That's How You Bounce On Support
Submitted by Nic Lenoir of ICAP
I shall not comment on the GDP number, nor the fact that estimates were revised down yesterday. Anybody who pays half attention to the market knows that it is an old trick used on a down day ahead of numbers to suck the last sellers in before the bounce. Last NFP day is a good example that should be fresh enough to most traders' memories. Let's focus on where we are now after this rally.
First, I hate to admit it since I am bearish, but today was an obvious move. Looking at EURUSD we tested the bottom of the channel on the sell-off and flirted within half a figure of the 50-dma. S&P futures came close to the 1,032 support of the bullish channel as well yesterday, and gold tested the 1,026 support area. The move today is brutal, and we need to look at the levels to watch to determine whether this is another ramp up, or if this bounce needs to be sold.
For the S&P future 1,070.50 is the line in the sand. If we go beyond then game over, new highs are upon us. On the Dax future we are back testing the former support of the channel, now resistance around 5,600. The 50-dma is at 5,609, right above us, and the key barrier would be on a further push 5,713, which corresponds to 1,070.5 in S&P future and would invalidate the impulse structure of the sellf-off the past few days. I would argue it is worth selling the Dax around here rather than any of the other markets. That will require discipline however when watching the stops. EURUSD we are already back on the overlap we broke the other day at 1.4845 and we have retraced almost 50% of the move already. Selling here requires to be religious respecting the 1.4974 stop, but the 1.4920/1.4974 is probably a better zone to reload on shorts. Gold is back almost on the resistance area between 1,050 and 1,055. A break past the top of this range probably invalidates further weakness as well.
If you want to play the carry I will bring attention to GBPUSD. I think you are still exposed to weakness for risky assets until you break the resistances mentioned here above, but GBPUSD is a trade that could work either way. Given it has decorrelated recently from the rest of the short-USD/pro-risk space it could be one way to play the anti-US theme without getting annihilated if equities do sell-off further. GBP has partly become a funding currency for carry trades. We had a H&S triggered on 09/24, and we retraced 38.2% of the rally since March 11. The correction shaped into an ABC with C=A. We have broken back above the neckline and the 50-dma, and on the pull back a few days ago we tested and held succesfully the moving average. It looks like a perfect technical set-up for an acceleration higher. Of all the pairs against the USD, it is the only one that offers a compelling bullish case other than just following the trend. The upside target if the move plays out is 1.7902, so the upside is quite significant, and a break below 1.6263 (the 50-dma) and the former neckline should be used as a stop on a close.
The Fed has now completed its treasury buy-back program. It will be interesting to see if the US Treasuries market comes under pressure as a result, especially given that the 7-year auction did not go that well today. Maybe the fact dealers can't hope buying at auctions to sell it right back to the Fed at a profit means they won't be buying. It is well documented that Treasury dealers have had a relatively easy time taking a commission on bonds issued by the Treasury and headed to the Fed's balance sheet, and POMO reports have shown that bonds purchased by the Fed had often times been issued in the weeks or even days before the Fed bid on them. More on the yield/risky-assets relationship later, for now let's see what charts say about the 10Y Treasury futures, and the key support levels to watch that would indicate yields are about to rise aggressively. The 180-minute chart shows we have a potential H&S triggered if we break 116-29 on the downside (I would observe the break on a daily close). What is even more interesting is looking at the weekly chart, one realize that this H&S is itself within the shoulder of bigger picture H&S. The big picture neckline is just about at 113. The next support below that is 106-21, so it is very important to kee all of this in mind. My conviction is that if equities push much higher here past 1,070.50 instead of retraceing we will go test the 113 level. A full point for the Treasury contract is about 14.4 basis points in yields, so that would imply rates would be 75 basis points higher for the 10Y Treasury approximately. I think if we get there it would put enough of a lid on recovery hopes that stocks would sell-off and balance the move in Treasuries. With the Fed no longer purchasing Treasuries, it is hard to contend equity markets can keep going much higher, even though some will argue that MBS purchases will still put pressure on overall rates.
Good luck trading,