Are We There Yet?
Submitted by Nic Lenoir of ICAP
While economic projections are all over the spectrum from 3.5/4% growth and inflation to a relapse, markets don't quite show the same enthusiasm as strategists. While moves are quick and erratic, overall participation in Fixed Income and Equities is very light. The exception is the gold bubble where volumes are on the rise, but keep in mind the gold market is very small compared to the rest of capital markets, and since it's purely speculative and there isn't much else exciting to buy that's understandable.
We would like to point out today the strong divergence observed on 4 key markets: AUDUSD, EURUSD, S&P & Dax Futures.
Interestingly we note that AUDUSD has topped almost exactly on the 2.618 Fibonacci extension at 0.9406 (high was 0.9404). The pair usually observes Fibonacci symmetries quite well. We also see that by taking the 38.2% retracement of the rally since 02/02/09 we find almost exactly the local high of June at 0.8239. We came back today to test the support of the channel we broke last week, but as can be seen recent highs were made with huge divergence. On the 3-hour chart we see it seems likely we will retest 0.9330, but this could be the high before at least a retest of the resistance and neckline of a potential H&S at 0.8968.
When it comes to divergence the daily charts of the Dax and S&P futures are fairly impressive as well. Both RSI and MACD show a tremendous amount of divergence around recent highs. The only possible bullish case I could see in the near term is a quick run up to 1,127 (50% retracement of the entire sell-off). I know many expect to see the 61.8% at 1,235, but volumes are absolutely not confirming any of the new highs made. Also, with many people bracing for 2010, and given it is unlikely that people on the sideline will jump in here without a material retracement providing the illusion at least of a bargain, it is hardly possible we run up that high in the month left before year-end. We would strongly consider building shorts between 1,020 and 1,030.
EURUSD finally is very close to the 76.4% retracement of the last year's sell-off which should prove strong resistance at 1.5161. The MACD and RSI also show quite a bit of divergence. The main support to challenge and break to start a correction is at 1.4850 (50-dma / trend support).
Markets are tired, but it appears that there is enough liquidity being pumped still to shrug any sort of bad news for now. Dubai, even though not a sizable market, is a very good hint at what is going to happen when CRE deals have to be refinanced, unless they default on interest payments before that... It shows that even though assets have been revalued on balance sheets they still have negative carry, and some of them no one really wants to help refinancing. There is also a massive wave of mortgage resets in 2010. That's why overall we think December, without a negative catalyst, will range and maybe make slightly new highs, but we would brace for a different business environment in 2010. There is a lot of expectation, and we have a market which by many technical measures is overbought, and is priced in for the most optimistic range of economic forecasts. Comes also the question of how long Japan and Europe will accept to be the butt of the FX market. Maybe the first cracks will come from political trouble to extend debt ceilings, pass new budgets, or international quarrels on foreign exchange and interventions. Until then, watch the 50-dma on a close in EURUSD, AUDUSD, DXY, or almost every US cross for that matter, and the 100-dma on the Dax. A break would mean Christmas is early this year.
Good luck trading,