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The only problem at the moment is that price action is bullish

Per-Erik Karlsson from Avantage Financial GMBH at 11/25/09


Market Comment

S&P 500 futures picking up from lows this morning after Asian stocks fell overnight (Chinese market down more than 3%) on broadly negative comments from policy makers, especially out of China with researcher Zhang Ming (Academy of Social Sciences ) pointed out that capital controls could be strengthened to address speculative inflows related to low US interest rates. National Price Monitoring Center researcher Liu Manping saw the optimal time for stimulus exit as the latter part of Q2 2010. Also China’s Vice Foreign Minister (Zhang Zhijun) signaled that the Renminbi will be kept stable, so a revaluation is not happening anytime soon seemed to be the underlying message. Euro getting sold this morning on report out in the” Frankfurters Allgemeine Zeitung“ suggesting that West LB may need as much as 6 bln Euro in additional capital before 30th of November to avoid being forced to shut down. We have mentioned for months that the problems are far from over for banks and that we expected to see banks being forced to raise capital to survive and West LB is not the last one for sure. In the S&P 500 futures, the levels to watch now are the 1082 key support and the yearly high at 1112.25 as key resistance and need to see a break out of this range to see a more directional move. Given the fact that cheap money has been used to short the USD and buy commodities and stock makes us think that we could see a correction on the USD going into yearend as traders take some profits. On the other hand the USD needs a good amount of inflows on weekly basis to avoid deprecation and generally in December these flows are light and therefore USD tends to perform bad in December. Looking at the attached chart of the December VIX contract later in the report, one can see a clear drop in the volatility over the last 2 months and approaching our buy zone of 20 to 22. This is over a period of rising equities and increased risk appetite and it basically signals that investors are materially less afraid of a pullback in equities now than 2 months ago. Are investors now becoming too confident and dropping the guard just so that the “Smart money” can catch them off guard and drive the market down? That would just be typical, given that so many investors and analysts have called for a correction for months only to be totally wrong. When the market now has shaken off that idea somewhat, it could be time for a drive lower. (Remember that Dow dropped about 50 points in mater of minutes following the Meredith Whitney interview on CNBC last week Saying “I have not been this bearish in a year". She also reiterated that banks will need to raise more capital and believes there will be a double dip recession in 2010.) We agree on this outlook in general, the only problem at the moment is that price action is bullish, so until the price action gives a clear bearish signal it is wise in our opinion to stay long or on the side lines and not short at least, cause remember that markets can stay irrational longer than you are solvent. We favor looking at shorts if we see the right confirmation signal unless the 1112 level is taken out in S&P. When it comes to the USD, it has not really been able to take out that 1.48 key support even though it has tried a few occasions over the last few day’s, so technically EURUSD still bullish above 1.48. We don’t expect USD to strengthen much unless interest rates are raised or if a stock market selloff would trigger a short squeeze/reduction in risk appetite. We maintain our view that JPY has limited scope for a very strong rally as BOJ will most likely step in and prevent the JPY from moving much below 87 vs. USD. Remember that Toyota was out last week saying that if JPY got stronger they had to move their production abroad. We can mention it again as we have done over the past few months, Japan has really weak looking fundamentals with ageing population, weak domestic spending, huge public debt and now a strong JPY. That is not a good mix to have in our opinion and it is unlikely that JPY can sustain a substantial rally when the fundamentals are that bad. We expect AUD to continue to perform strongly and dips to be supported as other Central Banks are still clearly behind RBA in the tightening. Although the RBA November meeting minutes out last week was a bit mixed and not as hawkish as we had expected and gave some doubt to how fast rates will be raised.
Looking at GBP charts vs. both EUR and USD it looks weak with both charts signaling more potential GBP weakness and we favor weaker GBP over the next month as long as the key resistance levels from last weeks are not broken. We agree and are once again looking to get short in NZD vs. a basket of AUD, EUR and CAD. Gold marching towards 1200 and we see trend channel resistance at 1175 and it certainly looks stretched now Stories continue to circulate that Central Banks will once again be net buyers of Gold and producers projecting supply shortages. Keep in mind that the high in Gold back in 1980’s adjusted for inflation would be around 2000 USD/OZ now. We note that crude has not been able to break above 82 USD per barrel on numerous tries since 16 Oct. That is weakness and we see rising risk that that key support at 75.50 will be taken out following the yesterday’s ugly price action.
Rejected towards 80 and closed all the way down at 77.56, bearish!!! That basically shows that Crude is relatively weak in comparison to the S&P, which has made new highs during the last month.
Interesting comment from IEA’s Executive Director Tanaka last week saying that there has not been much actual demand for oil in OECD countries. He also pointed out that the speed of the global economic recovery may not justify a Dec output increase from OPEC. We also expect the Euro strength to hurt European exports more than expected going forward as the down turn in the economy forces more focus on pricing power. Remember that there is always a sizable lag in the exchange rates companies operate at due to hedges and longer term contracts. Meaning that Euro zone companies might still be operating with a Euro rate that is much lower than the current rate, but when companies will have to re hedge and get new contracts the real rise in Euro will affect their pricing ability and sales. That is when we will start seeing the effect of the current Euro rate on corporate earnings and sales.

Some interesting news stories:


Below: A daily chart of the S&P500 futures contract vs. VIX Dec contract. A steep decline in VIX during the latest leg up in S&P and VIX is now dropping towards our buy zone (20 to 22) with S&P approaching overhead resistance. We are looking at a potential short S&P and long VIX play if the conditions are right.

Euro: Failed to get above 1.50 again overnight, but recovered well from the test of 1.48 Monday. The range is 1.48 to 1.5060 for now and need to see a break out of this range to trigger a more directional move. Long term rising support from March this year is coming in at 1.4770 today, so technically bullish above this trend line.

Cable: Breaking short term rising support from October low and looks toppish with a potential test of 1.6262 on the cards. Supply towards 1.69 looks

USDJPY: Has been trading inside the falling trend channel since March 09, with overhead resistance at 91.86 and support at 86.20. We see limited scope for JPY to go below 86 and favor longs on dips, however need a daily close above 92 to really open the upside.

Swissy: Bearish below 1.02 and need to break 1.00 to extend the drop. Overhead resistance coming in at 1.0203 this morning (falling trend line from 30 Jul 09)

AUDUSD: Still trading inside the rising trend channel that has been in place since 13th of July 09. The rising support of this trend line is down 0.9113 today with overhead resistance at 0.9586. Key support is 0.9061 today, which is Friday’s low.

USDCAD: Bearish below 1.0733 and this level held the rally last week, key support down at 1.02. A note, 1.0435 is minor support level, which was the breakout level on 20 October for the rally to 1.0869.

EURJPY: Struggling to stay above the 135 level and looks more range bound inside the key resistance of 138.72 and support down at 131 (2 Nov. low). Rising support (from April low) coming in at 130.60 this morning as well.

GBPJPY : Broke the short term uptrend on support line last week and key support is 2nd Nov. 09 low at 145.82 with key resistance up at 153.24, the reaction high from 23rd of Oct. 09.

AUDJPY: Rising trend channel from 13th of July is still in play with support down at 79.82 and overhead resistance at up at 89. Two other key levels are the 2nd of November low of 79.48 and the yearly high at 85.31


Our outlook
PairOur strategy TodayOur medium term forecast
EUROBullish above 1.48 and looking for a re test of 1.5060Our 1.50 year-end target reached
CableBearish below 1.6880, but expect support towards 1.64, favor selling ralliesNegative on both GBP and USD
USDJPYLooking for a test of 92.50 over next 3-4 weeksweaker JPY, 100 or higher by year end
USDCADBearish below 1.0770 with support at 1.0430, watch equities and crude oil for directionReached our target of 1.0350
EURJPYTrouble to get above 135, bearish below 135.30 today140 level within 3 months
AUDJPYAll down to equities, but AUD also trading a bit heavy following RBA comments casting doubt over the Dec rate hike85 target hit
GBPJPYBearish below 149.50, GBP weakness showing both vs. EUR and USD153 target hit, stand aside
AUDUSDBullish above 0.9060 and key resistance 0.940695 within 4 weeks

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