Opinion – Thursday 21 August 2014

After making consistent gains over the past two days the US Dollar was given another modest leg up yesterday with the Dollar Index rising another 0.2% after some snippets from the July 29/30 FOMC Meeting pointed to a more lively debate over US Labour market improvement and what that might mean for the timing of the start of normalisation. The further rise in the US Dollar has been more incremental than seismic in nature and in that respect the US 10 Year Treasury Yield is only 1/2 basis point higher than before the minutes were released.

The main takeaway from the FOMC Minutes showed that the ‘significant under-utilisation of labour resources’ view of the labour market is what carried the day as far as Monetary Policy is concerned. The market now awaits for Ms Yellen’s address to the Kansas City Fed’s Jackson Hole Conference tomorrow.

The minutes of the August Bank of England MPC Meeting were more fiery. They showed the Committee splitting for the first time under Governor Carney. External Members, Weale and McCafferty, voted for an immediate 25 basis points rate increase, the rest voted for no change from the 0.5% level. In response, Sterling had a brief flurry higher however it was not sustained in the face of a higher US Dollar.

This morning on the economic front we have German Manufacturing Services PMI at 8.30 am which is followed by the Euro-Zone equivalent at 9.00 am. At 9.30 am we have UK Retail Sales and Public Sector Borrowing Requirement. At 1.30 pm we have US Initial Jobless Claims. This is followed at 2.45 pm by US Manufacturing PMI and finally at 3 pm we have  the Philly Fed Index and Existing Home Sales along with Euro Zone Consumer Confidence.

September S&P 500

My outstanding S&P short position worked out well yesterday as shortly after I posted the market followed the Dax lower which enabled me to cover my 1979 position from Tuesday at 1974 and I am now flat. The S&P briefly sold off after the FOMC Minutes were released but yet again it managed to rally into the close as the market is determined to take out the 2000 level before attempting to sell off. The market is overbought on a Daily and Weekly basis but, as yet, is not trading at the top of its Bollinger Band despite rallying nearly 100 handles since its August 7 low at 189. Today the market will probably go on hold ahead of Ms Yellen’s key note speech at Jackson Hole tomorrow afternoon. The S&P is within touching distance of another all time high which I would expect to happen before  tomorrow. Today I will be a seller on any further rally to 1991/1996 with a 2003 stop. I will also raise my buy level to 1971/1976 with a 1967 stop.

Euro/USD

The Euro continued its recent sell-off and in the process easily took out support at the 1.3280/1.3300 area which my last real support level. After I posted yesterday the market traded down to my 1.3290 buy level before stopping me out of this position overnight at 1.3255 and I am now flat. The Euro is very oversold on the charts but despite this development I am not going to be a buyer here. Today, for the first time in weeks, I will be a seller on any rally back to 1.3300/1.3330 with a 1.3360 stop. The 1.3300/1.3350 should now act as strong resistance.

US Dollar Index

The Dollar continued its recent move higher and is overbought on a Daily and Weekly basis. For this reason I am not going to chase it higher and I will leave my buy level the same at  81.60/81.80 with a 81.35 stop.

September DAX

My Dax trade worked out yesterday as my fears that the market was trading heavily on Tuesday certainly came to fruition. After I posted yesterday morning it sold off which enabled me to cover my short 9335 position from Tuesday at 9290. It then traded down to my 9270 buy level with a 9247 low before following the S&P higher which enabled me to cover this position before the close at 9320 and I am now flat.

By way of illustrating how much the Dax has underperformed the S&P, the last time the S&P was trading at 1985 the Dax was over 10000. Today I will again be a buyer on any dip to 9270/9300 with a 9240 stop which is just below yesterday’s low. My only interest in selling the market is on a rally to 9400/9430 with a 9455 stop.

September FTSE

The FTSE again traded in a very narrow range yesterday despite the fireworks from the MPC Minutes. Today I will raise my buy level slightly to 6695/6725 with a 6665 stop. I still do not want to be short the market at this time.

Dow Rolling Contract

My Dow trade also worked well yesterday as shortly after I posted it also followed the Dax lower which enabled me to cover my 16915 short position from Tuesday at 16875 and I am now flat. Even though the S&P is back trading near contract highs the Dow is still along way from its 17150 high made in July so it is possible we have negative divergence between the two main Indices. Today I will again be a small seller on any further rally to 17010/17060 with a 17080 stop. If I am taken short and subsequently stopped out I will be a more aggressive seller in front of 17130 with a 17170 stop. I still do not want to be long the Dow at this time.

September BUND

No change as I am still short at 150.20 with the same 150.75 stop.

Gold Rolling Contract

No change as I am still long at 1294 with the same tight stop at 1283. If I am stopped out of this position I will look to re-buy on any dip to 1268/1274 with a 1261 stop.

Silver Rolling Contract