Something Smells Fishy

From Nic Lenoir of ICAP

We had highlighted last week that a lot of reversal patterns were in the works for beta assets. A lot of them were not validated by a follow through the next day, with the exception of precious metals. Still, the picture remains the same: if you buy equities here you buy a market that rallied 25% since July 1, with bullish sentiment at its highest since the Nasdaq bubble, trading anemic volume on the uptick, with the 10-day NYSE TRIN at its lowest since before the 1987 crash, and a put-call ratio telling you no long is hedged. With that in mind some will tell me that I am going to miss an 8% move or something like that. When you start getting worried about missing out on some upside that's exactly when you start thinking like the guy who is going to be left holding the bag. Personally I would gladly miss even 20% to make sure I am not left long when this one bursts. I won't extend too much again into why I think we missed a great opportunity to clean up the system in 2008 and instead set ourselves up for a harsher fall as I fear I might lose my most bullish readers to their brickgame.

In short, a lot of the flashing lights technically that we observed last week are still very worrying for the risk-on theme.

I start with precious metals which never invalidated the pattern of last Tuesday: Gold failed on the 61.8% retracement today, and posted a worrying hammer on the local high. We have a potential H&S in formation with the neckline support at 1,378 and the 50-dma right below. This set-up is quite concerning and if we go through those supports the move will be vicious. Again please understand that I am most sympathetic to the fundamental arguments to own Gold, but I am warning longs that a pull-back a relatively important magnitude could well be imminent if we don't go bypass today's highs in short order.

In equities, while the candlestick charts does not paint as clear a picture, and the VIX looks like it could have more to fall to go test support around 15.00/15.50, the hourly chart is showing a lot of divergence. That is of course on top of massive daily divergence in momentum indicators and all the over-extended measures of sentiment mentioned earlier. At least consider buying some protection if you are long here. I pointed out to couple friends this morning that the 1,220/1,200 put spreads expiry end of month were worth 4. Even if you are comfortable with your 53 longs to 1 short allocation, maybe spending a bit of insurance money here would be wise. The bank index posted a reversal pattern (evening-star-like pattern) today, and it was echoed by some very nasty looking charts for some of the major financials. Even with no hike last weekend the Shanghai Composite index also failed last night to carry on momentum and failed against the 50-dma 38.2% resistance. Chinese equities would need a red session to confirm the turn but certainly it's worth looking at the overnight session given our observations of the US market. Even some of the leaders like AAPL looked honestly like they needed QE3 today.

ERU2 almost tested to the tick the resistance at 98.00 this morning and turned south sharply. I still believe fixed income volatility for red Euribor contracts is far too cheap here.

Good evening and good luck trading,