Bollinger Bands

While there are a plethora of Wall Street analysts calling for much higher levels for the S&P 500; most of these calls are based simply on the belief that the current trajectory must continue indefinitely.  While you certainly cannot "fight the Fed" the underlying fundamentals and economics that support the markets long term are not present for the party.  What is very important to understand, and can be clearly seen in the chart below, is that despite repeated calls for "ever rising" stock markets in the past eventually left investors devastated.  Markets do not, and cannot, continue indefinitely in one direction. Unfortunately, for most individuals, by the time they realize what is happening it will likely be far too late to act. Could the catalyst be 'language' changes from the FOMC as they see bubbles and froth in high-yield credit and margined stocks?

It is the yen, not the dollar, that is the key currency in the foreign exchange market.  

There have been some large moves in the foreign exchange market in recent days.  The euro posted its largest rally in four months last week.  The yen has fallen to its lowest level against the dollar since June 2010 and extended the declining streak to nine consecutive weeks, something not seen since 1989.  The Canadian and Australian dollar rose to multi-moth highs, as did the Mexican peso.  

In last week's technical note, we suggested the key question whether the sharp drop in the major foreign currencies following the avoidance of the full fiscal cliff in the US was trend reversal or overdue correction.  We favored the latter and looked for the underlying trends to continue.   They did.  

Now market participants face a different question.  Given the out-sized moves, have the trends become stretched?  The answer, we propose, is more nuanced than last week.  There is not one answer for all the major currencies we review here.

Because there are still some traders who adhere to such old normal traditions as charting and technical analysis (because apparently the FOMC committee sits down each month and observes Ichimoku clouds, RSI indicators and Bollinger bands), it is probably notable that one of the most respected chartists, Steve Cohen's favorite technician Tom DeMark, is now uniformly bearish on virtually all markets around the world which have triggered a sell signal in his studies, and is about to drop the axe on the US as well where a "Daily 13" signal is imminent. The caveat, of course, is that in a world in which fundamentals haven't mattered in years, why should technicals?

The US dollar moved lower over the past week against the major currencies, with the notable exception of the Japanese yen.  The greenback's technical tone has deteriorated.  The euro and sterling appear to have convincingly broken above significant down trend lines.  With the holiday season upon us, there seems to be no compelling technical reason not to look for a continuation of dollar weakness into the end of the year.  Few are incentivized to fight the trend.

The extent of the Fed's easing, and the implication of its guidance, suggests an even more dovish posture than the expansion of QE3+ (remember it was purposely open-ended, unlike QE1 and QE2). While the euro zone economy appears to be contracting this quarter at a slightly faster pace than in Q3, the slowdown in the US is more dramatic.  Growth may be more than cut in half from the 2.7% annual pace seen in Q3.   The fiscal cliff is the main cause of consternation at the moment.  Although there is private negotiations taking place, the public posturing is what investors have to guide them, and it is not particularly flattering.

Today's AAPL move, on no news, is as of this moment a $35+ move in one trading session, or a $30+ billion market cap move in one trading session, and a nearly $60 move from the Friday lows. As the histogram below shows, in absolute terms, this is the second largest intraday move up in the stock in the past two years, and a 4 sigma move for a stock which has moved 7% on a 1.7% standard deviation, for no other reason than the "stock is oversold" or whatever other narrative those who put narratives to stock moves have ascribed to it today. And with HFT's determining valuation based on momentum, RSI, Bollinger bands, and other meaningless New Normal technicals, we have just gone from massively oversold, to massively-er overbought.

The U.S. stock market is getting a wedgie, and so is the U.S. dollar. That matters, as wedges tend to break up or down in a big way. Stocks are a "risk-on" trade, the dollar is a "risk-off" trade, so they are riding a see-saw with wedgies. Yes, I realize this is an unpleasant image, so let's turn to the charts.

If there is one lesson to be learned from the Japanese experience with deleveraging over the past few decades it’s that deleveraging cycles have there own special rhythm of reflationary and deflationary interludes.  Pretty simple thinking as balance sheet deleveraging by definition cannot be a short term process given the prior decades required to build up the leverage accumulated in any economic/financial system.  If deleveraging were a short term process, it would play out as a massive short term depression.  And clearly any central bank would act to disallow such an outcome, exactly has been the case not only in Japan over the last few decades, but now also in the US and the Eurozone.  We just need to remember that this is a dance.  There is an ebb and flow to the greater (generational) deleveraging cycle.  Just as leveraging up was not a linear process, neither will the process of deleveraging be linear.  Why bring this larger picture cycle rhythm up right now?  The recent price volatility we’ve seen in assets that can be characterized as offering purchasing power protection within the context of a global central banking community debasing currencies as their preferred method of reflation for now, specifically recent the price volatility of gold.

A lot of technical analysts and financial pundits are expecting a standard-issue Santa Claus Rally once a "solution" to Europe's debt crisis magically appears. There will be no such magical solution for the simple reason the problems are intrinsic to the euro, the Eurozone's immense debts and the structure of the E.U. itself. The accident has finally happened, and it's called the euro/European debt crisis. I see a lot of analysts trying to torture a Bullish interpretation out of the charts, so let's take a "nothing fancy" chart of the broad-based S&P 500 with five basic TA tools: Bollinger Bands to measure volatility, relative strength (RSI), MACD (moving average convergence-divergence), stochastics and volume. If we use Technical Analysis 101 (basic version), a number of things quickly pop out of this chart--and none of them are remotely bullish.

At FMX|Connect we offer little variety in the technical analysis arena. We leave that expertise to Peter Beutel of Cameron Hanover fame, one of the preeminent energy analysts of our generation and someone with whom we are proud to partner. There are however two indicators that we feel quite comfortable with. These indicators are largely based on probabilities and volatility, areas we are much more at home assessing. The first one we’ve called our Trend-Vol Indicator. It measures the risk-reward in being short volatility through its cycles. Secondly, it often gives a low noise directional indicator which our readers may know we’ve used with some success during this Gold bull market. Its methodology is largely home-grown and proprietary: but suffice to say, it is a concoction of Bollinger bands, historical and implied volatility correlations, with a dash of skew thrown in. The second indicator we claim less ownership of, but have done some refinement to. It is something called the 6 Week Reversal signal, and if memory serves, was popular with Connors and Raschke for a while. Silver is entering an area right now that puts it on our radar for both indicators. This is extremely rare, considering the Trend-Vol system is used for breakouts, and the 6WR is for reversals. Before we get into it, some basic technical stuff we see in Silver.

Not quite. Give it a few hours: it just hit $39.70. Then we expect the Hunt High should be taken out shortly thereafter. And not to be left out of the party, gold just hit another all time record as well. At this point, Bernanke is officially panicking.

FmxConnect uses several proprietary indicators to predict volatility trends. One indicator, the TrendVol actually gives directional signals as well. Simply stated, if this week closes above 1416, there is a high likelihood of a 75 to 175 move higher in gold over the next 2 months. Although if the indicator hits, we'd expect the move to happen in a more compressed time. The signal does not usually waste time letting you know if it is right or wrong. The indicator combines Bollinger bands, implied volatility, skewness, and historical volatility to determine speed and direction of a potential move. The actual calculations involve using these indicators to create and proprietary oscillators.

Markets have remained range bound since the start of the year in Fixed Income and very little conviction seems to be present. Equities have been grinding higher but a lot of technical signs are flashing red and volumes are anemic so participation is minimal. Finally in FX the USD has also been range bound with the dollar index stuck between 77.5 and 81.5. Last week was another example, with slightly higher yields and weaker USD, but overall not much worth expanding on in the G10. However emerging markets took a beating from Wednesday onwards. Mexico & Brazil's stock markets are posting worrying technical patterns, following Asia which has been leading the way south. AUDUSD is sitting just above the 01/12 lows and the 100-dma and a break would confirm a move lower towards at least 0.95. The market broke the trend since last May on Wednesday while a retest pf the trend line as resistance is customary we would only look for selling opportunities here. This is in line with poor trading in emerging market bonds of late and China seems to be experiencing a liquidity crunch with the Shibor experiencing a lot of volatility. - Nic Lenoir

The market was down strong in the morning as both fears of rising inflation in China and common sense seemed to hurt sentiment, but then...

The data calendar is very light this week. The most of important piece of data is the Empire manufacturing survey which will or will not confirm recent uptick in industrial production. Claims will be of note as well after last week's uptick. We are still far from seeing a trend confirming the job market is on stable footing. If this continues we will end up with yet another disappointg NFP headline and lower unemployment rate as the participation rate in the active population keeps dropping. Most of the focus will be on the international scene: food riots in Algeria and Tunisia where it led to the ousting of the president are not without reminding me of those observed in 2008. As I was in France over the weekend I did get much closer to the situation with Tunisian protesters creating havoc in Paris and gruesome scenes of violence. The level of public anger is scary and there is little doubt that this is something a lot of political leaders around the world should watch and reflect upon: it could happen to any of them faster than anyone thinks. - Nic Lenoir