Same Stuff Different Day
By Nic Lenoir of ICAP
In the face of increasing liquidity in the system and a quasi consensus that the Fed and the government will do just about anything not to let financial markets relapse, at least not until November, I remain bearish.
The sell zone in S&P futures remains identified as 1,126/1,147. As long as that cluster of resistance holds I stick to my latest bearish recommendation (1,126 last week).
First chart that is key to highlight: AUDJPY. AUDJPY has been an excellent proxy for risk. We have a massive resistance area just above the latest consolidation. The intraday chart shows that we could well be in a wave 4 consolidation triangle here, but even if it is confirmed and we exit to the topside, we have the 100-dma and 200-dma at 80.41 and 81.04, the 61.8% retracement at 81.89, the overlap with the highs of 06/21 at 80.86, and the C=A from the lows of 07/01 at 80.86 as well. The overall set-up is technically very bearish and we would recommend starting to build a position if we do have one last impulse above 80.50. The support line comes below just above 78.00 and a break of that level should be sold in case we do not see the upside resistance before dropping. Even though the masses are now all agreeing that the market is going to go higher anyways, this bearish set-up makes me very comfortable with a bearish outlook.
I have also highlighted AUDUSD which as all carry trades is also a proxy for risk. There is an outside chance we could have a final push higher past my initial sell level at 0.9185 before the market reverses, but that being said very discretely the market broke to the downside of the ending triangle highlighted on the 30 and 180 minute charts. This could well be a false break given the lack of market participation, but this could be used as a confirmation signal in parallel to the strategy recommended for AUDJPY. If AUDJPY breaks lower right away then sell into it as it means AUDUSD was leading the way, otherwise wait for the topside resistances that are coming up imminently.
The Shanghai Composite gave me a few worries holding the bottom of the channel on the daily chart, but a closer look at the price action in 2008 indicate that we had a similar type of fractal action in the sell-off where we first held the support of the channel and retraced a quick 38.2% up before collapsing further and breaking through support. Here we have the 100-dma and the 38.2% retracement coming up as resistance shortly, so again watch this bearish set-up in case we get a repeat of 2008. The Shanghai Composite tends to be be very respectful of Fibonacci retracements.
Gold has also a very interesting setup to trade technically here. I had highlighted the support around 1,155 arguing for a temporary rebound before the next wave down. I think that testing simultaneously the 50-dma and the 50% Fibonacci retracement as resistance is a good indicaiton that the bounce may have run its course. Also note that we are threatening to break the support of the channel guiding the rally. As long as we stay below 1,225 on a daily close this looks quite bearish to me.
GBPUSD has lasso tested and so far held the key 61.8% retracement of the last sell-off. The Bollinger bands of the Vix are concentrating, which is a perfect set-up on a rapid push higher in equities and failed highs for an outside reversal. This has been the most reliable trading signal. So those two elements add a little fuel to my fire.
Fundamentally, it feels that the markets are pricing in QE2 already, but a failure to deliver tomorrow by the fed could well disappoint the market and trigger a USD rally which would in turn push financial asset prices lower. I would not be short USD into the announcement as more monetary largesse is already priced. In my opinion the Fed will instead wait for asset prices to be under pressure before reacting and printing further as the political support for pre-emptive quantitative easing will be difficult to gather.
Good luck trading,