Living Inside a Broken Clock: Wednesday, Feb. 10, 2010

We’ve all been here before. The rumours, the games, the hideous volatility against a short position – we’ve seen it all before. Does anyone here remember the first infamous Crackberry rumour that popped ES about 20 points back in October 2007? It will be the same with all the Euro-dominoes going forward. The only certainty is death, taxes, and the desperate lies to keep the market floating for distribution. China has begun selling “risky” US assets – which I take to mean non-Tbonds. MBS, we hardly knew ya.

Germany has said that it’s not about helping Greece, but the creation of firewalls to protect the rest of Europe. The Dutch have a battle plan against any Tsunami that comes roaring up the Rhine. They have pre-set channels and shock-absorbers and are quite wiling to give up a selected third of the country to save the majority. That nordic pragmatism is likely also present in the structures being put in place to save the EUR. There will be casualties but the EMU will likely hold. As to the blogosphere crowing: “but they have no common laws, blah blah blah….”, neither do the individual states. Just think about bankruptcy law. Case closed. Welcome to the broken clock.

EQUITY

Correlation is the name of the game. The overnight graph of EUR is looking at ES and it’s like looking in a smoky mirror. Oddly enough, DXY is up and so is ES. I’ll leave it to others to explain what will happen when the correlation goes from -1 to +1.

SPX was stopped by an elastic 5 DMA yesterday.  That trend line “Since Oct 2nd” proved to be the floor yet again after the underthrow earlier this week that bounced off of the TD support at 1046.50 (SPX). By the way, that support is still in place.  If you have time, check out the diagram at this link to see how the “perfect” FIB ratios fit into a Gartley pattern. Do the math, then come back with the ABCD numbers. I think you will find the results interesting. The Gartley pattern is supposed to occur at major reversal points.

http://www.stocks-trading-strategy-and-pattern.com/gartley-pattern.html

EDIT: I did the numbers for Gartley. Caveat Emptor

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

End of Edit.

NO surprise, the world is green pretty much – even Greece. Sweden, India, Singapore, and South Korea are the only Red. If we think back to previous reindeer games in 2007 and 2008 – we remember that the ripples took a week or so to subside, and then suddenly the bottom fell out for a while until the next “stick save” or rumour.

 The DAX continues its move up. I’ll bet the Gartley sequence fits nicely here. The peak on Feb 3, the bottom on Feb 5, forming the X – A wave. DAX would now be in the A – B wave up, whose length is determined as a FIB proportion of the X-A wave. IF the Gartley pattern holds true more or less, it turns into a bull trap.  Anyhow, only conumer staples are red in the DAX. The green is strong and across all sectors and most companies. A little silly to swim against this tide today.

ES dipped overnight to ride along TD support at ES = 1063.25. It popped up around 4:30 – 5AM EST.  Looks like GBP production and mfg numbers might have been the catalyst for the EUR and thereby the ES. Right now, there appears to be more upside potential on ES than downside. Pivots:

• R2: 1088.75 =  Around where the waterfall started on Feb 4. 
• R1: 1077.50 = Just above the high from yesterday. Looks like the roof for today. Could be the level where distribution happens again. Note that off the bottom on Friday, ES has been climbing in a channel but has yet to re-test the Tuesday high of  1077. Reaching this would suggest that that channel is still valid and there MIGHT be a swing trade back down to its bottom
• Neutral: 1065.75 = Was the roof all night until the UK data.
• S1: 1054.50  = Just below the floor from Mon. and Tue. This would break the bottom of the mini-channel – likely leading to a re-test from below before the next move down.
• S2: 1042.75 = Down around the LOD from Friday.  The shorts covered then. Next time will be a different story perhaps.

FX

Apparently the BIS has been selling above EUR = 1.3800.  Eyebaling the chart (3 min) shows an upward sloping channel putting in higher highs and higher lows. I see som TD resistance at 1.3793, 1.3798, and  around 1.3813.  Above that, there is a pivot at 1.3876 – quite a leap up and no place for a stop unless you have cash to burn.

Watch out for the EUR FinMins teleconference today – with Trichet, not the world. This will be at 3 PM Brussels time (around 10 AM NY time?). There are teetering dominoes and a lot of fast money has made bets one way or another in FX. Look for the ripples to slap against SPX and ES.

CAD and JPY are flat. EUR and GBP ar edown. DXY is up, but not above the magic 80 again.

NEWS

There may or may not be a firewall being put in place in Europe to protect the EUR. Reminds me of how in times of plague, the sick are herded together away from the others. It just seems to hasten the spread. Portugal is offering a premium to sell their EUR3 billion of 10 year bonds. Deficits are creating worry (fear).

Data

Mortgage applications were down 1.2% vs prior of +21%. Bloomberg Global confidence number for FEB fell to 55ish from 66.6ish (the beast divided by 10!).

At 8:30 AM is the trade balance expected = -35.8BB vs -36.4 prior. As this number moves closer to zero, it means that there is less USD in the hands of foreigners to buy T-bonds (recycling of USD). This means the FED needs to step up its various alphabet purchase programs or rates will climb. A number lower than the expected could have implications for the T-bonds, and ripple effects into equiies and FX.