Opinion – Monday 24 November 2014

When I wrote the update on Friday it looked like we were all set for a nice quiet end to the week with the data calendar very bare. That was not to be as just before I posted, the Chinese Central Bank (PBOC) unexpectedly cut its benchmark lending and deposit rates by 40bps and 25bps respectively. The Japanese Finance Minister had earlier warned that  the the Yen’s weakening was too rapid thus putting paid to another USD/JPY test of 119 while ECB President Dragi promised to take the necessary action to raise inflation expectations. Aso’s remarks had a little impact on markets but the other two events provoked some pretty punchy price action The most eye-watering was in FX where EUR/USD dropped 100 points in quick order and closed below 1.2400 at 1.2380 for a 1.2% fall on the day. Dragi made clear in his speech what ‘we must do what we must to raise inflation and inflation expectations as fast as possible’. He also said that this could include broadening ‘the channels through which we intervene’, leaving the door open to purchases of Corporate Debt and even Sovereign Bonds. The Dax closed 2.35% higher on these events.

The PBOC cuts its Benchmark Lending rate by 40bps to 5.6%,and its benchmark deposit rate to 2.75%. At the same time it will allow banks to offer deposit rates up to 20% higher than the benchmark from 10% previously. In a statement explaining its actions the PBOC argued that it was responding to higher financing costs rather than a slowing economy.

This morning on the economic front we have the German IFO Business Climate/Current Assessment/Expectations. At 2.45 pm we have the US Services PMI whilst finally at 3.30 pm we have the Dallas Fed Manufacturing Activity.

December S&P 500

The S&P closed at yet another record high on Friday. However, having gapped 20 handles higher at the US open, it quickly saw profit taking which saw the market trade back to 2056 before closing over 2060. In the process the S&P has left an ‘open gap’ from Thursday at 2050/2056 which I would expect to be filled over the coming days.

Just as I posted on Friday the PBOC announced their surprise rate cut which is its first cut in nearly 2 1/2 years. As a result I was quickly stopped out of my latest 2056 short position at 2063. The market made a subsequent high at 2072 and using my 5 handle rule I went back to the short side at 2067 and after a nice sell-off I was able to cover this position at 2058 and I am now flat. I still believe that the Central Banks are creating one of the biggest Bond and Equity bubbles in history and I have no doubt that this will not end well. I will continue with my strategy of selling rallies with a tight stop until we get a significant sell extreme. Today I will be a seller from 2064/2069 with a 2073 stop which is just above Friday’s high. Again if I am taken short and subsequently stopped out I will use my 5 handle rule to go short again with a stop just above whatever new high is printed. My only interest in buying the market is still on a dip to 2042/2048 with a 2037 stop.

Euro/USD

The huge move lower in the Euro on Friday again showed how important its is to have stops in the market. After I posted the Euro started to sell-off and I went long at 1.2510 but I was very quickly stopped out of this position at 1.2470 and I am now flat. This morning the Euro is again testing the now key support at 1.2350/1.2380 and I will be a small buyer in this area with a 1.2330 stop. A break and close below 1.2350 will be short term bearish and opens up the possibility of a test of the 1.2050 next key support.

US Dollar Index

I am glad that I lowered my stop on my 87.90 short position to 88.00 as after I posted on Friday I was very quickly stopped out of this trade and I am now flat. The Dollar did not weaken as much as expected given the rally in the Japanese Yen following comments from Japanese Finance Minister Aso. The next key resistance for the Dollar is from 88.60/88.90 and today I will be a seller in this area with a 89.20 stop. Given how oversold the Dollar is currently trading I do not want to be long the Dollar at this time.

December DAX

By the time I posted on Friday the Dax had started to rally hard which saw me stopped out of my short 9480 position at 9530 as it was already trading at 9625. The Dax spent the rest of the day trading higher and even when the US markets started to weaken it did not follow suit. Today the Dax is trading above its Bollinger Band and at the top of its Williams Index and for this reason I will look to go short again from 9760/9800 with a wider 9840 stop given the volatility.

December FTSE

By the time I posted on Friday the FTSE was trading at the top of my sell level at 6735 and thankfully I had a tight stop on this trade as I was quickly stopped out of this short position  at 6750 and I am now flat. The FTSE continues to under-perform the other major Indices at this time which is exactly what happened in September before we had the huge correction in the markets. Today, given how overbought the market is trading I will again be a small seller from 6755/6780 with a 6810 stop.

Dow Rolling Contract

My good run in the Dow came to an end on Friday as after I posted the market was trading at my 17810 sell level before quickly stopping me out of this trade at 17860 and I am now flat. Despite the Dow closing at yet another record high I will still keep to my strategy of selling spikes with a tight stop and today my sell level will be from 17850/17890 with a 17920 stop which is just above Friday’s high.

December BUND

Thankfully I had lowered my stop on my 151.75 short position as following the PBOC rate cut I was quickly stopped out of this trade at 151.95 and I am now flat. Next week’s ECB Meeting promises to be a very interesting affair given Dragi’s determination to fight deflation with a weaker Euro as I just cannot see the Bundesbank sitting back and allowing this to happen. Today I will again be a seller of the Bund from 152.10/152.40 with a 152.60 stop which is just above the contract high made in mid-October.

Gold Rolling Contract

Gold is continuing to find strong resistance at 1200/1204. I am still flat as Gold has not yet printed 1210. Again if Gold prints 1210 I will go long with the same 1195 stop.

Silver Rolling Contract