From Nic Lenoir of ICAP
Data this week is relatively light given and it's a holiday week. 3rd Quarter GDP at this point has no informative value regarding current and future economic activity. The slew of housing data is also inconsequential. Everyone knows housing is in a double dip so any slight improvement will be used by pundits to talk up the economy but fundamentals remain in the dumpster. Continuing claims is probably the most important piece of data this week given that durable goods is such a volatile series.
As a result I feel the markets this week will be mainly driven by sentiment and price action rather than news flow, especially given thin late December markets. Here are some of the key elements I am watching:
Precious metals give worrying signs to investors. On December 7 both Gold and Silver posted key bearish market reversals. After the initial drop markets tried to recover and failed at the 61.8% retracement for Gold on the 14th. Now we have triggered a H&S pattern we are trying to re-test the neckline as resistance and have managed to hold the 50-dma for now but when that support gives and knowing how bullish everyone is I expect a major correction. The February 1350/1300 put spread can be bought for $11 or $12 right now and for any asset manager out there who is long it offers great protection and a good risk reward for people who feel like taking a stab.
Obviously a move in Gold would come hand in hand with a stronger USD.
The Chart looks pretty constructive here for the USD index. There is an outside chance we could retest the 55 or 60 dma which has been a good envelop of the price action lately, but I feel that the dip on 12/14 marked the low on the pullback before further upside and a move through the 200-dma.
Fixed Income has given headaches to everybody recently, but the 5Y future weekly chart here is very interesting and if this week we close above 118-10 it will confirm a major turn. Interestingly I find that even if we are still in a bearish trend the market needs to pullback at least to 118-08. Therefore playing upside here makes sense knowing that it might only be a weekly play if the market fails to confirm the major reversal. For that reason if expressed via options the structure should have enough delta to at least capitalize on the bounce and cover 1 week worth of theta. The February 118.5/120 call spreads should work well in my opinion. If bought outright ideally 117-06/117-08 is the ideal entry.
As far as equities are concerned I am still very convinced we are nearing a top that will prove the high for at least a year. The resistance line and ideal sell level is considerably higher around 1,285/1,290 but it is very common to top out without testing trend resistance, especially with indicators showing the market is as over-stretched as it has been on the upside since the Nasdaq bubble top. The Nikkei has a very interesting profile technically here with massive daily divergence and failure so far to retrace beyond the 61.8% since April highs which is around 10,410. The market should pull-back towards 9,917 at the minimum. In the US the 5-day open Vs. 5-day close moving average has been a very reliable trend indicator so given the fact we are making new highs it might be more prudent to wait for a turn in the trend to sell outright.
Good luck trading this week,