Thanksgiving Friday Market Update

Submitted by Nic Lenoir of ICAP

First of I apologize for the radio silence the past week as I was travelling. For those of you in the US I hope you and your families had a very happy Thanksgiving.

Now straight to the markets, the obvious question is whether black Friday this year will take a different meaning than just a shopping holiday. Obviously if you stuffed your Turkey with Dubai bonds this year you are risking a serious indigestion. A lot more on the follies of that market later. For now here are a few indicators I would look at in order to confirm this move has more legs than what we have seen so far, or whether it is to be faded.

The Dax bounced this morning on its 100-dma. Remember that was the support we had identified late October / early November. While I think in the medium term a deeper sell-off is inevitable, breaking the 100-dma on a daily close is an important confirmation.

EURUSD bounced on its 50-dma. This support has been religiously respected during the rally and we need to break and close below on a daily close to confirm a serious retracement is in the works. Same obsevation can be made on the USD index. Note that it is surprising that people have been selling EURJPY aggressively in this risk aversion environment but EURUSD is still holding support. The outperformance of the JPY on this move is quite overdone in my opinion: given that both USD and JPY are now carry-funding currencies and both trade weak everytime risk is bought in the market, I would expect more USD strength. It is worth keeping an eye on USDJPY which shows divergence on these new lows and appears to be in the process of forming a morning star candle which would be a clear buy signal.

Finally Gold came back to retest the former resistance of the short-term bullish channel we broke out of now, and is now resistance. While the key support remains the support at 1,070 which is still ways away (depending on volatility it's closer than one thinks) reintegrating the former bullish channel would be bearish. By the way, if you think you are fighting bubble creation being long gold against fiat currencies in a deflationary environment as I have pointed out many times you are wrong. You may make a lot of money, but the rational is flawed and you are in fact taking part in one of the bubbles. The price action on this move shows exactly that, as Gold has not realy been trading like a safe refuge in the past 48 hours. It is worth thinking about as part of a broader reflexion on the gold trade. Certainly as we have suggested on many occasions one should at least be long gold against another currency than the USD to mitigate the leverage.

The only trend that seems relatively certain going into year-end is higher US treasury prices. Ever since we have broken above the 200-dma we have had confirmation the direction is higher. Seasonals going into year-end obviously favor long positions as well, and given we managed to rally in Fixed Income in the past few weeks despite strong equity and credit markets, we should expect that any sort of risk aversion will only add fueld to the fire. The curve should flatten along with this move.

Good luck trading,