Nic Lenoir Turns Bearish With Conviction

From Nic Lenoir of ICAP

Bearish with conviction

All forward looking indicators point to severe economic weakness, I am talking recession here, not just a sub-par 1.5% growth. Most economists like my friends Julian Brigden and Jonas Thulin who do cycle analysis using leading indicators have highlighted this much more eloquently than I could quantify my bearishness which in economical terms is the summation of a lot of observations but lacks the timing and numerical dimension they can provide. The following link I found very interesting in that perspective:

http://theautomaticearth.blogspot.com/2010/09/september-28-2010-graphic-peek-into-our.html

Where my timing leaves less to be desired is in terms of technicals. 3 weeks ago now I recommended buying VIX calls, specifically I like the 37.5 November expiry calls. We had a signal in VIX to sell stocks with a reversal outside the bollinger band, which historically precedes the highs in stocks. The lag has recently been 7 to 10 business days, but I was definitely open to a longer lag this time around since there are many people trying to get involved from the short side and the specter of the Fed and the plunge protection team looming. That is mainly why I suggested buying November expiry and wait before getting outright short.

After observing the price action a bit more and reflecting on the patterns, I have come to the conclusion that the market will top between 1,155 and 1,164. In that zone we have in order the top of the channel (120-minute chart) guiding the consolidation since July, the 61.8% retracement of the sell-off since April's highs, the resistance joining the 2007 tops and the 2010 tops, and the C=A of the correction start in July (daily chart). I add to that relatively convincing divergence and the incapacity of daily 21-RSI to bypass 60 which is an excellent confirmation of a correction in bear market and not a new bullish impulse. Gathering all that and adding to it the VIX signal we had early in September, the economic mix which is turning very sour, the start of trade wars, the ever present sovereign default crisis in Europe, the common knowledge that bank balance sheets are marked to solvency and the housing double dip, and I think it's fair to say the pricing for the major equity indices is rather generous. I did say yesterday that it all starts and ends with the USD. Well, the attached chart says that based on M2 EURUSD is headed back to 1.10 or even parity, and USD bullish sentiment according to CFTC is pretty much 0%. We also had Fed speakers on the air today saying that more Treasury purchases may not be the answer.

I will have much more on M2 considerations and currency valuation in the next few days but I have not yet sufficient proof to support my theory. When I do I will share!

Good luck trading,

Nic