Markets were expecting the economic divergence trade to play out further last Friday with soft Q3 GDP and strong US Consumer Reports. That is exactly how it played out but the US Dollar could not make further gains with the market seemingly pricing in the divergence into the Euro especially with the Euro as expected trading back above 1.2520 versus the Dollar. Sterling has continued to be something of a laggard as dovish rate expectations weigh on the currency.
Commodities rebounded strongly on Friday helped by the softer Dollar with notably Gold and Silver both having Key Upside Reversal days. Gold rebounded nearly $50 from its 1147 morning low. As for the data, US Retail Sales in October rose 0.3% versus 0.2% expected while Consumer Confidence came in at it highest level since 2007 at 89.4 versus 86.9 expected. The G20 Leaders Summit in Brisbane re-affirmed their commitment to raise growth by 2% by 2018.
This morning equity markets are opening a lot weaker, led by the Nikkei which closed down 3% as Japan again entered recession in the last Quarter. GDP fell 1.6% versus a gain of 2.2% expected. Japan’s second straight drop in GDP, matching the textbook definition of a recession, followed a revised 7.3 percent contraction in the second quarter that coincided with an increase in the national sales tax from 5 percent to 8 percent. Unadjusted for price changes, the economy contracted an annualized 3 percent in the three months through Sept. 30, the Cabinet Office said. Japanese stocks slumped.
This morning on the economic front we have Euro-Zone Trade Balance at 10.00 am. This is followed at 1.30 pm by US Empire Manufacturing and Industrial Production at 2.15 pm. Finally the Fed’s Evans will speak on the economy at 3 pm.
December S&P 500
The S&P cash market stopped moving last week with little variances between closes during the entire five-day stretch. The S&P 500 has closed the last five days between 2038.25 and 2039.83 a very narrow range of just 1.58 points. The last time such a narrow range occurred was in August 2007 before the market sold off aggressively.
After I posted on Friday the S&P traded higher to my 2038 sell level and after a nice move lower overnight following the awful GDP report from Japan I have covered this position at 2031 and I am now flat. As I have mentioned over the last several weeks Deflation is not good for world economies and given all the stimulus that Japan have implemented over the last 12 months the economy is still in recession does not augur well for Europe going forward. Today I will again be a seller from 2037/2043 with a 2046 stop. Again I will use my 5 handle rule to reset my short position in the event that I am stopped out of any new short position with a stop just above whatever new high is put in. My only interest in buying the market is still on a dip to 2018/2023 with a 2011 stop.
Euro/USD
The upside move that I have been looking for over the last two weeks finally started in the Euro on Friday which had an upside reversal day. After I posted on Friday morning the Euro traded lower to my 1.2430 buy level with a 1.2405 low before having a nice rally in the afternoon. I covered half my position at 1.2520 and I will raise my stop to 1.2480 on the other half as I look for the Euro to trade higher possibly to 1.2750/1.2800 as the oversold sentiment/Bollinger Band/Williams Index all need to correct.
US Dollar Index
The Dollar Index has finally started to sell-off given the huge move up in the Dollar since last May when we were trading at 78.00. I am still short from last week at 87.90 and today I will lower my stop slightly to 88.20.
December DAX
The Dax is trying to rebound from its early morning opening following the 3% drop in the Nikkei overnight. I am still flat the Dax and despite the positive price action so far this morning I have no interest in been long as in my opinion it is only a matter of time before this market breaks substantially lower. Today I will lower my sell level to 9270/9310 with a 9340 stop.
December FTSE
I am still short the Ftse from last week at 6620. The Ftse is not following the other European Indices lower and I will give this market one more day to fall or else I will close my position and stand aside. I will still leave my stop the same at a tight 6655.
Dow Rolling Contract.
The Dow just missed my 16680 sell level after I posted on Friday and I am still flat. Today I will lower my sell level slightly to 17660/17700 with a 17740 stop. Given how overbought the Dow is currently trading I do not want to be long the market at this time.
December Bund
No change as I am still short from last week at 151.78 with the same 152.25 stop. If I am stopped out of this trade I will be a more aggressive seller in front of 152.50 with a 152.80 stop.
Gold Rolling Contract
One signal that I have learned to respect over the last five years is the Daily Sentiment Reading Index which has again proved its worth with the move in the Dollar, Gold and Silver last Friday. This Index is especially good when its is aligned with the Bollinger Band and Williams Index. Last Friday Gold had a Key Day Reversal Day to the upside and I am impressed the fact that Gold was able to close over the key 1180 resistance area. I covered half my long 1157 position near the end of the New York close at 1190 and I will raise my stop on the other half to 1170. If Gold can break and close over its next resistance at 1200 it will very positive.
Silver Rolling Contract
I was very lucky not to be stopped out of my two positions on Friday at 15.25 as the low print was 15.27. I am still long at 15.30 and 15.80 and because Silver broke 16.25 I was now raise my stop to 15.75. If Silver breaks 16.60 I will then raise my stop to 16.30.
Nymex Crude December
My long Nymex position worked really well on Friday. After I posted Nymex was still trading below 74 and after the US markets opened Crude started to rally hard. I covered half my position at 75.50 on Friday and today I will raise my stop to 74.20 on the other half. I am disappointed that Crude has not followed through to the upside this morning. If I am stopped out of this position I will look to go long again from 73.00/73.50 with the same 71.95 stop.
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