Global Macro Update

By Nic Lenoir Of ICAP

Good morning and apologies for the lack of updates the past couple days. I actually feel pretty good that I did not say anything. Despite my very bearish long term outloook I spotted a rat in the price action and recommended tactically to get long at 1,040/1,045, as painful as it is for me to do something like that, and since then I have not seen anything very interesting to talk about other than playing the break at at 120-14 in 10Y US Treasury futures.

So what now? Well EURUSD tells us we have reached the potential of this rebound. I had highlighted the 1.2154 resistance and we have failed to breach with an overnight high at 1.2152 (Boy do I love when that happens). As long as this level is not breached I see downside potential at 1.1640 in the near term, while long term my call is that the Euro will go so low it won't exist anymore. Similarly AUDUSD is getting very close to resistance. We had recommended on May 28 to sell 0.8550/0.8525 with good success. The market has come back close to this key level. We see that on the daily chart, as long as we stay below 0.8575 the market should remain in a bearish dynamic. From the tops (identified as Failed 5/ on the chart) I think we have an incomplete bearish impulse, and we are completing a wave 4) now of lower order before another leg down with theoretical potential at 0.7733. The risk reward to be short is therefore excellent here.

Equities however are not there just yet. The price action is confusing to say the least. The Nasdaq future almost looks like it is shaping a triangle. I do not favor this scenario for the following reasons: a) a triangle is the second to last pattern in a move 90% of the times b) I am very bearish long term. If we follow a standard triangle pattern and then sell off we obtain 1,537 and 1,337 as standard targets to the downside. While 1,137 makes some sense because it almost coincides with the break out level of the double bottom posted around the Januray 2009 lows, I think we have embarked on a 5-wave sell-off of huge magnitude, and as such I don't like thinking we are in the second to last pattern of the move, or that our downside potential is limited to 1,137 in the most bearish case. Short term however the reason why I had issued the warning about a return of risk appetite temporarily still stands: a rally up to 1,900 would have open the way for a much more significant sell-off and allowed the momentum indicators to pull back to gather momentum for an aggressive move lower. Similarly I look at S&P futures, and I somehow feel that we could have such a bigger move lower and a perfect entry level should we bounce to at least 1,106 to retest the break of the 200-dma one last time and we would also get an amazinf risk reward in terms of entry level for fresh shorts.

In the same line of thoughts, 10Y Treasury futures have an interesting support at 119-00 and a retest would give a good entry level for fresh longs, and it seems such a retest is a possibility. Watch 120-14 as the resistance in the short-term, should we break it would mean we will accelerate to the upside.

Fundamentally it is very interesting to note that retail sales have hinted at what we have been discussing for a while now: the top of the economic cycle may be behind us. My friend Julian Brigden's global liquidity index show that central banks around the world have halted the removal of liquidity, which is the only reason why equities have based. However it has been my contention that once the economic cycle rolls over, governmental tricks to avoid the unavoidable will be relatively useless. Let' watch closely if the markets can take the crisis to the next stage where liquidity in the system does not even matter. That would coincide with the case where money flows out of equities, maybe even out of Treasuries simultaneously, and into cash and gold. From that standpoint it is VERY IMPORTANT to note that Bernanke talked about gold recently. Precious metals are the latest central banker's nightmare. Recently there were flows out of Germany and into Swiss Franc reported to the tune of 9Bn Euros in one day... That is massive. Similarly physical gold and silver dealers are running out of inventories. Bernanke's nightmare is that every USD he prints flies into gold which would make him completely useless. It is concerning because I would suspect governments are capable of banning the trading of Gold if it gets there, because for them it's the end game where they cannot control the monetary system any longer. At least such developments have the advantage of letting politicians (central bankers are now pretty much politicians at this point) know what people think of their economic policies.

There is a lot of cash on the sidelines but an unemployed middle class does not warrant any monetary velocity from the wealthy, and that is the big problem we face right now: monetary policy cannot help us out of this hole.

We would recommend taking off those tactical longs in equities, initiate shorts in EURUSD and AUDUSD close to the resistance we indicated using tight stops, and wait for good levels to enter fixed income core longs as short term rates are going absolutely nowhere from a long long time. At this point I assume everybody is also sitting on a pile of insurance against sovereign bonds!

Good luck trading, and have a great world cup,

Nic

Comments

[velobabe]

C H A R T S  and art.

tyler i wanted to ask you once again. why do i have to answer the math problem when using my iphone. i am log in, it just doesn't seem fair. because if i have to use my iphone i probably am not at home, therefore i don't have my calculator handy. please, just think about it. plus, i am making another donation. i liked this article, as well.

[lance_manion]

Ms Velo; your iPhone has a very nice calculator, n'est-ce pas?

:)

[Double down]

+10

She is a good one.

[yabs]

if you need a calculator for these easy sums perhaps you shouldn't be into trading ?

[velobabe]

who the heck said, i ever was into trading, not me.

the only thing i ever knew, was how to press the buy or sell button, on my various online brokerage accounts. lost me way to much money with that particular skill, though.

[ALPO]

> At this point I assume everybody is also sitting on a pile of insurance against sovereign bonds!

Would love to be.  How does the little guy do that?  Call State Farm?

[Matto]

Actually id like to know that too, i was looking at shorts for USTs but perhaps there are better ways even for us retail guys.

Anyone have any info?