Month: August 2011

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The Bar for QE3 Remains High

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As anticipated Ben Bernanke did not offer up any new policy moves during his Jackson Hole speech. Instead he called on Congress and the President to do more for the US economy by supporting responsible fiscal policy and additional measures to stimulate economic growth. By extending the next FOMC meeting by two days the Fed chief put even more for a policy response though the bar for QE3 remains high.

The lack of new policy measures was largely expected as Ben Bernanke emphasized his past statements of a slowing US economy and the Fed’s ability to act if needed. Bernanke chose to highlight steps the Federal government could take to support the economy. This may now set the stage for a potential stimulus program from President Obama in his September economic speech, one factor that may ultimately help the US economy rise up from the almost 4-year downturn.

Key data events this week will likely help to formulate market expectations for additional policy easing measures with the release of Thursday’s ISM PMI survey and Friday’s jobs report. Forecasts are steadily bearish with expectations declining by 9k between Monday morning and last Friday.

In his speech Ben Bernanke did announce that the Fed’s next FOMC meeting in September will be extended to a two day meeting. This hints at additional Fed action at the September meeting. But those looking for another round of quantitative easing may be getting ahead of themselves. While the Fed has reduced its expectations for US economic growth, increased inflationary pressures will likely keep any QE3 in the tool chest of the Fed until the risks of US growth expectations are affirmed to the downside or another dramatic swing lower in US equity prices. Until then the bar for QE3 remains high and the Fed will likely limit its policy moves to less controversial methods such as increasing the size of its balance sheet or extending the maturities of the US Treasuries the Fed holds.

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US Consumer Prices and Spending Steady in August

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Expectations for consumer data in August were for only mild growth in spending and income levels among consumers. The monthly percent change in personal income held steady near the forecast 0.3%, but spending levels surged an unexpected 0.8%. This data outpaced last month’s adjusted contraction of 0.1% in the same indicator.

The reports, issued by the US Bureau of Economic Analysis, represent stability in consumer prices in the American economy. The Core Personal Consumer Expenditures (PCE) CPI reading also revealed stability as it came in at the forecast level of 0.2% growth. Though markets anticipate a downturn, price increases appear to be holding steady relative to consumer income.

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What Could Lie Ahead for the S&P 500 & Gold

JW Jones & Chris Vermeulen – optionstradingsignals.com

Now that Mr. Bernanke’s speech is old news, what was the financial media thinking exactly? A significant number of financial writers have been anticipating discussion of QE III or QE III Lite which clearly were never even on the Fed Chief’s radar this week. The focus of the Jackson Hole Summit was how to achieve long-run growth, not conduct discussion of monetary policy.

QE III will not be discussed openly until the next FOMC meeting in September, which noticeably was extended to two days. Besides the extension and the Fed Chairman’s prediction of growth in the back half of the year, the remainder of Mr. Bernanke’s speech was nothing more than a brief synopsis of what he has already said in the recent past.

While Chairman Bernanke focuses on the U.S. economy, I have been more inclined to monitor the action across the pond. Price action in Europe is having a major impact on financial markets here in the United States. Traders are monitoring credit default swap (CDS) spreads on European sovereign debt as well as on domestic and European banks.

Recently U.S. banks have seen the CDS swaps on their debt rising indicating that the marketplace believes their debt is a greater risk to investors. While the price action is nowhere near the 2008 & 2009 levels, current prices are relatively consistent with what was seen during the correction in the late spring of 2010. While there is no reason to panic at this point, this is a trend that I will be monitoring closely going forward.

For now, I continue to believe that equity markets will rally in coming weeks as conditions are extremely oversold. The price action so far today makes sense as the wild price swings helped flush out weak hands that were long. Consequently, the snap back rally pushed shorts into stop levels as well.

A significant move lower does not seem likely at this point, but a retest of the recent lows is possible, if not probable. I would remind readers that stock market crashes generally happen within the context of an oversold market. While the likelihood of a crash is remote, it is still possible and tight risk definition in this environment is warranted regardless of which side of the tape a trader is playing.

One price chart that I have been watching closely is the German DAX. The German DAX is presently a thermometer for traders to monitor the situation in Europe. The reason the German stock market index is so important is due to the financial strength of Germany within the Eurozone. Without Germany, the Eurozone would crumble in on itself and the Euro currency would be in trouble. Recently Germany’s equity markets have been crushed and the daily chart below illustrates the recent carnage:

Another metric I monitor regularly is market momentum. The chart below illustrates the number of domestic stocks trading above their 200 period moving averages. As can be seen below, the U.S. equity market has not been this “oversold” since back in 2009. Chart courtesy of Barchart.com.

In my previous article posted back on August 18th, I discussed the likelihood for stocks to pullback and put in some form of a basing pattern. I wrote the following statement in that article:

“It is entirely plausible that Mr. Market thrusts lower from here to shake out longs. If that scenario plays out it could potentially carve out a double bottom or another basing pattern which would give active traders another entry point to get long.”

Since August 18th, we have seen the S&P 500 push lower and there is a double bottom on the daily chart which is capturing quite a bit of attention in the trading community. I would also draw your attention to the wedge pattern that is also present. A breakout higher or lower out of this wedge pattern will be the clue that will indicate Mr. Market’s short term price direction. I continue to believe we will see a breakout higher, but a retest of the lows is always a possibility. The daily chart of the S&P 500 Index is shown below:

In the short to intermediate term, I believe we will see higher prices and a test of the key S&P 1,220 area or possibly a re-test of the key S&P 1,250 price level which corresponds with the March 2011 pivot lows. Additional resistance would come in around the 1,260 – 1.270 area which marks the neckline of the recent head and shoulders pattern which triggered the selloff in the S&P 500. The daily chart of the SPX below illustrates the key resistance areas:

Gold Analysis
My most recent article argued that gold prices were going parabolic and that a pullback was likely. We have seen a major pullback in gold prices. Admittedly, I was about $200 an ounce early on my call, but members of my service were able to capitalize on an option trade that captured 32% based on maximum risk through the use of a double calendar spread. While my timing was not precise, the juiced volatility in the GLD options allowed me to roll contracts forward and make additional adjustments to produce a strong gain for the service.

Some traders argue that gold prices are going to rally back sharply in short order, which I find hard to believe. Instead, I am of the opinion that we could see additional downside in the weeks/months ahead in gold prices. There is an ominous pattern starting to form on the gold daily chart which if it is carved out and triggered, it could produce the next leg of this selloff. The daily chart of gold is shown below:

While it is far too early to determine if a head and shoulders pattern will be carved out or if lower prices take place, I am of the opinion that this selloff will offer an attractive entry point for longer term investors. At this point it is a bit too early to get involved, but if my analysis is accurate the next leg of the gold bull market will be potentially extreme.

While I believe stocks will rally in the short to intermediate term, I am of the opinion that we have officially entered the next phase of the bear market. The next wave lower in stocks is going to be just as severe as the likely rally in gold.

The reason I believe gold will rally is primarily due to future weakness in Europe. If European banks have a credit crisis, a sovereign nation unexpectedly defaults, Germany leaves the Eurozone, or a currency crisis transpires gold prices should soar while U.S. equity prices tank.

While it is far too early to make that determination, if the S&P 500 puts in a lower high on this next advance higher and consequently takes out the recent lows on a selloff, the bear will be in full swing and gold prices should take off. The chart below illustrates my expectations for the S&P 500 in the future:

The next few weeks are going to be very telling about the future in domestic markets. Is this just a correction that pushes stocks higher by the end of the year, or is this the beginning of something far worse?

For now I am going with the latter, but price action in coming weeks will offer clues about what lies ahead for U.S. equity markets. Right now this is nothing more than speculation, but the next few months should be very interesting. Risk remains exceedingly high.

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JW Jones & Chris Vermeulen

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

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Australian New Home Sales Down 8%

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A monthly report on new home sales in Australia revealed a continuation of July’s dismal housing figures from the Outback economy. The Housing Industry Association (HIA) published this month’s reading with no expectations priced in, as is typical, and underscored the bearish 8% contraction in new home sales.

The report measures the monthly change in sales of only those homes recently constructed, not those already existing. The demand for newly built houses has declined in Australia consistently since May of this year, when it only experienced 0.2% growth. The Aussie has been falling under heavy pressure lately and this housing data will likely continue to push it further bearish.

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German Prices in Minor Contraction

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Preliminary data out of Germany this morning showed a possible contraction in consumer prices as they are measured by the Consumer Price Index (CPI). Expectations were not terribly high to begin with for this reading, but a turnout of negative 0.1% may push traders out of the risk-taking sentiment they had adopted last Friday.

The last time German prices turned bearish was in late-January 2011 amid a broad spike in EUR values. Fundamentals out of the euro zone have painted a rather ominous picture, though the EUR did see an upswing last Friday and this morning. Will this data offset those gains?

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Riniker Says Markets to Stay Volatile for Next Few Days

Aug. 29 (Bloomberg) — Christoph Riniker, head of strategy research at Julius Baer Group Ltd., talks about the outlook for market volatility following Federal Reserve Chairman Ben S. Bernanke’s remarks in Jackson Hole, Wyoming, on Aug. 26. Riniker also discusses the state of European banks. He speaks from Zurich with Maryam Nemazee on Bloomberg Television’s “On the Move.” (Source: Bloomberg)

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The Senior Strategist: European Banks worry the Market

European Bank´s exposure to weak economies in southern Europe worry the market and made IMF chief Christine Lagarde suggest that banks should be forced to accept capital injections.

Due to this European banks will take focus this week, says the senior strategist Ib Fredslund Madsen, who also mentions important economic data from the USA.

On thursday the American ISM is expected to come out below 50 and thus pointing in a negative direction. The American jobrapport on Friday is not expected to be pleasant reading either.

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Video courtesy of en.jyskebank.tv

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Jackson Hole Speech Delivers Sober Assessment

By ForexYard

Bernanke’s sober assessment of the US economic condition at the Jackson Hole Symposium in Wyoming initially drove many investors into the value of the dollar as a vote of confidence that further measures could be taken, but weren’t at this time. But a sudden flight to higher yielding assets generated a wide swing in dollar values by late trading Friday, with the USD’s value now floating near weekly lows.

Economic News

USD – US Dollar Dips on Risk Taking Surge

The US dollar (USD) was seen trading bearish Monday morning as traders saw a sharp rise in risk taking following last week’s statements by Fed chairmen Ben Bernanke. The EUR/USD jumped from last Friday’s low of 1.4328 to a weekly high of 1.4485 in this morning’s early trading hours. The USD/JPY dropped a similar amount as dollar traders dumped the greenback en masse in exchange for other assets.

Bernanke’s sober assessment of the US economic condition initially drove many investors into the value of the dollar as a vote of confidence that further measures could be taken, but weren’t at this time. But a sudden flight to higher yielding assets generated a wide swing in dollar values by late trading Friday, with the USD’s value now floating near the aforementioned lows.

As for this week, the US economic releases will focus mostly on housing, consumer confidence, and employment, with the ever-important Non-Farm Payrolls (NFP) data being released this Friday. Today’s publications also appear to be USD-heavy. Liquidity will likely be higher in today’s afternoon trading as several events are being published in rapid succession by the American economy. Housing data will get published at 15:00 GMT after earlier data gets released on personal income and spending.

EUR – EUR Bullish as Traders Seek Higher Yields

The euro (EUR) was seen trading with largely bullish results this morning following Friday’s sobering assessment by Fed chairman Ben Bernanke. Against the US dollar (USD) the euro was trading near a weekly high of 1.4485 before leveling off in today’s early Asian sessions. Against the Great British pound (GBP), however, the EUR soared, making significant gains and reaching a high not seen since the rapid spike of August 10.

Traders are looking for a way to balance a renewal of risk appetite with continued shakiness in global markets. A mildly pessimistic sentiment towards investing in the US dollar at the moment has many investors on edge. An embattled euro zone, fending off market bears amid turmoil in its peripheral nations, also looks to be standing on uncertain ground as safe haven assets such as the Swiss franc (CHF) and Japanese yen (JPY) make gains despite the sudden risk-taking sentiment.

Economic sentiment across the euro zone remains negative, with many analysts and economists expecting moves towards safety by traders this week following last Friday’s sudden surge of risk taking. With a heavy news day ahead, many traders are anticipating significant data releases to move the market. If today’s data turns negative, the EUR is likely to take a hit.

JPY – JPY Bullish as Intervention Fails to Quell Buying

The Japanese yen (JPY) was seen trading moderately higher versus most other currencies this morning as its value as an international safe haven continues to push its value bullish. Being linked to international risk sentiment, the yen has experienced an expected uptick during a period when shifts away higher yielding assets became prominent. The JPY has been experiencing several long strides lately from the various shifts into riskier assets.

The latest moves of the JPY are causing some concerns, however, as many speculators were anticipating a downturn following the Bank of Japan’s (BOJ) latest intervention. A strengthening yen has benefits for the buying power of the island economy, though its dependence on exports makes a strong yen unfavorable for longer-term growth in Japan’s current financial model. The persistence of the yen’s rising strength is causing some furrowed brows in Japan’s economic circles.

Gold – Gold Price on the Rise

The price of Gold found support over the weekend amid the plummeting strength of the US dollar, the currency in which such assets are valued. Gold has been trading with rather mild price action since June, but traders have been awaiting price resurgence due to the rampant increase in risk aversion due to rising tensions from the euro zone’s periphery and a recent downgrade of US debt by S&P’s ratings agency.

As investors seek safety, the value of gold, which has been seen trading with mixed results, is expected to rise, but a selloff in commodity futures pulled down on precious metals last week. A sudden rise in dollar values due to this week’s uncertain environment is expected to assist the sentiment favoring Gold. Should risk sentiment continue to bounce in sporadic directions this week, the price for this precious metal may continue to experience similar swings in value.

Technical News

EUR/USD

Last Friday’s candlestick posted an outside day up, a telling bullish signal. The EUR/USD has followed up this price action by breaking out above the falling resistance line off of the May high and triggering stops that were lurking above the 1.4520 area. Initial resistance for the pair comes in at 1.4540. A close above 1.4700 would signal an end to the sideways price action and open the door to the next resistance level from the May high of 1.4940. To the downside the euro may find willing buyers at 1.4325 where the 20-day moving average is located. Further support is found at 1.4260 off of the rising support line from the July low as well as the long term trend line at 1.3940.

GBP/USD

After failing to make a close above the 1.6550 resistance level sterling was sold only to find support at its 55-day moving average near 1.6210. Rising daily stochastics hint at an additional test of the range between 1.6550 and 1.6615. A break here may have scope to the April high of 1.6745. Should the 55-day average fail to contain the pair support is found at 1.6110 where the 200-day moving average is floating. 1.6000 may also prove to be supportive.

USD/JPY

The doji candlestick reversal has bought the yen some temporary respite from the selling pressure on the 76 yen level as the pair failed to test the all-time low last week. However, falling stochastics appear on both the weekly and monthly charts and hint at additional declines in the USD/JPY. A lack of support on the charts makes it difficult to find a target to the downside. A move higher could find resistance at last week’s high of 77.70 followed by 78.50 and the post intervention high of 80.20.

USD/CHF

The reversal of the USD/CHF continues and the pair is beginning to show additional bullish signs. Traders should eye the close of the monthly candlestick. As it stands now the candle is set to close on hammer pattern, a potential reversal pattern that hints at additional gains. The pair is testing the falling trend line from the February high at 0.8090 and if broken could turn into support as often occurs with previously broken trend lines. Additional resistance is found at 0.8270 followed by the 100-day moving average at 0.8340.

The Wild Card

EUR/CHF

The Swiss franc continues to weaken versus both the USD and the EUR as risk appetite shows a bit of a turnaround. The pair is currently testing its falling trend line from the April high with the next resistance located at 1.1890. Forex traders should note a break here could encounter three significant resistance levels in the near term; the 100-day moving average at 1.2020, the July 4th high of 1.2345, and the all-important 200-day moving average at 1.2460.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

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