Markets – Time for a bounce?

May 21, 2012

FOREX, Global Macro

On Saturday morning I sat down and wrote the Trading week wrap over at MacroBusiness where I looked at a number of markets and what the price action and thus the technicals, mostly, suggested about the near term direction. After a week like last week I expected to have my bearish bias reinforced but by the time I got to the end of the piece I was actually less bearish, not more and I think it might be time for a rest in the sell off if not a bounce.

Let me recap.

Obviously last week was a week when what could go wrong for markets seemed to go wrong. The lingering concerns over Greece weighed heavily and David Cameron’s speech certainly didn’t help. Neither did the fact that the Chinese RRR fizzle in terms of market impact even before it began.

For me though the big thing last week was this RRR fizzle because I believe that this sell off has more to it than just Greece and Europe – I strongly believe that the prospects of growth in the year and years ahead has been downgraded.  Indeed I believe that markets are focussing less on the free money associated with the zero interest rate policies that have artificially increased the net present value of “potential” cash flows from owning stocks and dropped the competing risk free rate to zero and are markets are now focussed on the low and slow growth future that is ahead of us for years to come.

But as I say when I did the market wrap I was struck by how many markets looked oversold and how many markets had essentially hit target levels. Let recap.

Let’s start with the US Dollar Index (DXY) – since this remains the reserve currency and the first barometer of risk.

The US Dollar Index is close to a break out from last year’s highs but it has as yet been unable to push through. Given that markets were in a funk last week, and given the safe haven bid that the US dollar took as a result, this inability to break tells us that much is already priced in and puts us on notice that possibly/probably markets need further bad news otherwise some sort of reversal is in the offing:

Longer term the best you can say about the USD is that it is basing after a massive multi-year down trend. But it does look like it will trade higher eventually:

Euro (EUR/USD) – I’ve had a target of 1.2660ish as I’ve been writing in MacroBusiness Morning this week, as well as for some time now. So the low of 1.2640ish and then bounce and weekly close above this level suggests, like the US Dollar Index price action, that much of the potential and actual bad news was priced in this week. So we need further bad news out of Europe or last week’s low could be it for now:

So, in summary, my target has been satisfied and I am now less bearish than I was and have been over the course of May. A rally back to 1.2887/1.2950 is entirely possible. A break of last weeks lows at 1.2642 opens up the way to 1.2397.

The Yen – USD/JPY – The Japanese will not be happy that the Yen has been strengthening all the way through this market sell off that began back in March. GDP data this week was stronger than anticipated which only added to the Yen’s improvement and it looks like it is going to unwind most, if not all, of the much needed sell off from earlier in the year. Perhaps the 100 level in EUR/JPY might be support and help the Yen against the dollar over the week ahead if the outlook for the euro bears fruit.

Australian dollar (AUD/USD) – Ahhh the battler. Under pressure all week and unlike the euro and Dollar Index which held or couldn’t break important support the Aussie dollar looks to still have a downside bias. As I have noted above my view is that from a fundamental perspective the recent price action in global markets has been as much about a rerating of Chinese and BRIC growth rates as it has been about a simple fear of Greece and Europe. So the Aussie’s acute weakness is to be simply reflective of this:

Now, there will be a bounce of some sort sometime and my sense is that if the euro can head back toward the high 1.28’s or mid 1.29’s the Aussie will get pulled higher in it’s wake (US Dollar weaker). But the Aussie’s outlook is a little more sour and I continue to expect it to head toward the very important support zone around 0.9430 which was last years low and the previous range top as you can see by the red line in the chart below:

The green uptrend line that the Aussie broke through this week is now resistance and comes in at around 1.00 in the first few days of next week. Above here 1.0046 and 1.02 are the fibonacci retracement levels.

Gold (USD) – Gold bounced nicely off the support at USD 1534 that I highlighted earlier in the week and looks like it too might have made a short term low. But like the Aussie, it has broken a big uptrend which in the case of gold is multi-year. Time, and the outlook for the US dollar will tell on this one:

US 10 year Yields – Another market that got close to important technical levels and held. US 10’s, as you can see in the chart below at around 1.7% are as low as they have been during this crisis. Fundamentally I find it difficult to see a reason for a sustainable selloff (increase in yields) but technically this 1.65% region looks solid:

CRB Index – the commodities index  is in a distinct down trend and has broken through important support which will now be resistance. The weekly close below this line is a bearish indicator and this outlook fits with my view on the fundamental drivers behind these moves in commodities and the Aussie dollar. I know you are not supposed to mix technicals and fundamentals but that is my process. Anyway here is the longer term CRB chart:

Crude– if you read MacroBusiness morning during the week you know that I think crude, in WTI terms, is headed toward USD 80 bbl. But the collapse in open interest for the active futures contract suggests that much of the selling may have simply been speculative unwinding of long positions. But given the marginal player sets the price as the outlook deteriorates so bids get pulled and the downtrend remains in force. USD 90 looks like it might provide support this week:

S&P500 – I identified 1277-1300 as the support zone for the S&P 500 previously and we are now in that zone  and the 200 day moving average now sits at 1278. The MACD indicator I use is starting to look a little oversold so I’m guessing that this zone will hold in the next week. Longer term though I am targeting 1200:

S&P/ASX200 (XJO) – Now the local market, but before I write about that let me say that the result of all of the above, of the charts, of the thoughts that arise from putting this report together, both technically and fundamentally, suggest to me that after a very poor week and with critical levels holding, with so much bad news priced into the market and, I’m guessing, with positions being cut back – the market is positioned for a consolidation.

Short term the ASX200 looks like it is oversold based on a simple MACD indicator I use – very subjective I know:

This is reinforced when I look at the longer term chart from of the last 5 years as you can see below. It is both scary and supportive. Scary because if this trend line breaks the “bull” market from the 2009 low is finished and supportive because there are enough touches of this red line to put some faith in it. The level for the next week is the 3980 region which is also the December 2011 low:

So all up it looks like it might be time for a bounce in markets given so much bad news has been priced in. But as you can also see in many of the charts/markets above there are very clear and distinct levels the break of which you will know that the next leg lower of higher is underway.

Good Luck and have a great day

Gregory McKenna

www.twitter.com/gregorymckenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If however you do need advice on Investments, Economics, Funding and Liquidity, Interest Rates and Forex and Derivative markets we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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  1. Pessimism Fatigue – Markets rally | Lighthouse Securities - May 22, 2012

    […] week and we were going to need substantial fresh BAD news to knock markets lower on this basis. Here is the link to yesterday’s piece again if you haven’t read […]

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