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Bye-Bye January

naufalsanaullah's picture




 

SPY continues its decline off of its January highs. The 107 level could act as important support, and marked September 2009 highs and November-December lows. Volume is picking up and the 50DMA remains broken, so keep watching for further decline. On short-term timeframes, the probability for a bounce off of the 107 level is high.

SPY

The VIX is coiling for a big move to the upside, in my opinion. It spent the entire year of 2009 in a linear downtrend that seems to be breaking out or ready to break out soon. The 200DMA is going to be an important zone going forward and a sustainable push above that level should send the VIX to the 30s, 40s, and beyond. In addition, as the Tsy yield curve begins flattening (front end of the curve is at a nominal floor that has nowhere to go but up while back end should tighten short term due to risk aversion), this will start decreasing MBS duration (the correlation between FNCL-LIBOR effective duration and 2s10s Tsy spread is very high), which could cause a large spike in vol as the "pure market" negative OAS manifests in surging rate vol. I will be going long OTM VIX calls in size for 1-3+ month maturities soon, if the charts confirm my theses.

VIX

Apple (AAPL) broke two significant uptrend support lines in its high-volume selloff January. Additionally, AAPL's 50DMA has been taken out. I'm looking to see this drop to its 200DMA after a possible short-term bounce, and a break below its 200DMA should send it selling off further.

AAPL

First Solar (FSLR) sticks out to me because it is in a huge 20-month symmetrical triangle pattern that has been consolidating its huge 2006-2007 run-up from its IPO. The triangle has been broken and FSLR now sits at support around 111 and seems to be bear flagging. With continued weakness in the overall market, especially in Chinese equities, FSLR could suffer a huge sell-off, if its chart pattern's size and duration mean anything, sending it back to double digits.

FSLR

The Pound/US Dollar (GBP/USD) pair is showing continued weakness, which is helping ShadowCap's short trade idea. The 1.57 level is an important S/R zone, and if the GBP breaks it to the downside, it could revisit January 2009 lows quickly.

GBP/USD

We mentioned the possibility of a reversal in the Euro/Australian Dollar (EUR/AUD)'s decline a few weeks ago. Now the pair has bounced off of the long-term support we had mentioned and appears ready to battle resistance at 1.59-1.60. This pair rallying is going to be a huge risk aversion event going forward.

EUR/AUD

Gold remains in its descending triangle at its support level around 105 in the GLD ETF. Continued dollar strength will send gold breaking down with other risk assets. I expect a short-term bounce early this week in gold and other risk assets and will most likely be shorting gold, silver, and precious metals-related equities (though I am long PMs since November 2008 for the long term and will be buying on weakness to add to my longer term positions, most likely this spring or summer; these shorts are more hedges than anything else).

GLD

Copper has been one of the biggest rallies in commoditysphere since the risk asset rally began. However, it has broken down from its rising wedge pattern that defined its ascent since late March 2009, as well as broken its 50DMA. January featured copper's biggest monthly drop since 2008 and concerns about diminishing demand from China (especially as it begins tightening) and a rallying USD should send this bubbly commodity selling off much further. Again, be wary of a short-term bounce, however.

HG

Crude is still in its rising wedge and may break down soon. This would be very bullish for USD and bearish for other risk assets. The 200DMA is approaching and crude's behavior around there should dictate its future direction. Also, the contango trade from early 2009 is now unwinding, as the promises for delivery from traders who picked up crude during early 2009 contango for Jan-Mar 2009 physical delivery come due. A recent WSJ article delved into this concern:

Contango has narrowed to around 40 cents a barrel, and "to cover your freight and other costs you need at least 90 cents," said Torbjorn Kjus, an oil analyst at DnB NOR Markets.

The contango trade is 50c/bbl out of the money at current levels and consequently no demand from that thesis is existent right now. This has big implications for crude prices, as the contango trade isn't rolled over. Much of the crude due for physical delivery from the contango trade's origination is due in February and March, and experts are voicing concerns over a lack of demand for tankers as storage demand declines:

ICAP said there were currently 21 trading VLCCs offshore with some 43 million barrels of crude. Seven of these are expected to discharge in February and one more in March. So far, it appeared those discharged cargoes wouldn't be replaced by new ones.

"I haven't seen any fixtures for VLCC storage in the last two weeks," said Simon Newman, ICAP's senior tanker analyst. "That would imply that storage looks set to fall in the short term."

Assuming there are no new fixtures, the amount of crude in storage could sink to 27 million barrels by March, the lowest level since the current contango play began in late 2008.

More than 70% of oil's rally from January 2009 came from January to July 2009, while it was in contango. The spread shifted to backwardation in July but soon reverted back into contango, though not nearly as steep as in the days of January 2009. The contango trade represents the demand behind oil's rally from January to July 2009 and as that ended, the oil market flattened out (crude is back to July 2009 prices after its recent selloff). However, the big issue going forward is the imminent supply influx coming as the contango trade unwinds and key players are forced to provide their stored crude for physical delivery, rushing supply back into the market. And with such a tight contango and a net-negative profit from origination for the contango trade at current levels, the contango trade won't be rolled over and what was previously demand will come due as supply.

CL

The US Dollar Index broke its 200DMA last week. The last time it had a 200DMA breakout was August 2008, which preceded the commodity crash and the equity crash a month later. It sits at an important resistance level around 80 and I expect a short-term correction in the DX and maybe a retest of the 200DMA. If it holds, however, a breakout through the 80 level could trigger further decline in basically all assets besides USD and Tsys.

DX

Another important 200DMA breach last week was in the Shanghai Index, this time to the downside. Its ascending triangle that it broke down from appears to be a repeat of January 2008, which was the top and preceded a crash of epic proportions. The last time the Shanghai broke its 200DMA to the downside was back in the spring of 2008, right before all hell broke loose. China announcing tightening surely affected Chinese equities this past month. I'm keeping my eyes peeled for excellent China shorts. I expect this decline to be susbstantial, as well.

Shanghai

 

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Mon, 02/01/2010 - 12:33 | 213297 kensuneit
kensuneit's picture

Very fine post, excellent analysis.  Thanks.

Mon, 02/01/2010 - 13:26 | 213364 Chopshop
Chopshop's picture

really nice charts, excellent analysis and solid TA.

great piece, Naufal.  thanks for it.

Mon, 02/01/2010 - 13:43 | 213386 Anonymous
Anonymous's picture

The impending market implications of military confrontation with Iran and the middle east in general - which looks increasingly likely - is the big monkey wrench in any market trend prognostications going forward. Especially concerning crude.

These are hazardous times for any trader to call.

RH

Mon, 02/01/2010 - 14:01 | 213411 Anonymous
Anonymous's picture

The impending market implications of military confrontation with Iran and the middle east in general - which looks increasingly likely - is the big monkey wrench in any market trend prognostications going forward. Especially concerning crude.

These are hazardous times for any trader to call.

RH

Tue, 02/02/2010 - 23:23 | 215568 mw1
mw1's picture

The Technical case for a turn around in the EUR/AUD is clear, but I am still trying to wrap my head around the story.  A pause in Austrailian rate hikes helps make the case for a turn around.  But, it seems to me that increased risk aversion would be bad for the Euro given that they have Greece, Spain, Portugal and Italy.  Do you see fear shifting from these countries and into other countries?

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