Note on risk correlation

It is not a statistical observation, but it looks like intraday correlations of risk assets tend to weaken on the verge of trend change.

Boiling point

(this post was prepared on Tuesday night, as it took some time to format it because of the new edit software. Market behaviour today confirms analysis further) 

It looks like this week we might have reached an inflection point in the risk assets rally. Multiple reversals down from key moving averages coupled with some topping candlestick signs occurred in the overbought momentum territory. 

My interpretation of the move...  Chinese currency flexibility is a stick of two ends. From one hand this should be bullish for commodities in the long term as well as it should support foreign exporters. From the other hand allowing Yuan to appreciate is effectively an interest rate hike which is probably another attempt of the government to cool down the economy. The other problem arises from the fact that rising Yuan discourages Chinese from buying into treasuries of other countries. Again, I repeat, that my opinions never mattered to the market. Market knows best...

On individual assets:

1. S&P is struggling with 200 days moving average, coupled with overbought momentum further losses are likely:

2. Oil, same as S&P, but reversal takes place under intersection of 50&100 days moving averages:

3. Copper is a mixed bag but if other asset classes are to fall, this metal is also likely to reverse down

4. Dollar index remains in the up-trend.  looking for a close above 100 month moving average in June, which should lead to multi year dollar rally.

5.  Euro posted a reversal pattern in line with risk off trade, so did Canadian dollar (0.9 correlation with crude):

6. Nymex gas fell below $5 consolidation area, but still remains in the uptrend

Bottom line, it looks like summer will not be quiet and further dollar advance looks likely and while correlation with commodities and equities persists losses in equties and commodities are expected despite supportive fundamentals. the latter ones are expected to get worse in line with the idea of forward looking markets. Looking for month end closes to confirm medium term outlook. good luck trading!

I am back!

It is nice sometimes not to follow the market for a week and then, having cleared your mind, to have a fresh look at the charts... So what's going on?

1. My gold trade idea was wrong as gold in dollars continues making new highs... here's a lesson for me: even if charts look good, going against the trend is a tricky business. Luckily (not a good word for trading ;-)) hypothetical stop order was tight.
2. The other market I liked since the start of this blog - Nymex gas - continues its trend higher having risen by over a dollar since mid May. July contract is consolidating comfortably above $5/mmbtu.
3. Correlation between the usual suspects of risk trade has dropped:

Not sure what to make out of this... will have to look at it further.

4. Correction in risk assets: metals, oil, currencies continues. I will refresh the charts tomorrow as we approach key moving averages:



5. I would have thought that market reaction to news on Chinese currency would be more aggressive. hmmm...

Otherwise there is nothing else interesting to mention today.

Taking a break...

There will be no updates for several days as I am getting used to new way of life - being a father...

Let's get bold on gold today shall we?

I never considered gold in the portfolio, but looking at spot chart few ideas come out:

First, gold has low correlation play with macro story. here is the most recent correlation matrix I use:


Second, gold has a tendency to reverse off extreme highs on weekly charts:



Third, we tested and failed to close at new all time high yesterday creating something that looks like double top:



Moreover momentum reverses from oversold levels on both, daily and weekly charts. Bottom line, if markets turn the page and forget the debt problems and equity prices stabilize, we might see some good profit taking in gold... Fearless speculators would sell now with a stop just above recent high, targeting 1165. Conservative technical players would wait for double top to be confirmed (break of 1165) for a final target of 1100.

I admit selling gold now is like going against a train at full speed, but risk reward ratio of such a trade looks very good.

Other asset classes continue to consolidate with little direction to my mind. I will post any emerging trends once they appear.

Nous avons un problème, Monsieur le Président!!!

So how does a European bailout work? Countries in need of funds are being rescued by countries in need of funds. Then the cycle continues...

I personally had been watching sovereign CDS markets (Credit Default Swaps) for quite some time now, ever since Iceland went bust. At the moment my current list of CDS consists of Germany, the UK, the USA and PIIGS... The insurance cost for the latter ones obviously went through the roof. The UK had problems of its own and Germany and the US continue to shine. What I did not notice was the problem right in front of my nose as we say. Look at the following:



French 5year CDS rallied since mid March exceeding the one of the UK! Guess which developed country is in trouble next? at the moment everyone, but the debt markets, is ignoring the possibility of France getting into some sort of trouble. But wait until French officials start making more comments on this issue.

Thanks Business Insider and Vincent Fernando, CFA for the tip.

From Business Insider tweet

Still Don't Think The Flash Crash Low Was Real? Now The Market Can't Get Above It by http://bit.ly/9qoIYH

That says it all... While were we were looking for someone to blame for fat fingers, it was in fact simply the start of the next leg down in the market!