The stock market is now pricing in a very rapid recovery

Per-Erik Karlsson from Avantage Financial GMBH at 10/20/09

S&P 500 futures back above 1085 after a dip in early Asian session towards 1075 support (former break out level). Strong bullish momentum intact above the 1075 level. A few weakness signs on the Gold chart and could fall back and test the break out level of 1033 near term. We will monitor Gold closely over the next sessions to potentially set up a short trade. JPY weaker again this morning as the equities rally and risk appetite increase for carry trades, main beneficiaries are AUDJPY, NZD and GBPJPY. GBP has been very bid last few sessions after the GBPUSD had a successful test of the key 1.5720 support area (Dec 08 high) last week. Lots of negative press out on GBP over the weekend, see links below. We agree that outlook for GBP is not very good and will most likely remain weak vs. Euro for the rest of the year. Euro dipped towards key 1.4830 support in early Asia after story out in the FT titled “Time for the ECB to get serious about the overvalued Euro”, see article link below. A note of caution on EURUSD though, the trade starts to look very crowded and we would not be surprised to see a correction at some stage over the next week to shake out weak longs, which would most likely pressure Gold as well. Crude breakout above 75 USD per barrel last week is pushing Crude higher and next resistance is 80 level. Nat Gas got very close to our goal at 4.33 for the correction (that we mentioned earlier this week) and it seems like there was fresh buying below 4.45 Thursday on the release of the Nat Gas inventory data and been rallying strongly since, key resistance remains 5.10 November futures. As long as the 4.33 support holds the outlook remains positive for another run at the 5.10 level. Soybeans, wheat and corn have shown some weakness following the huge run up, we are looking for slightly higher levels to get short, unless the support levels of these contracts give in. Still uncertainties about how much damage the recent cold weather have done to the crops, but would not be surprised if the damage is much less than feared. In currencies AUD and NZD continues to perform strongly, but we think NZD is overvalued compared to the out and we are favoring shorts vs. a basket of currencies, but maybe not USD just yet as the pace of the selloff in USD still looks strong. More and more talk about exit strategies and timing for the FED and other Central Banks. This will be very interesting to follow as the economy has to prove itself when the stimulus gets removed. We have argued for time that the economy has been held on life support through stimulus packages and private spending needs to pick up to keep the recovery going. The private spending remains weak and we think this will filter through to a much slower recovery than most people expect. The stock market is now pricing in a very rapid recovery, which we think is not the most likely outcome, but for the moment the momentum is bullish, so a bit early to get very short. We are looking at European financials as particularly interesting for short plays

Technical’s

Euro: Took out 1.4850 key resistance last week and 1.50 is next up as long as 1.4830 support holds.

Cable: Bullish reversal after hitting 1.5720 (Dec 08 high) support Tuesday last week, which is basically very bullish development. Next target is now for a run back towards the top of the recent range up at 1.6740.

USDJPY: 88.00 is key support and while above this level we are looking for a move back toward the 93 level and as the repatriation flows back to Japan are done after the half year end are over. We expect JPY to struggle for the rest of the year.

Swissy: Broke below 1.02, looking for parity next.

AUDUSD: Bullish momentum strong above 0.90 level, Next key resistance level is 0.93 now. Yesterday’s price action shows weakness as the it made a new high of 0.9274, but falling back and closing unchanged. Had to be some selling to make it close off the highs.

USDCAD: Potential bottom reversal Thursday last week when the pair made a new yearly low and closed above the previous day’s high. Need to see a daily close above 1.04 to confirm this reversal. Basically weak below 1.04.

EURJPY: Traded above the 135.48 resistance Friday and next level to the upside is now 136.09. Key resistance is up at 138.72 and we look for a test of this level over the next weeks.

GBPJPY: Huge rally last few days and break above the 144.54 key resistance last week have now turned this pair bullish. The next resistance level is 150.37 followed by 153.26 (September 09 high).

AUDJPY: Looking for a test of 85 next.