Submitted by Nic Lenoir of ICAP
All or pretty much all of the major equity indices have it an important intermediary support this morning and bounce on it. The support trend joining the lows of 08/19 and 09/02 was tested and temporarily breached by the Dax, the Nikkei, and the S&P. The only exception is the Nasdaq which has not retraced comparatively. But overall strong support has been tested.
While I have been a strong advocate of shorting this tape ever since we tested the 88 week moving average in the S&P, it would be wise to lighten positions a bit here and reassess. The 30-minute chart on the Dax shows there was no divergence around the lows, but a proper confirmation of the break would be preferable rather than just trusting short-term momentum indicators especially after a 7% move down. Note also that we have failed so far to close the gap at 1016.48 on the SPX index. That would be the best confirmation that the break is validated and we will be moving lower.
Regarding bonds, the Tnote future is posting a massive reversal on a key resistance at 119-23. If the future closes down on the day we are at risk of posting an evening star on a major resistance (probably the biggest resistance until the highs of last December should we break). I would advocate a reversal to be confirmed here. While for equities my medium-term view is so bearish that I do not rule out further selling off, in Fixed Income we have hit a major inflexion point.
The usual suspects [ZH: emphasis ours] did a great job at managing the market expectation yesterday, which is why we dipped ahead of the number, and shorts took profit following the release. Congress's Finance Committee get the numbers at 2PM the day prior, why shouldn't the right institutional traders get them too? Obviously this softened the blow delivered by the news. The key is that economic news has started to roll over a bit, and if this trend continues then it will be hard for the market to shrug it off. Most indications coming out of the credit markets show that the widening in CDSs is continuing for now. As this happens this will also put pressure on the stock market.
Good luck trading,