Better Trader

A Long Cold Winter Ahead for the Dax

By Kathryn James

The markets seem critically placed at this moment in time. Technically some big numbers have been taken out - S&P 1400, Nasdaq 3000 and with relative ease and the Dow has sliced through 13,000 adding a drop of over 1000 points since the highs in September. The usually volatile month of October, although a little late in starting, did not fail to deliver a dose of gloom to the bulls.

The daily chart shows how this week has been technically bearish for the Dax. At the start of the week the uptrend from the June lows was broken, then the breakdown from a usually bullish rectangle pattern followed, highlighting the underlying weakness of the market with the failure of bullish follow through. The final alarm bell has been sounded today with a break of 7000 support and as I write this the Dax is fighting to maintain a level starting with ‘7’. Incidentally 7000 was broken to the upside during the build-up and hype of the QE3 announcement, perhaps the bull’s last stand in a market of hope and highly priced expectations.

 

Many are blaming Sandy for the Dows fast track to 12,500 and there’s the election, fiscal cliff, Israel and so on but Europe still faces its own bubbling economic problems as well. The Euro crisis is still at large and for the first time in three years the Eurozone has fallen back into recession. A following comparison chart shows how far the Dow has stretched from the Dax in the last few weeks.  I’m leaning towards the Dax catching up rather than the Dow springing back and with the risk of further downside before a rally in the Dow, a pair trade may not prove fruitful. So it’s not without reason that the Dax could likely play catch up to the US and set its sights on 6400 in the near future.

 

Election Scenario Analysis of the Markets

By Ashraf Laidi

We avoid making simplistic if-then scenario analysis on the US elections for US equities, solely based on the notion that a Democrat president is negative for stocks and a Republican victory is a positive due the presence of three major elements:

1) Potentially positive market implications of Obama keeping pro-QE Bernanke, likely offsetting classical partisan implications for equities.

2) Implications of Romney threatening trade war retaliation with China as a consequence of labelling Beijing as a currency manipulator (which is a USD negative).

3) Interaction between the new White House and Congressional balance of power and its impact on averting the Fiscal Cliff.

The least ambiguous scenario analysis from the US presidential elections is that a Romney victory would be deemed a negative for gold and metals due to the Governor’s plan not to re-appoint Fed Chairman Bernanke when his term expires in January 2014. Considering Fed Chairman Bernanke’s explicit support for ongoing quantitative easing, which could extend into mid 2014 (until unemployment drops below 7.0%), removing Bernanke and his dovish supporters would likely sustain serious damage to gold and possibly boost the US dollar (in the event that Romney does not push China into a trade retaliation to his labelling them as currency manipulators).

If Romney threatens a trade action with China, as did Bush in February 2002 with his trade war on foreign steel, it would be a de-facto negative for the US currency. Recall that February 2002 marked the top of the US dollar despite prevailing so-called ‘strong dollar policy’ by Treasury Secretary O’Neill.

The implications for metals are especially magnified by the threat of the potential fiscal cliff; the combined expiration of the Bush era tax cuts; and across-the-board spending cuts in the event that Congress takes no action to avert it by end of year. Both of the spending cuts and the removal of the Bush tax cuts are expected to remove $607 billion from the US economy, or 4-5% of total GDP. Such a bite from the world’s biggest economy is estimated to drag down growth to 1.0% in the first half, before possibly printing a 2.0% contraction in the first quarter.

The above is magnified by the possibility that Romney could well ask Bernanke to resign instead of waiting until January 2014.

Aside from the Presidential race, the balance of power in Congress could also be crucial. A Congressional status quo (Democrat-led Senate and Republican-led House of Representatives), combined with a Romney victory may reduce the odds of the fiscal cliff but is likely to ease the way for a Bernanke ouster.

The worst case scenario for gold and metals would then be a Romney victory with no change in the House and the loss of further Republican seats in the Senate but without the Republicans gaining more seats in the Chamber.

The combination of a Romney victory and persistent budgetary stalemate in Congress would have a negative knee-jerk reaction throughout the metals complex. Gold has already lost half of the gains accumulated this summer. It could lose a lot more this quarter, and risk testing the $1600 territory.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index

Dax Update: Support and Resistance Examined as Consolidation Continues

By Kathryn James

Since my Dax update a few weeks ago (link:http://www.bettertrader.co.uk/blog/2012/09/dax-shows-early-signs-of-uptrend-fatigue.html) the Dax 30 has remained resolutely within the consolidation boundaries of 7100support and 7500 resistance. I have rounded the support and resistance numbers to the nearest whole number as the markets lack of short term direction could prove tricky and hunt stops around these levels. This range of consolidation could stretch even further to 7000 - which will provide good psychological support and 7600- which is the previous high from May 2011. So what we have is a range bound Dax, currently trading towards the top end of the zone at 7420, but still below the highs of 7478 put in on 21st September. A break on either side of the stretched zone at 7000 and 7600 should pre-empt the next directional trend move.

 

On the daily chart, when the Dax broke 7300, 7100 was a potential target, but this failed to occur and the Dax bounced from a low of 7182 last week. However, the steeper uptrend from the July lows has now broken, so a pullback to the uptrend support from the June lows is still a possibility. This now stands at 7000 and is worth watching as the sideways consolidation draws the price closer to the rising trend line. Should the Dax break 7600 to the upside, this would be significantly bullish as it would mark a new high not seen since January 2008 when the breakdown of the financial crisis was just beginning.

I’ll leave you with a monthly chart image of where the Dax currently sits in context against the bigger picture presented over the last decade.

 

Dax Shows Early Signs of Uptrend Fatigue

By Kathryn James

I’ve been watching the Dax 30 closely for signs of uptrend fatigue over the last few weeks - following early warning signs from Crude Oil’s recent declines mentioned in my post last week (see post). 

On a shorter term hourly time-frame (see chart below) the first warning shots of waning bullish momentum were fired last week. The Dax gapped higher then lower over a few days and then went on to make a new high of 7478 by the end of the week. This week that new high failed to hold. The Dax gapped lower yesterday in a classic sign that the summer bull trend is possibly faltering and attempting to shake out a few weaker long positions. Support at 7300 is being tested today, if it fails to hold then a pullback to test support at 7100 is likely.

 

On the daily chart, the Dax still remains within the steeper uptrend from the July lows, but a target of 7100 would mean an imminent break of this supportline and subsequent selling pressure likely. If this does happen then traders should watch for signs of support from the less steep uptrend from the June lows (see chart below).

 

The early technical warning signals of further weakness ahead have been gaining traction over the last few weeks; however the Dax could comfortably pullback to 6900 and still remain within the bullish uptrend from the June lows. 7600 above offers resistance from the high made back in May 2011, new highs above this level would be technically bullish for the Dax.

What Next For US and European Markets

By Spreadbet Magazine

 

With the FTSE All share, Dow Industrials and S&P 500 all either close to or at 52 week highs and the U.S market showing very strong gains for year to date (S&P 500 up 16.5%), the big question is, how much further do markets have to go this year?

As the previous post on the blog has said, with the Federal Reserve unveiling and effectively “open ended” QE3, and with the Eurozone debt crisis seemingly in retreat for now following the European Central Bank’s intervention, the sense of optimism seems palpable. The bulls are in the driving seat…

In early September, Mario Draghi, President of the European Central Bank (ECB) said the bank would purchase unlimited government bonds from Eurozone members at their request with the overall objective of preserving the Euro. On September 12, the German constitutional court dismissed a complaint filed by 37,000 Germans arguing that the establishment of the European Stability Mechanism (ESM) was against the country’s constitution and so ensuring that Draghi’s intervention methods remain and preserving the mantra that the ECB “would do whatever it takes” to preserve the euro.

The major indices may have further to go but perhaps not too much further, with some major technical hurdles to cross, particularly in the US market.  With institutional investors showing big gains in S&P 500 stocks, the temptation may to bank some profits in the short term on this stimulus induced rally in the North American market and redeploy it elsewhere. If further progress can be made in Europe on tackling the overwhelming issue of sovereign debt, gains in European stocks may be more likely, but much depends on Spain in the short term.

Spain’s continued issues caused by the bursting of the property bubble haven’t gone away and its leadership continues to avoid asking for help from the ECB, partly because Spanish bond yields have moved sharply into reverse (5.8% compared with 7.6% in July) in recent weeks but also to avoid a politically uncomfortable bail out. In order to accept money from the ECB,  Spain would need to agree to accept strict policy conditions, in essence, further austerity measures and oversight by the European Commission, ECB and IMF.

The bears may be in hibernation for now, but perhaps the eurozone debt crisis hasn’t been confined to history just yet. I for one am not making oversize bets that’s the markets will continue their run of recent weeks, especially in the US. Steady as she goes, as far as I can see in big caps, but riskier assets may well now catch up, so expect some action in the small cap sector in particular.

Research provided by Spreadbet Magazine

Macro Metrics of​ German Panic Point​

By Ashraf Laidi

The chart below suggests the likely time of “concern” by German equities (a loss of at least 10%) may emerge when:

1. Both German manufacturing and services PMIs have shown at least 3 months of sub-50 readings,
2. ZEW current index drops below 10.0;
3. The IFO business climate index drops below 100.0

Given the current positioning of these variables, such a time could take part in early Q4.

Hours after Moody’s downgraded its credit outlook for Germany, German July manufacturing PMI hit a fresh 3-year low at 43.3, posting its 4th monthly contraction (sub-50). Germany’s July services PMI fell to 49.7, posting its 2nd monthly contraction. Notably, the figure matches the 49.7 reached in Sep 2011-right before the Fed’s Operation Twist was delivered, followed by the ECB’s LRO in December.

Germany’s fiscal resilience is the latest variable being added into the European debt equation after Moody’s outlook downgrade for Germany, Luxembourg and the Netherlands implied the possibility of an actual downgrade by next summer… at least in theory. But if the pace of macroeconomic deterioration maintains its rapid pace, then an actual downgrade of AAA Germany may come in earlier than next summer.

A Spanish downgrade to junk status may become the next speculation point, which is seen synonymous to a 2nd bailout. The increasing reliance on the EFSF/ESM is likely to exacerbate the sovereign’s debt burden as the autonomous regions line up for more assistance from the €14 bn bailout fund. Another downgrade to Spain (possibly due in October) maybe well be the next market-punishing event, as paper of the Eurozone’s 4th largest nation in the Eurozone may no longer be accepted as collateral by the ECB.

Meanwhile in the Netherlands, negotiations among the various political parties to cut the budget by € 17 bn see no progress. The cuts will require a rise in the VAT, a freeze in public sector pay and cuts in health and development budgets.  All parties have and their constituents favour smaller budget cuts than those stipulated by the European Union.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index​

Sovereign & Priv​ate​

By Ashraf Laidi

Days after Spain pushed its €65bn austerity package through parliament, the Bank of Spain’s latest growth forecasts remind of the possibility that recession will remain until 2014.  The €65 bn package includes salary cuts of up to 7% and a three-point rise in VAT to 21%.
It may no longer matter for Spanish aid to bypass state books and onto ailing banks when deepening signs of economic contraction are joined by harsh austerity measures.
The Troika was able to capture the imagination of the market by directing funds to Spanish banks without raising the sovereign debt burden. But as the autonomous regions seek bailouts from Madrid (Valencia request for aid may be followed by at least 3 other regions) and contracting GDP complicates the meeting of debt/GDP targets, the burden would have to end up hitting the sovereign books.

€100 bn has already been committed to the recapitalization of banks, the first €30 bn. of which shall be disbursed by month-end. Spain’s autonomous regions are increasingly seeking help from an €18bn emergency-loan fund designed for these regions.

Spain’s Economy Minister Luis de Guindos says his country will "absolutely not" need a full scale bail-out as pivate economists mention amounts as much as €300-400 bn. for a 2nd Spain bailout.
Magnifying the selloff in Eurozone equities is the short-selling ban of Italian financial stocks. Dax lost 3% to break below its 100 WMA, facing the next key support at 6230. Yet, the key support level for the German index remains at 5940, which is the 200-WMA, last broken in January. Spain’s IBEX-35 was supported by late short-covering to end down 1.10% at 6,177, after touching a new 9-year low of 5905. Italy’s MIB closes down 2.8% at 12706, narrowly avoiding a fresh 3-year low.

Gold’s safe haven allure erodes each day, proving it’s increasingly dependent on the prospects of further central bank stimulus. Gold is trading at 1578, nearing its 100-week moving average (now at 1555). This technical level was last broken in December 2008. Gold has had 3 failed attempts to break below its 100-WMA this year. 1555 will be the level to watch for gold bugs.
Best

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index​

Dax Confluence &​ Gold/Oil Ratio

By Ashraf Laidi

Our July 3 piece “Why Gold & Oil Point to Higher Equities?” made the case for further gains in the major stock indices on the rationale that a decline in gold relative to oil prices paves the way for an improvement in risk appetite (more favourable for energy prices than for metals). Since then, Gold/Oil Brent ratio has declined 7% and major equity indices are 2-3% higher after an interim decline in July 5-9.

We explained that a rising Gold/Oil Brent ratio reflects the declining value of oil, resulting from weaker demand/global growth conditions. Conversely, a falling G/Brent ratio reflects the proportional stabilization in oil, which is usually accompanied by a rise in risk metrics, such as equities and energy currencies.

Shifting to equities and their technicals, Germany’s Dax-30 is up 13% from its June 5th low. More importantly, it broke above the important levels of 6575-6585, presented by the 100 day and 100 week moving averages. The mid-point of 6580 is the overlap of both of these important averages. Such overlap is known as a level of confluence—an important property in technical analysis. The fact that the Dax has risen 100 pts above this level, may allow for further gains, with 6895 in focus.

If we anticipate further declines in the Gold/Brent from its current 15 towards 13.50s, then further run-ups in equities may be in store. 7000 on the Dax may be a possibility as a 0.75% LTRO becomes increasingly likely at the same time that the probability of a Fed QE3 remains on the ascent.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index​

Investors Addicted to the Drug of Stimulus

By Spreadbet Magazine

 

It really is a crazy world! For stock market investors the indices are ebbing and flowing as expectations change in relation to new rounds of stimulus by the world’s central banks. Growth seems to have been forgotten and now we need the heroine induced high of central bank intervention. But we all know that abuse produces highs and extreme lows and one day the addict has to detox! By god it’s difficult to wean yourself off it! 

Just to put things into context, the amount of central bank intervention over the last 3-4 years has already been staggering. Here’s a summary of the US, European and Chinese dosing in addiction to the ultra low interest rates in most countries in the West.

The US Federal Reserve has expanded its balance sheet from around $800 billion to $2.8 trillion since 2007 as a result of two doses of quantitative easing (QE 1 and 2), where US government Treasury bonds are bought. The Fed announced an extension last week of the $267 billion “Operation Twist” programme to buy long dated bonds in exchange for shorter dated ones, helping to reduce long term interest rates and bring down borrowing costs.

The Bank of England has spend £325 billion on quantitative easing, with talk of £50 billion or more very soon to try and kick start Britain’s stuttering economy. Good news for mortgages, terrible news for pensioners buying annuities!

The Eurozone has committed €1 trillion to the European Financial Stability Facility (EFSF) and the European Central Bank (ECB) started buyinggovernment and private debt securities in May 2010 reaching over €220 billion by early 2012.

 In December 2011, the ECB started the biggest infusion of credit into the European banking system in the euro’s 13 year history. Under its Long Term Refinancing Operations (LTROs) it loaned €489 billion to 523 banks for an period of three years or more at a rate of just one percent. Previous  refinancing operations matured after three, six and twelve months The by far biggest amount of €325 billion was taken by Greek, Irish and Italian banks. As well as reducing a potential bank credit crunch in Europe, the ECB hoped that the extra liquidity to be used to buy sovereign debt and reduce the pressure on government bonds in Italy, Spain and other markets. On 29 February 2012, the ECB held a second auction, providing 800 Eurozone banks with further €529.5 billion in low interest loans.

Plus lets not forget the 4 trillion yuan ($587 billion) that the Chinese government spent on stimulus in 2008/2009 with money pouring into infrastructure and cheap loans to businesses.

At last weeks meeting the Eurozone finance ministers aimed at resolving the eurozone crisis, it appears as though the main point of disagreement between Germany and the others is the potential issue of eurobonds .

If eurobond’s were to be used, debt issued by individual eurozone countries would be aggregated, so in effect Germany would support the weaker countries and underwrite their debt. This would bring down the unsustainable interest rates being expected to raise new capital for Italy, Spain and others. They argue that without Eurobonds, weaker countries will need unsustainable levels of austerity and recessionary conditions for years to come. Unfortunately this approach is pretty unpalatable for German voters. Italy and Spain are pushing Germany to adopt the bonds, but Angela Merkel is resisting for now, given the backlash from voters.

Germany is reluctant to reverse the principle that Eurozone members should live with the consequences of their spending habits, poor tax collection and hence huge debts.  The counter argument that it would be collectively good for the Eurozone to have lower interest rates to stimulate growth and drive demand for German goods seems to be falling on deaf ears. Germany, Finland and Austria believe that any collectivization of debt will lead errant countries to continue their spend thrift habits rather than tightening belts and taking the pain. In other words it sends the wrong signal to the “credit card” economies of Europe who have spent hard and worried about the consequences later gorging on cheap European credit.

The cost conscious economies of Europe want any further bail outs or centralized approach tied to agreement of central control of budgets. Lets face it if German tax payers are taking the strain, they want the Mediterrean mind set changed. This is pretty unpalatable for the French, Italians and others. All may become clearer at the meeting at the end of this month.

Research provided by www.spreadbetmagazine.com

Dax Hits Quadruple Resistance Zone

By Kathryn James

We are at an interesting technical and fundamental point for the markets at the moment, opinion of direction is fairly divided, as highlighted by the indifference in the AAII (Investors Sentiment) http://www.aaii.com/sentimentsurvey at the moment. The summer malaise may have started in earnest but the volatile woes of last summer are still fresh in trader’s minds and with the recent positive news stream of: EU leaders easing the worry; a Spanish bailout; a Greek election result; a surprising China rate cut all now priced into the tape, participants are left guessing what form the next ‘oomph’ will come in in order to keep the economic plates spinning?

The daily chart of the Dax shows the index hitting four levels of resistance:

1.    The sloping downtrend line drawn from the highs in March
2.    The 50-day moving average
3.    The sloping head and shoulders neckline
4.    The resistance high made back in October 2011 of 6430

The first chart shows the resistance high from last year’s volatile season and the second chart is zoomed in to highlight the Dax hitting all four resistance levels around now.  Of course any outcome is possible but with the Dax facing so much resistance overhead - it may prove a tough level to overcome.