Daily Form May 21, 2010

Inter-market Technical Analysis using algorithmic pattern detection

FRIDAY MAY 21, 2010       06:55 ET

The recent near panic conditions across all asset classes showed no signs of abating yesterday with evidence of acceleration.
Even though my area is technical analysis, and I have a certain skepticism for much of the "reasoning" that is put forward to explain what is currently troubling markets, there are certain things that seem obvious to me. Here are my ten observations on the current turmoil facing markets

  • 1. The Eurozone architectural framework is deeply flawed and to suppose that a monetary union can survive without proper fiscal and political integration was something the architects were clearly wrong about
  • 2. The current austerity measures being insisted upon, primarily by Germany - which is required to pay the most in the EZ bailout - will only act to reinforce deflationary tendencies in the global economy
  • 3. Markets are often irrational. How else can one explain the extraordinary love affair that many asset managers have had for the Australian dollar, currencies from emerging markets and EM funds in general.
  • 4. A massive FX carry trade unwind is taking place that has very little do with "market fundamentals". It has more to do with quant funds that have been synthesizing investable funds to play with in the algorithmically based equity markets
  • 5. Politicians should never say that they are going to take on markets - don’t bite the hand that feeds you.
  • 6. Uncertainty surrounding financial regulation is keeping financials under pressure
  • 7. France and Germany are not seeing eye to eye over the future direction of the EU and both countries are doing their best to protect the balance sheets of their own private sector banks which have huge exposure to debt from southern Europe
  • 8. Inter-market correlations/alignments are far more significant as causes behind the mayhem than one month’s job claims number - although yesterday’s US numbers do suggest that the notion that the global economy is on the verge of "growing" itself out of the sovereign debt crisis is highly suspect
  • 9. Valuation of assets based on fundamentals, P/E multiples etc. goes completely out of the window when investors behave viscerally which is why TA is so useful
  • 10. Central banks can only prop up a flawed currency, i.e. the euro, for so long before markets lose total confidence in its integrity. The capacity for damage to global financial confidence from a disintegration of the EMU and the euro, is enormous and still has not been factored into current asset prices.

The S&P 500 faces a key test at 1050 and a close below that level would suggest that a large scale correction is under way with targets eventually down to 870 needing to be tested. Interestingly the 1030 area is an area indicated on the weekly Ichimoku chart as perhaps more fundamental technical support.

The clue to near term direction for US equities is, more so than at most times, to be found in the FX markets and in particular the direction of the euro and the yen.

Signals based upon Ichimoku patterns can be found at the Tradewithform website for premium subscribers and here is the link .

EUR/USD faces a wall of resistance from the cloud formation on the 240 minute chart. Trading this currency has suddenly become a lot more risky as the ECB and other central banks are now intervening in the market to try to "defeat" FX traders.
Still the underlying tone for this currency pair is to sell rallies.

The Nikkei 225 dropped by 2.5% in Asian trading - considerably more than Hong Kong which had already reached down to the February low.
My intuition is that the market could be close to mounting a relief rally but with the ongoing critical rumblings in other geographical regions it seems likely that a re-visit to the 9000 level should be countenanced in the intermediate term.

One of the best leading indicators for the very hard week for those of a bullish persuasion - it has been a spectacularly good week for those bearish on most risk assets - has been the behavior of AUD/JPY.
The chart below suggests that 70.40 on this cross rate will eventually need to be tested. But that may have to wait while there is short covering in the Aussie dollar whose demise this week has been extraordinary.