Macro Picture After The Close
Submitted by Nic Lenoir of ICAP
It was interesting to see the bears all come out of their caves today after the move yesterday. What's even more interesting is that non-bears joined the negative talk, with Bill Gross calling basically for a 30% sell-off in equities and arguing housing was overvalued by 50% from 2007 highs (by the way if the latter is true, the stock market should then correct by a lot more than 30%, more like 75%), and GS and BOAML came out with bearish outlooks on housing. Given upbeat equity predictions by the latter two firms (helps to have replaced Rosenberg with a bull!) it's all the more intriguing.
What we see on the charts, is that EURUSD looks like it has completed a very clean impulse from the highs, and while that means there is more weakness to come, we should probably retrace towards 1.4925/1.4950 (careful, the 76.4% at 1.4994 is always a worry, but if we are trully bearish the aforementionned range should do it) before we resume the sell off. 1.4620/1.4660 remains the target zone we should test and a break there would confirm a much more significant break of the uptrend.
As mentionned yesterday Gold was on a short-term basis around support levels, and we still think that we need to retrace towards 1,052 or consolidate further here before moving lower. Silver seems like it is bound to test 15.75/16, before 14.2 which is the support of the channel. Ultimately the big support is 12. But make no mistake, while correlations are not necessarily a great indicator between Silver and Gold, it is hard to imagine in the current environment to have Silver test 14.2 without taking any prisoners on the way down and have Gold not retest 986.
Just like we observed on EURUSD and Gold, short-term equities are a bit oversold. We brought it up yesterday, and despite making new lows today we look for now as we might close above the lows of yesterday. Divergence of short-term momentum indicators is there, and we would expect to at least try to test 1,070.50 over the next 48 hours for the S&P future. A break there would mean we should see 1,085/1,089 in theory. Anything above that would mean we are going for the resistance at 1,106 but that is not our favored case. We think short-term we test either 1,070.50 or 1,085/1,089. After that we would like to see the 1,038 support being challenged and possibly broken which would confirm a move to test at least 875. Dax is confirming our conviction that short term we will face a bounce. We have a little bit more downside possibly to 5,570 but after that we risk a retracement higher. 1,070.50 should correspond to 5,740 in theory. What bothers me is the great resemblance with the last 2 weeks of September for the Dax index as highlighted by the 30-minute chart. Also, the daily chart confirms we are close to support. On the daily chart for S&P we have an interesting turn of the second derivative for the MACD, but the RSI is pretty much on support. Both are not incompatible, as the MACD has a bit more latency and indicates if anything we will see more weakness after the bounce.
We were a touch early favoring an end of the sell-off in Treasuries on Monday morning as a few stops pushed the market lower, bt ultimately we have well recovered. 118-13 on the 10Y future is the level that will make all the difference. Auction today was well subscribed. As we discussed previously, the recent back-up in rates is likely to have made Treasuries more attractive for real money accounts, and the worries surrounding EURUSD and equity weakness probably also bring a bid in the market.
Good luck trading,