Living Inside a Broken Clock: Wednesday, Feb. 17, 2010

Yesterday, short covering lit a fire under the EUR which pulled risk markets along behind it with echoes of the JPY /EUR carry trade. Under the cover of this, a stong bid was put in the US markets with non-existant volume. This was predictabe when the “Short interest in the EUR has never been higher” comments began appearing. I am long DXY from yesterday late. If the shorts have covered, who will buy with the STUPIDs and the GS monty card game still in force? 

Meanwhile, import port traffic is down YoY in LA. This doesn’t say anything about the value of the imports – but it MAY be a proxy. In this case, lower imports means lower USD for FCBs (foreign Cenbtal Banks) to deploy in buying US Treasuries. China has been selling to the extent that Japan became the largest buyer, and the TIC data made it appear that enities in Europe were the direct buyers of late. The FED’s QE (buy Treasuries directly or indirectly) programs are running out of money and time.  Tick. Tock. Tick. Tock.

EQUITY

The world is green.  There is not a single red box on the pie chart  There are some grey ones indicating closed markets. The DAX gapped up at the open – just like every open since Feb 10th. This time, it is pushing against resistance from Feb 4th (a Thursday) at around 5650. The gap begins around 5595. For the DAX, only consumer staples are red (yesterday was consumer discretionary – see the pattern of rotation?)

For the SPX daily, you can see that the little darling gapped up at the open and closed above SPX = 1086. Just around 25 points to get to the Gartley B point.  Remember that C and D are ranges. Here are the numbers as a refresher. SPXC closed at 1095ish. Remember that there are no guarantees. TA does NOT drive the market. The Market drives TA. This pattern is an assumption about how the topping of the run up from March might unfold and reverse. There are other equally valid patterns.  I’m just not going to spend my time saying SPX is in P2, no wait: P3, no wait, P2 5(ii)C, or whatever. The trend may be your friend, but the market punishes traders with bias. Play the market in front of you – not the one you’re dreaming about because of some random TA pattern.

Here are the numbers I get for SPX:

X = 1150.45 (Jan 19)
A = 1044.50 (Feb 5)
B = 1109.98 (projected)
C = 1058.50 – 1069.50 (projected range)
D = 1124 – 1135 (projected range) Go short here if the pattern holds

ES has been crawling upward since yesterday at open. This is NOT related to USD weakness. There is correlation, not causality. Think of it this way.  If one borrows USD cheaply, then one needs to put them in a FOREIGN CURRENCY risky asset for it to be a carry trade, and to have the USD drop in value. Last I looked, the SPX is not a FOREIGN CURRENCY equity market.  If one were borrowing JPY and buying EUR to then invest in the DAX, the JPY would fall relative to the USD, the EUR would rise relative to the USD – but the net effect on SPX would be non-existent because this “new” money is not going to the SPX. Clear?  Pivots:

• R2: 1107.50 = getting awfully close to a Gartley moment.  This was a resistance area throughout November 2009. It was no support in the January waterfall.
• R1: 1100.50 = ES made an attempt to get there this AM, but has pulled up short.  This was a resistance area at the start of FEB. Clearing this would certainly set up a distribution moment as retail traders rushed in – following the TA over a cliff.
• Neutral: 1087 =  Looks like a support area from November 2009. Didn’t even get a nod on ES (and SPX)’s ramp yesterday.
• S1: 1080 = was a support area for yesterday’s ramp after being reisstance in the previous 2 – 3 days.  WOuld likely be support on any re-trace.
• S2: 1066.50 = I don’t think we need to worry about this in the short term (this week).

FX

Oh look. The DXY is up. CAD is stronger, but JPY, EUR, and GBP are weaker. Has the carry trade ended already (sarcasm).  As I mentioned, I was short the DXY and now I’m long. None of the PIIGS or STUPIDs problems have gone away. The EUR is not dead – but flight to quality and the fear trade still means USD and US Treasuries. Think of how bad it must really be in the other banks of the world for this to be the fear trade for those in the know.

NEWS

UK unemployment is highest level since the Labour Party came to power. GS and Greece didn’t disclose the swap – misleading investors. China sell US Treasuries (note not just reducing purchases. This came out of the vault). Toyota decides that they will NOT testify in front of congress. DOn’t be fooled if Greek spreads narrow, as it may just be a technical adjustment. Dubai World (remember them?) will present a restructuring plan in March. March is shaping up to be a nasty news and surprise month all over. Volcker just married his assistant. There’s no fool like an old fool is what they say.

DATA

MBA mortgage applications were down 2.1% (FEB 12) vs down 1.2% prior.

8:30am est =

IiMPORT PRICE INDEX; hOUSING STARTS, BUILDING PERMITS.9:15 = Industrial production and cap utilization.  14:00 = FOMC minutes.  All of this in an OPEX week should lead to some volatility. Be careful.