Daily Form November 15, 2010

Inter-market Technical Analysis using algorithmic pattern detection

MONDAY NOVEMBER 15, 2010       11:33:00 GMT

The problems besetting Ireland, Portugal and Greece pose a threat to the EFSF or European Financial Stability Facility, which I plan to discuss later this week in this commentary and also on a TV slot.

However, just as daunting are the "challenges" now facing many US states and municipalities. California is one of the worst affected and recent negative revisions to the dire condition of the state’s public finances has taken its toll on the exchange traded fund CMF which is a vehicle that can act as a proxy for its municipal bonds.

The plunge below the cloud formation and on Friday below the 200 day EMA, accompanied by heavy volume suggests that while many traders are focused on the EZ peripheral states they would be well advised to keep an eye on the deterioration of states which can hardly be said to be on the periphery of the federation that is the United States.

EUR/GBP has made steady downward progress and now faces a critical test at the point where the dotted trendline has met the base of the cloud formation on the daily chart.

The woes in the EZ are not likely to be cured for a long period and the UK has the benefit of being able not only to print a lot more sterling but manage its own monetary policy so that it can keep up in the currency war. The Irish government must have mixed feelings about their decision to join the EZ and several analysts are now suggesting that a return to the Irish punt may not be such an unrealistic scenario.

Since QE2 was officially ratified there has been a noticeable ratcheting up of yields not only amongst US Treasuries (even the five year UST is now at 1.35% or more than30 bps above where it was on November 4th - which is a sizable move in a very short period) but also amongst investment grade, junk bond debt and even the more speculative variety of emerging market sovereign debt. The PCY fund, which I have mentioned several times, is now losing ground as expected.

LQD is a fund which can provide a proxy for investment grade debt and as can be seen by the highlights on the chart it has twice suffered from bouts of illiquidity in early May and on October 1st. The recent selling of this fund, which has produced a drop below the daily cloud formation, should provide yet further evidence that credit market woes are not confined to the Eurozone.

AUD/JPY was featured here last Friday and the comment made - i.e. "Now 81.80 looks like it could provide overhead resistance on the sharp reversal" has prevailed into this morning’s trading in Europe.

However the recent corrective performance of the Japanese yen is now suggesting that a re-test of the 82.50 would be a target during today’s trading. But as with many such FX trades this would be a near term opportunity and the appropriate risk/reward calculations would suggest that a fairly tight stop loss should be adopted.