Daily Form December 21, 2010

Inter-market Technical Analysis using algorithmic pattern detection

TUESDAY DECEMBER 21, 2010       11:54:00 GMT

Sterling is sliding during European trading on Tuesday morning after abysmal data was published on the Public Sector Net Cash Requirement or PSNCR. The data revealed that the gap between tax collected and expenditures on public services widened at a rather alarming rate and, contrary to expectations that it should be stable or even contract. The gap amounted to almost £23 bn (or $35 billion) and calls into question the more optimistic notions that the UK coalition government had "sorted" the deterioration in the public finances.

The gap might even require the Chancellor to engage in some "comforting" pep talks with the folks at the major CRA’s.

As can be seen on the hourly chart there is a real possibility that sterling could take out recent support at $1.5460 and after that there is scope for further downside to $1.5350 at least.

This will be my last commentary for 2010 and I would like to extend very best wishes to each and all for the upcoming holiday and for peace and prosperity in 2011.

At the end of last year I published some predictions about the possible direction of numerous asset classes during 2010. Just to focus on the key ones, I was pretty much on the money about the euro and gold, too pessimistic about sterling and interestingly both right and wrong about the S&P 500. I predicted a range for the year between 870 (not seen of course) but with an upside of 1280 (but tended to the view that this would be seen mid year rather than at the end of the year).

I would not be surprised to see the S&P 500 continue to eke out gains between now and the last trading day of this year and perhaps come close to the 1280 level. However I would also not be surprised to see a rather abrupt correction in early January as well.

The Nasdaq 100 continues to display candlestick patterns which are symptomatic of a rolling top formation, and if the view on the S&P 500 is correct then the Nasdaq 100 could be in the vanguard of a late year advance but also leading the charge (should there be one) in a sharp correction during the first few sessions of 2011.

The Bovespa Index in Brazil is still in the vicinity of its 200 day EMA after violating an uptrend line, and I shall be monitoring this index closely for clues about direction in a number of emerging markets in general - some of which are also covered in the discussion below.

EUR/USD is moving at a snail’s pace in current trading and the near term direction is hard to call. Longer term the outlook for Q1, 2011 from both a technical and fundamental perspective is not favorable.
Here are some noteworthy comments to be found in a column today by Ambrose Evans Pritchard, from the Telegraph, under an article entitled Pimco says ’untenable' policies will lead to eurozone break-up

Andrew Bosomworth, head of Pimco’s portfolio management in Europe, said current policies are untenable in the absence of fiscal union and will lead to a break-up of the euro.

"Greece, Ireland and Portugal cannot get back on their feet without either their own currency or large transfer payments," he told German newspaper Die Welt.

He said these countries could rejoin EMU "after an appropriate debt restructuring", adding that devaluation would let them export their way back to health.

Mr Bosomworth said EU leaders were too quick to congratulate themselves on saving the euro last week with a deal for a permanent bail-out fund from 2013.

"The euro crisis is not over by a long shot. Market tensions will continue into 2011. The mechanism comes far too late," he said.

"Can countries inside a fixed exchange-rate system like the euro grow and tighten budget policy at the same time? I don’t think so. It didn’t work in Argentina," Mr Bosomworth said.


The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions.
None of these setups should be seen as specifically opportune for the current trading session.
For a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm

IDX  Market Vectors Indonesia ETF  

Here again are comments from last week

IDX, which tracks Indonesian equities, after registering a series of lower highs may be headed for a test of the base of the cloud formation and even further towards the 200 day EMA which also coincides with a support level on the daily chart.

There appears to be a gradual attrition in several of the newer emerging markets and in line with my comments about the Brazilian index it may be that a process of capital withdrawal from these high flying markets is under way.

THD  iShares MSCI Thailand Invest Mkt Index  

THD, which tracks the MSCI index for Thailand, is also part of the story alluded to above.

PGJ  PowerShares Gldn Dragon Halter USX China  

PGJ, an exchange traded fund for a select group of Chinese equities, has retreated to a zone where buying interest should be expected to emerge. As stated in regard to the previously mentioned geographical sector funds, should there be a lack of interest at current levels for PGJ, this would suggest that EM asset classes may not be the focus of capital allocation decisions as we enter the New Year.