After posting a new record closing high for the S&P 500 prior to the Easter break, the second quarter has got off on the back foot with the S&P closing yesterday with a loss of 0.5%. An unexpectedly large drop in US Manufacturing ISM of 51.3, versus the 54.2 level expected, and lower than expected Chinese Manufacturing PMI have been partly responsible. A 2% drop in the Nikkei has come alongside a stronger Yen in front of the Bank of Japan (BOJ) meeting on Thursday amid a growing view that the BOJ will struggle to meet expectations already priced into currency markets, with USD/JPY now trading at under 93 compared to over 97 two weeks ago. In addition, Euro-Zone political developments remain troubling with no sign of a Government being formed in Italy. Meanwhile there is plenty of commentary around highlighting the rationality of deposit flight from various Euro-Zone banking systems after Cyprus moved to haircut large depositors in the now defunct Laiki Bank as well as the Bank of Cyprus. Partly thanks to a softer Dollar after the ISM report, the Euro is holding up well clear of last week’s 1.2750 low, evidence of a short squeeze. To top things off, Korean geopolitical tensions have risen further with North Korea passing a measure aimed at giving nuclear weapons greater prominence in defence and South Korea promising a strong response to increased aggression from the North. Later this morning we get the final Euro-Zone PMI’s for March and the UK Manufacturing PMI, the latter being of relevance ahead of Thursday’s Bank of England meeting.
Today at 1.30 pm the US releases Factory Orders and New York ISM. Later, the Fed’s Kocherlakota, Evans and Lockhart will all speak on the economy.
June S&P 500
The positive seasonal bias, that I wrote about last Thursday, which will continue to the end of this week coupled with the fact that the S&P closed at a new record high makes it very difficult to go short this market until we get two sell extreme days in a row which so far this year has not happened. After I posted my commentary on Thursday, the S&P traded below my 1553 buy level and I was able to take a gain at 1561 on this position ahead of the weekend. The next level to watch on the S&P is the cash high of 1576, made on Oct 11, 2007, just before the onset of the sub-prime bubble and the global financial meltdown. This morning I have bought the June S&P at 1556.5 in small as I look for the market to test 1570 (which is equivalent to 1576 in the cash market). I will leave my stop at 1550 and I will need a closing break of 1538 for me to turn bearish. I will still look to go short the S&P on any rally to 1573/1578 with a 1585 stop.
June DOW
I was very unlucky on Thursday as the market just missed my 14410 buy level with a 14425 low. I still want to go short in small on any rally to 14570/14600 with a 14650 stop. I will only turn bearish if the Dow breaks and closes below 14310.
Euro/USD
The Euro worked well as just after I posted last Thursday the Euro traded down to my 1.2785 buy level with a 1.2770 low. I took a gain at 1.2830 ahead of the weekend and I am now flat. I am impressed with how well the Euro has held up over the weekend given how negative the press were against the Euro-Zone and her currency. Today I will look to go short the Euro on any rally to 1.2870/1.2900 with a 1.2920 stop. I will still look to buy any dip to 1.2770/1.2800 with a 1.2745 stop which is just below last weeks low.
June BUND
The Bund also worked well as the Bund traded up to my 145.78 sell level with a 145.87 high. As I did not want to have a position over the long weekend I took a gain at 145.40 and I am now flat. This morning I will use any rally to 145.60/145.90 to go short again with the same 146.20 stop. I do not want to be long at this time.
June DAX
The Dax just missed my 7860 sell level last Thursday with a 7857 high before having a nice sell-off and I am still flat. Given the seasonal bias of the S&P I do not want to be short at this time and this morning I will look to buy the Dax in small size on any dip to 7820/7840 with a tight 7795 stop.
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