Macro risk analysis - Daily Form for June 8, 2011

Inter-market Technical Analysis using algorithmic pattern detection

WEDNESDAY JUNE 8, 2011       06:11:00 GMT

I am writing today’s column earlier than usual - Asian markets are still open and European markets will not be open for another couple of hours - as I have an all day commitment.

The main story from yesterday’s session was Bernanke’s widely reported speech on the economic outlook and monetary policy. It seems to have been the judgment of the pundits that the Fed chairman has ruled out the possibility of any near term supplement to the existing QE2 program which will conclude at the end of this month.

Reviewing the S&P 500 futures chart at present on the daily chart (see below) the index has now broken below and closed below a key trend line. There is a strong likelihood, in my estimation, that 1280 now needs to be robustly tested, and should that fail - and if prop trading desks and funds really want to send a "distress" signal to the Fed that without further monetization programs they cannot be relied upon to support equity prices - then we could see a rather sharp and abrupt move down the 1240 level in coming sessions.

There are still a lot of asset managers that will want to buy on the dips and there is likely to be some near term volatility as the bulls and bears struggle for control. As always the key to how this struggle will be resolved may well be found in the broader currents across other asset classes and specifically FX. As suggested yesterday my focus will be on looking for signs that the euro and the Australian dollar might be revealing evidence of intermediate term "peaking".

The configuration on the daily chart for the Russell 2000 is also suggesting that the very positive environment for equities which has prevailed since last August, when Ben Bernanke first articulated the QE2 program, now seems to be ebbing away.

Yesterday’s suggestion that instigating short positions on AUD/USD ~ 1.0740 turned out to be prescient.

As the hourly chart reveals the US session failed to reach above this level and during the last few hours of Asian trading we have dropped down almost 100 pips from the trigger level proposed.

In general the current dynamics are suggesting that traders are looking for rallies to get short and this would lend plausibility to my intermediate term target for the Aussie against the dollar the base of the daily Ichimoku cloud around 1.040.

Perhaps the most useful chart for detecting the overall level of risk appetite across multiple asset classes can be seen in the weekly chart for AUD/CHF.

The line drawn at 0.90 on the chart illustrates how critical the current position for this FX pair is, and with pending Aussie weakness and continued safe haven buying for the Swiss franc it would appear that there is increasing doubt that this level can be preserved.

Macro risk analysis - Daily Form for June 7, 2011

Inter-market Technical Analysis using algorithmic pattern detection

TUESDAY JUNE 7, 2011       11:32:00 GMT

At the time of writing there are cross currents in the markets I follow which are suggesting that today’s action during the North American session could be erratic and directionless. The euro is continuing its upward trajectory - which in my estimation is largely due to the unwinding of some very large short positions by macro funds built up prior to the new "rescue" of Greece (actually the final nail in the coffin in my humble opinion) and yet the US dollar is showing some evidence that it may be finding a bid against other currencies.

As can be seen on the 240 minute chart for the S&P 500 futures (eMini June contract) the index is trying to rally back above the key trend line which has been violated following Friday’s weak data and a re-appraisal by decision makers on their appetite for risk. Some of the correlation analysis which I do suggests that there are several similarities between those FX/ETF pairs that were registering extreme readings in May 2010 and the data today.

As readers will recall equities sold off last summer and the current macro-risk environment is suggesting that we may be in for a similar episode in the next few weeks. As suggested here last week I continue to favor a trading stance of selling any bouts of enthusiasm for US equities.

Eurozone retail sales data was released this morning (June 7) and came in quite a bit stronger than expected which created some upward momentum for the DAX.

However the chart formation suggests that the index will face considerable overhead resistance around the 7350 level.

After a holiday in China yesterday the Shanghai exchange once again demonstrated that the 2700 level is a key support level. However this index has a lot of lost ground to make up and the fact that the 50 day EMA is descending down towards the 200 day EMA again is indicative of a lack of sustained commitment to this market by large asset allocators.

The Brazilian index took a tumble in yesterday’s trading and looks set to re-test the May low.


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.
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The hourly chart for AUD/USD is pointing to growing resistance in the region of $1.0740 and this is currently my target level for instigating short trades with an intraday scalping horizon


Due to some technical difficulties I was not able to comment yesterday on the market action Friday in the wake of the weak NFP report.

One of the more interesting reactions to the data was the surge in EUR/USD which saw the currency move above the $1.46 level which I had targeted based upon the daily Ichimoku cloud formation seen on the chart below. The euro peeked above the cloud last Friday but came to rest almost exactly at the top around $1.4640. After a drop back into the cloud the currency is now moving higher in what appears to be one more attempt to crack the $1.50 level.

In my estimation the action, as the single currency flirts with this pivotal level in coming sessions, could be a harbinger of what lies in store for risk appetite in coming weeks. If we were to see a successful challenge to this critical level where there is substantial overhead resistance this would point to perhaps a more benign environment for risk assets in general. If however we see another failure - which is more probable in my opinion - the failure could mark an intermediate term top for global equities.

XLY  Consumer Discretionary SPDR  

The chart for XLY, the exchange traded fund for the consumer discretionary sector, reveals the "re-thinking" about the vitality of the US consumer sector in the light of Friday's NFP data.

There is chart support at the $38 level which would act as a deterrent for me to be shorting the sector, although longer term, my intuition is that we are headed lower.


The index for investment banks and brokers, XBD, shows that this key sector in the financial economy is very much out of favor as there are strong headwinds for several of the major firms in the sector - especially Goldman Sachs. I would stay away from the big names in the sector for the time being.

XLF  Financial Select Sector SPDR  

XLF is also showing extended weakness but is approaching a chart level where a snap back rally and buying support could become evident.

EPU  iShares MSCI All Peru Capped Index  

EPU is an exchange traded fund which provides access to Peruvian equities and, the 13% drop yesterday may not be the end of the selling after a socialist president was elected receiving more than 50% of the votes, and dampening the "animal spirits" of some of the EM bulls who had been quietly and steadily building positions in this frontier market.

Macro risk analysis - Daily Form for June 3, 2011

Inter-market Technical Analysis using algorithmic pattern detection

FRIDAY JUNE 3, 2011       11:02:00 GMT

The big picture that has emerged during the last few sessions is that global equities are now coming under considerable pressure as asset managers are preferring to "hide out" in global government bonds (except of course for the EZ periphery) rather than take on more risky assets.

The question is - to paraphrase Art Cashin from UBS (a CNBC regular for those who don’t watch) - whether bad news really is bad news for stocks. We may be a little closer to knowing the answer to that in a few hours when the US Dept of Labor release the NFP report for May.

As can be seen from the 240 minute chart traders have positioned themselves defensively right at the base of the range over the last few weeks. Of course, it could be that there will be a lot of fireworks after the data is released but that, later in the session, the S&P 500 may well drift back to close not far from where it is right now.

One sector chart which should be monitored closely in coming sessions is for the US retail sector (RLX).

The recent action which includes a break below the 50 day EMA as well as a peek below the cloud formation suggests that the 500 level may now be the next target in the intermediate term. A topping out for US consumers - as would be suggested if this index fails to find support soon - would not be a good development for risk appetite...but then again could it be the trigger for more QE?

Sterling has dropped to a new low in recent history against the Swiss Franc as can be seen on the weekly chart. This validates the viewpoint that was expressed in a piece I blogged recently and which was reprinted here.

The focus on the action in GBP/CHF - as indicated in previous discussions regarding EUR/CHF - illustrates why it is better to play most other currencies against the Swiss currency rather than the dollar as the trends are far more evident in cross rates against the franc.

The Hang Seng index dropped 1.3% in Asian trading Friday, and came to rest for the week at exactly the 200 day EMA.

Interestingly the Shanghai index diverged against the Hong Kong market and continued its bounce off the 2700 level.

Macro risk analysis - Daily Form for June 2, 2011

Inter-market Technical Analysis using algorithmic pattern detection

THURSDAY JUNE 2, 2011       10:27:00 GMT

Yesterday’s trading, after the release of the ADP data and other signs that the US economy is far from exhibiting any dynamism, did not bode well for the Risk On funds and trading desks. Having said that some of the more agile have learned to turn on a dime, and in the highly correlated markets that presently exist, it became obvious to short all of the usual suspects and seek out the safe harbor of UST’s.

Was enough damage done yesterday to turn the tide against equity bulls? I personally doubt it. The simple fact is that yields on UST’s are not going to supply the kind of returns that will produce healthy fees for hedge fund managers, and risk has to be embraced. While the Fed remains the ultimate back stop there is still reason to believe that bad economic news, will courtesy of Chairman Bernanke, see that the seemingly unstoppable expansion of public balance sheets will lead to such abundant liquidity eventually pushing equities higher.

The 240 minute chart for the S&P 500 futures shows - now with the benefit of hindsight - the phoney breakout from the descending channel which occurred while the US was commemorating Memorial Day. The late rally in Tuesday’s session strongly suggests that some trading desks were moving prices up for better short entries in anticipation of the release of key data in the latter part of this week.

In my estimation there is mounting evidence that the world economy is slowing down and there is a distinct possibility that there could be negative growth (to use the ironic oxymoron) ahead for some markets - especially in Europe. However with fiscal gridlock, not only in the US but in many of the "advanced" economies, the only lever that governments have to prop up asset prices is to keep expanding their public balance sheets, and until the bond markets cannot digest any more paper (not likely while the Fed, BOE and ECB keep buying the stuff) then equities should avoid the plunges which are more typically seen when monetary policy is less accommodating.

Having said that, and as if to underline the bipolarity which characterizes the new normal in investing, I would prefer to sell rallies in equities rather than hold long positions overnight!

The yield on the five year UST has come down to a key technical level where, absent some Armageddon event such as the collapse of the euro (just joking), then one would expect to see a bounce up in yields. Especially notable on the chart is the cloud formation and the horizontal trend line coinciding at the 1.6% level as highlighted in yellow on the chart.

However, as just commented in reference to the S&P 500, I would suggest that expecting higher yields in the near term is more of a scalping opportunity than a positional play.

Using quantitative analysis as a tool for "forecasting" price development can be quite error prone and I readily admit to some miscalculations. For example, last week I suggested that the exchange traded fund, AGG, which tracks corporate investment grade bonds, was showing negative divergences. Well it is now still showing them but at a quite higher price than last week.

One instrument which I have been consistently right about has been to maintain - as a long term play - a short position in EUR/CHF. This pair has been registering new lows on an almost daily position in recent weeks.

Reviewing the chart I am now taking off most of the position and would expect in the intermediate term to see a test of the lower boundary of the horizontal channel shown on the daily chart.

The candlestick registered in Asian trading today (Thursday June 2nd) suggests that while the Shanghai market, in harmony with all of the Asian markets, sold off on the poor trading in the US yesterday, the damage was relatively confined.

2700 still seems to be a valid support level and I would be more favorably disposed to a recovery in this market rather than to expect a prolongation of the recent weakness.