its low yield).









Since the current downturn began, the USD started trading as a safe-haven currency, i.e. one that traders buy ONLY in times of rising fear. Without getting too much into the technicalities of why this is the case (like that it's used as a funding currency of carry trades) suffice to say that it behaves this way due to the USD's poor fundamentals, including:

• Low income: yield low short term yields that are likely to be among the last among the major currencies to rise, thus one gets very low returns from holding low risk USD debt

• Low chance of capital gains due to (at least perceived) ballooning supply that is widely believed to virtually guarantee inflation/devaluation), thus making the USD a poor holding for capital appreciation



Thus the only reason to hold the USD at this time is that it DOES tend to rise when there is risk aversion. Because stocks are currently seen by currency traders as the prime barometer of risk appetite, the safe-haven USD falls when stocks rise and vice versa when they come in.



DISCLOSURE: NO POSITIONS IN ABOVE INSTRUMENTS

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.



Consider:

• 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.

EURUSD DAILY CHART (04 Nov 24)



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.








DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.