Ireland is not big enough

Despite the fact that I am a medium term bear it feels like European problems in this form is not enough to derail global equity markets and who cares about Irish, Portugese or Spanish equties that continue to slump. So turn the page but fold the corner just in case as I am sure we will revisit it in the nearest future, probably as early as next week.

The mounting social and monetary cost of bailing the US and Europe does not bode well with long term growth prospects and GDP growth for next year is likely to be zero for these countries. Coupled with monetary policy imbalances the risk remain on to downside.

I tend to lean towards deflationary environment in the coming quarters. Strangely enough recent US inflation data showed that in majority only the prices of products with developed futures markets rose... developing world and weak dollar is keeping the US on the edge. thank you, global trade...

Too much talk

All focus on Europe these days. There's just too much talk, but it does not feel like officials will be able to talk us out of this. Looks like the markets are testing too which extent the credit markets can be stretched until long term bond investors come in. Yet the resilient equity markets in Germany and the US suggest market is not yet pricing in contagion.  But it is spreading through higher interest rates that will separate boys from men. Which country is prepared to withstand interest rates hit? Feels like only Germany will be able to...

Otherwise mixed feeling about economy. But I still have questions that remain unanswered. Why China is not raising interest rates as its peers? Is there something we do not know? Is QE in the US a failure or success? Economic data post announcement disappoints but sentiment continues to rise.

Since the news are coming out almost hourly it is impossible to run charts and to have a view as most likely I will be wrong. So sit and wait for the moment.

Verbal Rhetoric Escalates

So far it has been an exciting day, despite very little scheduled economic data. Chinese reserve requirements rate hike came just in the middle of Ben Bernanke's speach in Frankfurt to defend QE. Did Chinese plan it? It is probably just too coincidental... Same goes for a number of comments from ECB, IMF et al on debt problems. I doubt they will be able to talk everyone out of this, as anticipation of eventual deal for Ireland is being priced in. I am not sure whether the deal itself will help as it opens doors for further bailouts for Spain, France, Portugal. Yields above 5% for any country will make IMF loan look cheap.

there are few ways out of debt laden economies in Europe: economic growth (valid only for Germany), deflation (yes here it comes again), outright default and full fiscal and tax consolidation (something we should have done long time ago) or as I call it "averaging down your costs. Issuing common Eurobonds might help, but, obviously Germany is against it. Anyway, it does not look like it is going to be a quiet end of the year.

No directional opinion on the markets yet, just watching the show.

Still catching up... It is all about interest rates markets

Today's post is rather useless as it mostly discusses old news, yet for the sake of catching up with the market developments it is worth mentioning.

It is all about interest rates these days and nothing else matters. Benchmark interest rates hikes in Asia and rising yields elsewhere are weighing on the markets. Obviously the underlying factors for yields rise should be taken into account. While Asia and Latin America performed, well, better then developed world, and interest rates increase is the proper policy response to inflation, growth of monetary base, etc, the rest of the world is simply experiencing higher interest rates through bond yields. There is nothing new in rising yields in peripheral Europe, but French yields are a concern, yet it is more likely due to relatively better growth.

(for some reason I tend not to like the US, sorry for this) The fact is that US yields are rising as well post QE2 announcement (10y chart is below):

And, according to FED there are not supposed to. Ok, I might admit that it is also a growth story... or another insolvent country story. put everything aside, there is a trend there and the way for it is up. It is also interesting to see that rising yields correspond to stronger dollar (correlation of 10Y with Dollar index is very high):

and ,watching the markets intraday, you can feel that it just knock down a chair under the "risk assets". While it persists, stronger yields will limit a rise in oil, metals and equities.

No charts or technicals today as I am still catching up with the markets.

Silence is golden, up until certain limit though

Well, this is my first post in over a month... Not taking into account recent 3 weeks vacation, the desire to keep this blog alive was overwhelmed by the fear of saying something stupid. No, I am not afraid to start talking against the trend and neither I fear to be wrong (up to certain limit though). I just did not know what to say and I honestly did not want to say anything I did not believe in.

This break allowed me however to focus on other things and I also had an opportunity to write a small article for an university magazine. I will publish it later as soon as it becomes public. This was a tough task as anything I write in this blog is, among others, simply a writing exercise - need to express my thoughts better.


Feeling of uncertainty prevails, so it is time to go back to page one in financial theory book - risk free rate. This is probably the most commonly used "constant" in finance. So what is it now? German or US bills? Just some years ago I would have said yes without any doubt. The problem is some years ago I was still in the university. The reality now is it is much safer to purchase not the US bills, but 10year bonds as US government will buy them as part of QE. And German bills are no longer so attractive as Irish and Portuguese bonds are. You can be sure that ECB will purchase them and make sure there is no default risk associated with them as we all can count on bailout without any loss to bond investors.

The reality is we do not know any more what risk free rate is. So how does DCF and Black and Scholes models should work then, if indeed Irish bonds are safer then the ones of Germany?

Loooking at big picture

We indeed had a great September. Bucking the trend equities had a best year in 70 years and commodities followed. Most of the currencies strengthened vs dollar.

Can great September turn out to be a miserable October?

Last days of September were mainly characterised by expectations of FED easing, but recent data suggests that the economy is not yet there to employ heavy artillery. I, personally, it will take an effort to pass any additional easing as politics get involved.

Well, longer term charts suggest we're still not there to call it a winning situation and a full blown market rally. First of all, S&P monthly chart:

Long term momentum still remains down and 1155 is area where many moving averages cross. Moreover last 4 months of trading look more like a correction rather then a firm trend upwards.

This coincides with 15 month moving average in EURUSD, which worked well previously:

which currently acts like resistance. These are long term charts, so trading off them is difficult, but at least this will help to identify long term trends...

Commodities put a very good month thanks to weaker dollar and improving sentiment, however having copper at $8000 and oil at $82 still suggests long term bear trend. Faltering equities might as well put a cap on recent rally.

End of the month trading might result in bearish reversal days for equities (if we close under 1140) and EURUSD. (under 1.3560). While beginning of the month usually involves big money going onto either side of the market, I would wait until next week to have a clearer short term view on the markets...

Did we misunderstood the FED?

I mean, honestly, what did FED say during its last interest rate decision? Nothing new compared to a month prior decision, except for the fact that it acknowledged lack of inflation. Since officials are now questioning the benefit of additional stimulus I think any new ideas will run into the wall of bureaucracy. Yet weaker dollar will bring inflation so needed by FED to help it pay for its obligations among other things ... The problem is, with inflation, we will see higher yields, so here it is, the start of the bear market in bonds..... And that is exactly what FED does not want... but you cannot have both, stupid. Since demand is not there, it will be a big problem going forward... but for the moment we bought ourselves some time

Will this turn out  to be another crisis? probably yes

Do not underestimate weak dollar... last part

This is my final note that has to do with weak dollar. From now on I will focus on strength of other currencies rather then dollar weakness for a change. Just get the feeling that QE-2 will not end up good.

As mentioned earlier FED wants to have both inflation and lower bond yields. Correct me if I wrong but this does not work. Either you have inflation and high yields or deflation and low yields. Something has to give. But I have to admit until now it worked well. There is no indication of higher Bond yields yet as my favourite 10year maturity is still in the down trend:

Euro has posted another outside bullish day and is rising exponentially higher (dollar falling). Sign of a bubble, yes, but I would not try to catch falling knife. Portugal and Ireland are still a concern, but there is a greater evil out there. There is a resistance at March highs at 1.3770. Euro chart:

Oil is a boring market, base metals mainly follow weak dollar, so nothing interesting there. Still do not believe in higher equities, but cannot do much until we see some sort of top or fall under 1130:

To my mind while dollar weakness is substantiated, but risk on mode based just on that is a sign of bubble that will eventually burst. yet it is still not yet time to become a contrarian.

Dissociative Identity Disorder

Well, I admit, I might be having a dissociative identity disorder. Ask where market will go next and I can give plenty of reasons for them to go up or down and risks to either direction. And I will be right in both cases.

Here is the story from optimistic identity:


Technically S&P did not have a breather since end of August lows and went through range resistance, bounced off it and posted a new high. Fundamentally we will not have a double dip for the moment and FED will step in to support the markets if it happens. QE-2 (according to Goldman Sachs) will start as early as November. Companies sit on piles of cash saved from cost cutting and M&A activity is picking up. As a result of QE expectations dollar is falling and this will supports commodities.

A pessimistic part of me says:

Stupid, technically this is still a bear market as we have not reached post flash crash highs and weaker dollar is not a sign of healthy demand growth but rather then trying to pump a balloon with holes in it - you can try to make it bigger, but so will be the holes in it and it will eventually burst. This is still a bear market as real incomes will not rise to 2007 levels and we all know what will happen when inflation hits the market without underlying demand strength. Most likely FED's money printing is to end up with big kaboom...

You have countries that borrow money to finance economies with negative GDP growth at 6%. How long will they last? FED wants to have both inflation and low bond yields at the same time. Something have to give. Moreover, these days everyone wants to have their currency weak, especially vs dollar, but this is not the case. What started with Japan, may soon be followed by Switzerland, Europe. Brazil, Canada and other commodities exporters will follow. Currency wars? Protect your own - make life difficult for importers. 


A real me simply says WTF?!?! well, in fact you're both right,  while the optimist is assessing more short term views, the pessimist is looking at a slightly longer time frame. I am personally the pessimist and I think this is not a healthy environment for natural economy growth so I think these market will implode, probably this will be worse then 2008-2009 drop, but timing of this is uncertain. So instead of screaming this is the end of the world I will follow the winners...

I am asking myself, we remember what happens when dollar gets weak... Are we so stupid to repeat these events again?

Why I think Portugal will go bust or get bailed out...

I mean first of all simply because it will not be able to afford debt repayments... There are also dangerous signs in equity index, which to my mind is about to break down, whether it is because people are to realise above debt problems or economic data to get worse. But this descending triangle does not look good:

And momentum is not yet in oversold territory. So it is another bailout?

Is this a start of something big? PART2

Put it simply, I got it wrong. Last Friday's bearish reversals in European Equity indices did not materialise as we posted new highs.

As I said the problems will not come out of Ireland, but Portugal instead. And Portugal did not come off from the table. While 10 year yield has put a new high at 6.45% the chart looks concerning as we continue exponential rise. Only a move under 5.5% would stop the rise:

Now, this is a long term chart and effect while we can be taking clues from this market on active days rather then trying to anticipate the moves. bottom line this is a market to watch and risks remain for further yield rises.

Is this a start of something big?

a small note before I go home. There are multiple daily bearish reversal formations in most of the European equity indices. Does this confirm a top? well, you know where your stop loss is... Monday will be a real test for Europe. As I said Ireland was not something new, watch Portugal instead. 10y yield is at 6.10%

Have a good weekend.

If only everything looked ok

The 1 million dollar question today is whether equity markets will break higher out of recent ranges. While trends are intact, there is one potential threat in the short term that can derail the rally. and the name of it "Poortugal"

I think there were comments made today that bank of Portugal was effectively shut off from long term financing sources. 10 year bond yield is rising above 6 as a result. Time to get defensive? Not sure if it is the case I spoke earlier that market decided to tests other banks balance sheet by actually brining another country on the verge of default. Here is a Reuters graph for your info:

 

Well, good news is that markets other then credit and financial equities. Amazingly, I do not see any news covering Portugal on the front page of Bloomberg/Reuters/CNBC... Ireland is not new, but Portugal is... 

Resilience in equities and commodities can also be attributed to the weekend effect and that everyone is heavily long these assets... This week's Euro move also cleared lots of shorts in the market. So there is not enough selling power. I start to believe that Portugal might actually be a catalyst for new crisis... 

It is not BRIC, but rather a smal "b", small "r", big "i" and no "c"

There is consensus that BRIC countries offer if not an absolute but definitely relative potential for growth compared to developed economies. As title of this post suggests I think we need to change the name to something like "brI". Let me explain why.

Obviously BRIC stands for Brazil, Russia, India and China. It has been the case that emerging economies weathered financial crisis and the recession reasonably well. But recent month suggest that BRICs no longer lead the pack in the recovery. Forget economic data and focus on something more simple - respective equity indices.

Brazil and Russia did not put any remarkable performance ever since. Focusing simply on charts I have to say these markets are no different to the US and Europe. these markets do not offer diversification as chart patterns are similar to the developed markets. Brazil's Bovespa:

Russia's RTS:

 

Obviously Indian Nifty is the start performer and deservices the big "I" in the name:

And China, despite being in the news more often the others (probably due to the size of the economy) does not deserve to be in the pack whatsoever. Recent failure to go through 2700 level opens the lows as the first target:

Can't argue about the strength of the Chinese economy, but I cannot be positive about their stock index either. So please stop using the word "BRIC"... call it "brI" from now on or don't mention these countries as a group at all!

Respect the lines. Continuation

some weeks ago I speculated on possible head and shoulders formation in Shanghai composite. The break above 2700 would have opened 15% potential for this index. This assumption (that formation is to materialise) was also a part of my hypotheses on higher commodities prices. Well I think I got it wrong (not higher commodities, but h&s formation). In turn the price got squeezed under rising support line, which indicates at least further stabilisation if not further losses:

So why Chinese growth does not translate into higher equity prices? Still do not know. Chinese equities have rarely been the driver of global markets, but if the importance of the US is fading (see yesterday's post) who is going to lead the pack?

There are more questions  then answers in this post. I will be happy to hear some ideas on this.

Do not underestimate weak dollar PART1

This title of this post is taken from my post written roughly two weeks ago. What has started as some stability in dollar ended up with the major rally in equities and commodities. thus do not underestimate weak dollar.

I was quiet for the last couple of days for one simple reason, there was nothing to write about and there was nothing to change my view since last two weeks ago, which was weak dollar, stronger commodities and equities. it is time to revisit this statement for two reasons: I start loosing faith in risk on risk off trade and we're approaching some key levels...

Well, intra-day correlations still hold and are quite high. My problem is the following. I never looked at another safe heaven asset which is bonds.  The relationship of bonds with other risk assets is pretty much straight forward under "normal" risk conditions, bond prices have negative correlation with equities and positive correlation with dollar. during risk off trade everyone rush from equities into safe heaven bonds in the US forcing prices to rise and yields to fall. And today something strange is happening as dollar falls, equities rally and so do bonds! now one day of trading does not make a new trend but feels like something is going on. After asking around for opinions I tend to agree with the following... There is currently rebalancing taking place as big players are running away from the US and rush into emerging markets. you can see which market by strength of respective currencies vs dollar. Feels like people are throwing in a towel regarding the US. So while on top this looks like a regular risk on trade, digging further down makes me nervous. Again, the trend for risk assets has not changed for the moment, but I would carefully look at investors appetite for US bonds and especially at treasury auctions. There is may be another crisis coming, which US debt... time will tell...

Charts still suggest that bounce from end of August lows remains intact however we equities are approaching ranges high. it is 1177 level to watch for S&P for potential top, but I would guess that given the strength of commodities complex and weakness in USD we will overshoot this target, if conditions stay normal:

Dollar weakness is off particular significance as we broke through 200d moving average, so further losses in the short term are likely:

Again, I just hope that recent dollar weakness is coming in from risk on trade rather then something bigger. Oil remains strong and copper is within recent ranges -  nothing new, so I will not put their charts .

I gave up some time ago on any upside potential for NYMEX gas. Revisiting the charts still does not show any bullish signs and recent rally off $3.6 looks to be corrective, but bollinger bands offer at least some stability:

Out of time... will try to look more into debt markets this week...

Raising only a sign of warning at the moment...

I have mentioned roughly two weeks ago that you should not underestimate weak dollar as it stalled at its 50d moving average:

and then I left for a week on vacation... what happened since then? While I was expecting a sharp drop in dollar index and consequently a rise in equities and commodities, the latter ones in fact put a significant rally, while dollar fell just a fraction of what we got used to recently. Well, you cannot blame for mixing cause and effect relationship. equities and commodities did rally... and at least currencies did not screw my image ))))

anyway, what is next?

well, medium term volatility expressed by Bollinger Bands is falling for most of the markets and feels like September is going to be quiet. Nevertheless there ranges which can be played with. Also, we approach significant resistances foe S&P , copper and oil so for the moment I would just raise a warning sign to the recent rally.50d moving average for dollar index looks to be a good resistance and I would raise a red flag if we move above it.

S&P is approaching 200d moving average and upper BB and while it feels like there is no reason for the market to change short term trend I would get really nervous being long if we stall at this level. No reason to go short yet though, even if I continue to believe we will see much lower levels over the long term:

Chinese government, with it latest move to investigate market manipulation in rubber market is screwing my head and shoulders patter for Shanghai Composite. Also looks to be a boring market for the moment:

Oil has a potential to rally further as rose above most of the moving average and following a reversal day on August 25 the trend upwards might continue further. Again it goes against my bearish view, but I just cannot argue with the market. risk/rewards is still good for a long trade with a stop loss somewhere below moving average congestion yet I would not add to longs in here following my end of august bull case. I think it is time to get a little bit nervous about this market as well:

Copper is showing sings of trend exhaustion. Base metals were the strongest performers among risk assets. Will it lead the way down. This market is dominated by CTA's, so thinking their way, I would start liquidating my long positions, especially if Shanghai fails to to confirm Head and Shoulders pattern:

So at the moment I would only get cautious at the recent rally, but short term down trend  has yet to be confirmed. A series of lower highs in most of the market still suggest longer term down trend....

When do old news move the market?

This is my first post after a short vacation... first of all some feedback on places I visited:

1. Why Grasse is called the world's capital of perfumes if lavender fields are not there? in fact I did not find any fields and we drive more then 300km around Grasse. Wiki says that since 18th century perfume ingredients were cultivated in Grasse, so where are they?
2. The coolness of Cannes is over exaggerated
3. Overall at Cote d'Azur, local food is called pizza.

4. Yet, you can find lots of small, nice and quiet harbours west of Cannes (towards Saint Raphael). The most common food there is still pizza.

Going back to the markets... I cannot get rid of the feeling that this is not yet the end of the world as I expected it. Yes, we still have the same old skeletons in the closet, but there is nothing new. I said before that people are used to huge swings in the market and I doubt that recent news on European banks are the reason for market collapse. Having said that I obviously have to discuss the risks to this statement... There is a possibility that market decides to test banks balance sheets. So one need to watch developments in the sovereign debt markets... There had been no economic news otherwise so far this week, so at the moment we're digesting these bank problems...

No charts today as I am still sorting out staff while I was away.

Who is right, the bulls or the bears? PART2

Bull's do not get excited too much, but for the time being I am with you...

FED did not say anything meaningful today and, to my mind, markets took it ok... such statements as "we will do anything we can" always have two ends and it really is a gamble how markets will treat them .. there are basically two options:

1. we believe you and everything should be ok if you say you are prepared to do anything and
2. hmm, let's see what you are made of and we will test your ability to do what you have promised.

Clearly the collective mind of financial community decided to go with the first option... I hope we won't have a need to test FED's abilities in the nearest future.

Especially as I am packing to go for vacation, so there will be no posts for 1 week.

Have a good weekend!

History does repeat itself... or it doesn't? PART2

In the end history does repeat itself...

With dreadful economic data coming out from the world's biggest economy, markets managed to pull a gain yeserday. Still not sure whether economic data is to get better or this is Q.E. (quantitative easing) expectations. Time will tell.

Meanwhile, all the bulls, please switch to the first gear as temporary bottom is in place, what is more important stop levels are known. Lets see what is going to work out of this rally. I do remain a bear over the long term, but feels like this one still has a potential. One thing I learned is that I never should underestimate weak dollar... Currencies led the rally and looks like commodities are catching up:

Oil has put a daily bullish reversal I was looking for. And we're back into the channel (yet move upwards still is a corrective one in the overall bear market):

Copper has found some support at 200d moving average as expected. Overall, visually, copper consolidations normally are continuation patterns:

Dollar index is being squeezed between 11d and 50d moving averages, so something has to give up, and if the trend of the last days continues we will see a move towards 200d:

1040 area in S&P looks to be a good support:

As I said stop loss levels are know, lets see what is going to work out of this one.

Who is right, the bulls or the bears?

looking back through my posts I noticed one thing: I do change my mind often. Even though I started writing this post in May I had a few opposing ideas on market direction during such short period of time. Feels like I just cannot make my mind... well, no not really...

Consider this, we have seen the equities market falling by over 50% and then rallying by almost 80%... (funny thing these percentages - even though we rallied more in % terms, we're still lower then when we started). Anyway, so investors are aware that in fact we can do both, fall hard and rally hard. This changes people's mind as they know now that such things are possible. So nobody is surprised by such wild moves any more.

Big swings are common these day and I believe there will be no more panic in the market for the time being and 10% moves either way will be common going forward. Bulls got it right - we see 10% rally and everyone gets excited... we fell 10% - no panic whatsoever. But this is what probably is keeping smaller investors away from the market... small investor that has buy & hold attitude... you just cannot afford these swings in your portfolio. And it is ideal environment for traders as markets remain directional short term and they don't care which way market moves as the can go either short or long.

So I say everyone is right these days, bulls and bears. There is reasonable chance to have both bull market and bear market within a much shorter time frame then people were used to. you just have to choose your side carefully and the most important thing is to be able to switch them.

History does repeat itself... or it doesn't?

Just in the wake of last FED's meeting I warned that market psychology can play tricks on us... as a reminder the statement was: "the worse the data is to come the more market will think that FED is to deploy quantitative easing"... but at that time I called for an intra day bounce.

This time market is making a shift again towards expectations of more easing rather then focusing on bad data. And I get a feeling this will not be intra day, but something that will be with us for some time. Looks like it is time to switch to beginning of 2008 attitude when the market was moving up on bad data rather then good one...

This will probably end up with another crisis, but I would not even try to call a top for this as I still remember calling a top in oil at 120 while it rallied for another $27 after..  So where do we start:

1. Dollar  obviously... Dollar index looks to have found a top at 50d moving average... moreover we might see a bearish daily reversal if we close below 82.84... good risk reward play selling it probably through long EURUSD.... in fact I would prefer any currency pair vs USD with the exception of Yen. Dollar index chart:

EURUSD is also bouncing off and while it has fallen through most of the moving averages, if dollar fall to continue, EUR will be the beneficiary of its weakness:

2. Equities and commodities...Need  to see also some sort of reversal pattern today and/or tomorrow to confirm a bounce. S&P still looks weak, but not disastrously weak as it held the range:

Oil is a dangerous play, so need to wait for reversal:

Copper probably would be a better play as there is some support under it (100d and 200d moving averages):

In general feels like any bad news will be met with renewed dollar selling - the scars of 2008 have not healed yet... good news will support the market as usually.... The other possible explanation I can find is that market has bottomed as economic data is set to improve going forward.

Over the longer term I still remain a equities and commodities bear and dollar bull, but you just cannot ignore such signs.

Time to get contrarian

going back to my question whether the glass is half full or half empty... well, we're slowing down, but its not dramatic (except for housing in the US of course). It just does not feel right now as the end of the world as I imagined it... I do believe we will see negative growth due to either
a) sovereign problems or one of other pillars of financial system is to collapse or
b) consumers retreat and we will see deflation as the result


but I don't see it yet in the system... even deflationary fears I spoke about earlier retreated to give space to food inflation.

So I think we will see another swing up in the markets, however I don't feel there is anything worth trading now. The picture neither looks complete for a move up nor for a significant move down. This statement however is a step away from technical picture I see in the markets which is calling for more losses in equities, oil and gas, consolidation in base metals and FX. Again I would not chase any scenario yet... not until September when most of the people come back from vacation.

Have I been wrong all this time?

To some extent I got carried away with all this kububrum thing and while the markets traded according to my scenario up to now I think it is not yet time to call it the end of the world. Some positive developments are taking place right now and pose a risk to risk off trade... and this is taking place in China. I mentioned already that it feels like Asia is gaining more weight in driving not only commodities markets, but equities and FX as well. Earlier I wrote a post on Shanghai composite and how it respects horizontal lines. Well, we're sitting right under it at the moment:

And if we break higher through 100d moving average at 2700 we will confirm head and shoulders pattern that will target channel resistance and 3000 and possibly higher towards 3 100 - head and shoulders minimum target...

I however believe that if we fail through 100d moving average that would send the markets much lower as
we tried to break through this level 5! times.

If bullish scenario is to materialise this will push oil towards the channel resistance at 83-85 and possibly higher if momentum is good:

US markets are likely to extend higher on Chinese news and main risk to the bearish scenario is the break of 1130-1135 which will confirm head and shoulders in S&P as well which will target 1250 as minimum:

This latter is still in making so I would not bet on this yet, but Shanghai and oil look like as possibility... I think we will see it as early as tomorrow and I feel it is a a little bit dangerous to stay short going into tomorrow.

Have a good evening...

Forecasting extreme weather

Hurricane forecasting involves dynamic modelling of temperatures on the surface, see and air tracking of pressure levels and much more. One of the drawbacks of weather forecasting is that currently science does not have enough computer power and even formulas to model weather in 3D. From what I heard everything is simplified to 2D calculations and that puts a big question mark on reliability of data.

Right now I will offer a brief analysis of current hurricane season and my conclusion is, on contrary to everyone else, that this hurricane season in the US will be a non event... Hurricanes have big impact on energy markets in the US as they might disrupt oil and gas production in Gulf of Mexico as well as refinery operations on the coast. So, I think, in order to forecast weather, you should not look any further but at gas prices and refineries margins. Quick look at the charts says that market is not building any premium of hurricane disruption into the price:

1. Nymex gas had been very weak after breaking 4.55 level (see earlier posts on this) and I am not sure where the bottom is if we break $4.20...Moreover time spreads are not showing any change even though we are close to the peak of the season. Here is the front month graph:

2. Gasoline crack (for oct10) is the weakest since a while so there is no premium there as well:

Obviously there are many assumptions in my "research", but you rarely find a model without drawbacks. and I think the simpler the better... I honestly would bet on nonexisting hurricane season or at least the one with no disruption to energy operations in Gulf of Mexico.

Going to "Kububrum" PART 2

So we continue "Kububruming"....

Honestly, I was impressed by German GDP and in the beginning my emotions took over and it felt like we might even post the low for the time being. Yet, markets did not think this way. Like French say "Bon..." What are we looking at now?

S&P threatens to close down under all short term and long term moving averages. Moreover it gapped through 50d moving average. Whatever happens this is not a "buy" market. Looking for a retest of "flash crash" lost at 1062 and possibly lower, as momentum is still not oversold. Keep in mind that fundamentals have yet to catch up with the price action so the move there might be choppy from here.

EUR has its old skeletons resurfacing with long term solvency of Greece, Ireland and Italy being in question... I still think that it is France that will have a problem, as it is a ticking bomb with soaring social security costs and high taxation. Good 2Q GDP numbers do justify rally off 1.18, however market is discounting slowdown if not contraction....Last support to be taken out is May highs that coincide with 50d moving average:

Oil's summer rally looks to be coming to an end as we roll through all moving averages. There is some support that comes with bollinger bands and channel support line, but overall price action looks corrective within larger bear trend:

Even feels like Copper will give up in such environment, but technical picture is not yet turning bearish... probably this is another shoe to drop in overall bearish environment:

Overall no sign of bottoming in risk assets yet. But again, sentiment got hit but we need to see fundamentals catching up with the price action. Have a good weekend!

Going to "Kububrum"

Going to "Kububrum". This is the new word in the English dictionary that probably describes best my feeling about today's markets. Feel free to ask me for proper pronunciation. Anyway...

There is no such thing as "market went to far to fast" or "market is cheap or expensive". There is only direction or no direction... have a look at currencies today. EURUSD lost 300 pips... something we have seen only in time of crisis or when we had a big surprise... I doubt yesterday's FOMC statement was a surprise, we all knew Chinese economy was slowing, but not falling off the cliff. So where did surprise come from? I don't have an answer to this question. Read my posts instead. Market can bite you hard if you are unprepared...

Where to from here? While Asia still has to absorb European and US mood, which is clearly turning grim, I will take evening off and will not make any suggestions as it feel like this week's move is done.

Respect the lines

Asia is gaining more weight in leading the rest of the world markets, so I looked at Chinese markets...

You rarely see horizontal support and resistance lines for Shanghai composite. However if there is one, market respects it. Whether current pattern is head and shoulders in development is uncertain, but, from here, I am looking for a retest of the recent lows if we stay under the line.

Another instance of such behaviour occurred in June-July 2008 when financial crisis was just in the beginning:

Don't you worry, FED is there to save us again! Or not?

Have I missed much last Friday by taking a day off? Well, not really, but at least I spent a day out of the markets out in the air... Fresh look at the markets and looks like we have new dogma: "Fed is going to save us again!" Tomorrow is the FOMC decision and looks like this idea is on the mind of people. At least it is keeping the market supported ahead of it. That's good news. The bad news is...


Must be frustrating for US officials to acknowledge their economy is doing worse then Europe. Especially when Europe is undergoing budget cuts that could eventually limit growth. In the US this looks like happening even without forced budget cuts. Well, some states have understood that the cannot borrow more and decided to cut on employees expenses as it can be seen from the latest NFP report.

Where do we go from here... I doubt FED has enough bullets  to meet expectations of the market. Downgrading economic outlook is damaging by itself. Acknowledgement of this has to be followed by certain promises, but as I said it would be difficult for me to imagine something that markets does not know already. And not meeting expectations might just the last shoe to drop...

I think we might be even better of if FED does not say anything about worsening economic outlook. We'll see tomorrow.

Meanwhile on some ideas I follow:

- NYMEX gas has broken through long term support channel discussed last week so I don't see any good  upside potential from here for the time beeing.
- Oil looks to be a good sell as it was the most vulnerable following NFP release last week. CFTC report showed increase in the long positions - surely it might be a disappointment for oil bulls.
- S&P remains vulnerable under 1130-1135. see last week graphs for more
- It looks like calling a top in EURUSD proved to be a difficult exercise, but its fall today following some very good European data might be just it. Tomorrows US data and German GDP numbers will give more clarity on the direction.

No graphs today as I am out of time.

What's bothering me now

Before I take off for a long weekend, I just wanted to share with you some risks I see to the markets and that can derail all of my scenarios...

1. Deflation talk continues to accelerate and while it is known that prices tend to fall in such environment, I feel that immediate reaction to acknowledgement of this fact is uncertain. Dollar/commodities/equities relationship in the last several years had not been "real" supply/demand relationship... moreover there is a possibility of food inflation given the drought in Eastern Europe. Yet more and more people talk about deflation and from what I read in the news some are actually buying long dated bonds as protection. Go figure what it will be deflation or inflation

2. Some time ago I spoke about web bot software that predicted increasing tensions involving the US that might lead to a 3rd world war... Feels like that tensions between Iran / Israel and the US are likely to escalate given the assassination attempt of Iranian president and recent report on terrorism by the US where they called Iran biggest state sponsor of terrorism...

Is the glass half full or half empty? PART2

Just a follow up on the recent post...

Please keep in mind I will be out the office tomorrow, so in my absence markets are likely to move hard. call it a bad luck, but experience proves it.

Correlations between assets are picking up and feels like we're going to the normal risk on/risk off mode:

Meanwhile, markets are mostly going sideways at the top of their ranges under key levels, S&P stalled just under 100d moving average and 1130-1135 is the level to watch:

Oil is showing signs of trend exhaustion at the conjunction of various resistances and as I mentioned 82-83 level gives a good risk reward for a short position:

NYMEX gas has turned upside down following an outside bearish day reversal. For this market $4.50 has to hold - which is a channel support off august09 lows. If broken, this will be a significant damage to bull scenario I had speculated about since May this year and I would not be surprised to see a test $3:

Overall, there is a risk of significant correction in the short term as not only risk assets, but assets with low correlation show downside possibility. Put this two together and this makes good case for economic situation to worsen in the nearest future.

Have a good weekend

Is the glass half full or half empty?

My track record of being absent at work and missing something big in the markets is amazing... Keep in mind I will be off coming Friday, so expect something big to happen on this day, possibly NFP's will be a big surprise.


Deflation talk accelerates, now growing into a debate whether FED is to speed up money printing... while important as such, no obvious consensus is seen yet.

Answer the following question: is the glass half full or half empty? There is nothing wrong in answering either way, Eevery day we ask ourselves the same question, when reacting to economic data and majority wins. Yesterday it was the optimist camp that won the battle. However, it feels like yesterday's move was short covering rather then something else as volume in indices was very low. Last month performance in equities resulted in outside month bullish reversal pattern. While it is a sign of caution this actually makes little sense for trading as time frames are shorter for active investor/trader.

Does this change the picture? Are we going higher from here... Ehhhhh, I am not convinced. Start with equities:

S&P500 is still trading in bear market, according to my other scenario: having broken through 200d moving average it is sitting right under 100d and not far from June's peak, only sustainable gains through 1300 will make me change my mind:

The rally on Monday started with Chinese markets and looks like it might end with it as Shanghai index collapsed in the last minutes of trading to end up the day lower then Monday's open resulting in outside day bearish reversal:

Oil, while being up, still shows signs of range trading rather then a strong trend, especially when equities are to remain weak. Probably it is a good sell at $82:

EURUSD has effectively reached head and shoulders target and is currently a function of risk appetite rather then internal strength. my Need to wait for reversal confirmation under 1.31:

Outside bearish reversal day in Nymex gas was a surprise as well, while I think the market will rise over the long term, this signal cannot be ignored - time to tighten the stop losses:

Happy trading all!