Central Banks around the world are reacting to the abundance of cash in their economies. This has been pushing up exchange rates and depressing activity in trade-exposed sectors as the ECB, Bank of England, Federal Reserve and Bank of Japan throw money at their ailing economies.Yesterday the Royal Bank of New Zealand announced it had intervened in the currency market because of the strong Kiwi following similar action the day before by the Australian Central Bank in cutting rates due to the negative effect of the strong Australian Dollar.
In Europe, the Euro jumped to 1.3194 against the US Dollar on another round of better than expected German Industrial Production Numbers which rose 1.2% from 0.5% last month. Equities continued to rally with the Dow up 0.3% closing above 15,000 for the first time ever, whilst the S&P finished 0.4% higher hitting its 5th record high in a row. Gold, Industrial Metals and Energy Commodities also all finished higher after the sell off on Tuesday. Overnight China released its CPI which rose 2.4% in April slightly higher than expected whilst PPI fell 2.6% in April after March’s 1.9% drop thus giving a subdued outlook to inflation.
Today is very busy on the economic front – this morning we have UK Industrial Production at 9.30 am, the ECB publishes it’s Monthly Report whilst Spain has a Bond Auction. Later at 1.30 pm we have the Weekly Jobless Claims in the US and the Fed’s Plosser speaks on Monetary Policy in New York.
June S&P 500
The S&P closed on another record high as the market is now up five days in a row and ten of the last twelve days. The Daily Sentiment Index (DSI) that I mentioned yesterday pushed to a new high of 91% bulls last night. The last time the DSI had this high a reading was in April 2011 and the S&P subsequently fell 20% over the next five months. I am not saying that history is going to repeat itself but this S&P is now stretched like a rubber band and the initial snap-back, when it starts, will likely be swift and violent. Could the DSI go higher? Yes. Does it have to move higher before major warning flags fly? No. When only 9% of S&P traders believe the market is set to decline, historically it means the market is set to decline.
I was stopped out of my 1614 small short position at 1625 and I am still flat as we have not had a five handle sell off from the high as yet. Just to reiterate that I am only trading in very small size until and when this markets begins to cooperate and today I am a small seller on any rally to 1629/1633 with a 1635 stop. If I am taken short and subsequently stopped out I will use my five handle rule to go short once more with a stop just above whatever high is put in. If neither of the above scenarios happens and the S&P breaks 1620 I will go short with a 1631 stop. As I said yesterday my only interest is to buy the market on any dip to 1593/1597 with a 1589 stop.
Euro/USD
The Euro worked well yesterday as the market finally traded up to my 1.3190 sell level with a 1.3194 high. I have taken profit this morning at 1.3150 on this position. I am amazed at how strong the Euro is trading and it is interesting that everybody I talk to are looking for the Euro to go down. I am taking a counter view this morning in that I have gone long at 1.3150 with a tight 1.3120 stop as I look for to eventually break the important 1.3200/1.3240 resistance area. I do not want to be short the Euro at this time.
June Dax
Just like the S&P the Dax is also stretched and I was quickly stopped out of my 8190 short position at 8220 on the stronger German Industrial Production data and I am still flat. I did not expect the DAX to break the 8200 resistance zone and the next major resistance is not until 8350/8400. Today I will look to go short on any rally to 8330/8360 with a 8410 stop but only in small size. I will also look to go short on a break of 8195 with a 8240 stop. My only interest in buying the Dax is if we dip down to the major support at 7850/7900 where I will be a more aggressive buyer with a 7830 stop.
June FTSE
The Ftse trade up to my sell level at 6560 with a 6566 high. The FTSE is also very overbought and I will lower my stop to 6575 on this position. If I am stopped out I will be a more aggressive seller on any further rally to 6585/6610 with a 6620 stop. I do not want to be long at this time.
June BUND
The Bund has rallied up to my 145.90 sell level this morning. I have only gone short in small size and I will leave a 146.30 stop on this position to tray and give the trade some room.
Gold Rolling Contract
Gold has also rallied to my sell level at 1472 and I am now short with a 1485 stop as I do not want to risk to much on this trade.
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