Macro Update: Still Bearish Big Picture Despite The Fed
From Nic Lenoir Of ICAP
We start the day with an update on S&P futures. We initiated a sell recommendation at 1,126 for the long term and we are staying with it. At 1,070/1,075 we recommended taking partial profits while keeping a core short position, planning to add to shorts around 1,095/1,105 with a full stop on a daily close above 1,108. The game plan is intact. There are several possible Elliott Wave counts here. On the 180-minute chart we see that we could be missing one last impulse lower with a target around 1,060) before a final bounce ahead of wave 3) lower which will be a lot more violent. On the 30-minute chart however it seems relatively possible that we completed wave 1) at 1,066 and we would now already be in wave 2. Given that we already saw the 50% retracement from the highs for all intents and purposes the bounce could possibly be over but I personally think we will be consolidating a bit more and test 1,100/1,105 before accelerating south. Either way the game plan sticks: we had an opportunity to sell above 1,095 yesterday and whether we get another one or not I feel that traders should be and remain with a core short position.
Regarding Gold I had indicated that unless we had a daily close above 1,225 I had a preference for further correction. We did close above that level but barely. There are elements that make me feel that we still have more downside ahead. While fundamentally worldwide quantitative easing and monetary policies looser than teenage pop stars make me look desperately for a way to escape the government-orchestrated crash course, and while gold is right now the only viable alternative to escape politicians' control over one's wealth, I have to stay true to my trading methods. Taking a step back from the recent price action, I see that we have strong bearish divergence on the monthly, weekly, and daily charts. Most possible Elliott Wave counts all indicate that we have seen a key intermediary top or we are one last push higher from it, either way between that and divergences I feel it is hard to be bullish for the near term. As for the longer term: commodity rallies almost always end in a supply scare parabolic explosion, and we certainly have not witnessed that. I therefore remain confident that once the deflationary wave which may well coincide with the repricing of government debt occurs, we will see much higher levels. Zooming back in to the recent price action on the 180-minute and daily charts, we have seen the 61.8% retracement from the sell-off since the highs, and we have hit resistance at 1,228 so short-term trading confirms a possible corrective sell-off which is in line with our medium term expectation resulting from the strong divergences observed.
Last but not least, the Fed is back buying Treasuries. Yesterday's pop in equities was a nice resh reminder of what happens when the Fed pumps liquidity into the system. I added a chart of the 10Y US Treasury future because it is too funny to be ignored: the market rallies ahead of the Fed buying... and then dips, so the Fed not only injects liquidity in the system supporting a doomed market with your tax dollars, but it also splashes primary dealers in the process. The gift will keep on giving, as here is the list of the upcoming POMO operations:
August 19, 2010 August 20, 2010 Outright Treasury Coupon Purchase 8/15/2016 – 8/15/2020
August 24, 2010 August 25, 2010 Outright Treasury Coupon Purchase 2/15/2013 – 7/31/2014
August 26, 2010 August 27, 2010 Outright Treasury Coupon Purchase 2/15/2021 – 8/15/2040
August 30, 2010 August 31, 2010 Outright TIPS Purchase 1/15/2011 – 2/15/2040
September 1, 2010 September 2, 2010 Outright Treasury Coupon Purchase 2/15/2012 – 1/31/2013
September 7, 2010 September 8, 2010 Outright Treasury Coupon Purchase 8/15/2014 – 7/31/2016
September 9, 2010 September 10, 2010 Outright Treasury Coupon Purchase 2/15/2013 – 7/31/2014
September 13, 2010 September 14, 2010 Outright Treasury Coupon Purchase 8/15/2016 –
I am working on digging up the hourly price action for the 24H before and after the POMO days of 2009 in order to isolate the patterns for equities and Treasury futures and also try to measure the impact of the maturity being purchased on the curve. More to come on this when I have a chance to finish the study! Remember tomorrow is a POMO day so don't expect Treasuries to lose their bid, and then expect tomorrow to see today's gains washed away as dealers cash in. After all can you blame them: would you sell today if I told you a multi-billion buyer is guaranteed tomorrow? I didn't think so...
Good luck trading,