Last week the lower than expected Nonfarm Payrolls figure of 36k (estimated 143k) could have given the markets plenty of reason to retrace some of this year’s gains. However, the unemployment rate unexpectedly declined from 9.5% to 9% giving the equity markets the optimism they required to remain bullish going into Friday’s close. The figure also failed to change the prevailing sentiment in the bond markets as prices pushed down further.

Of most importance to us as traders was the behavior of the USD and the correlation this had with the broader markets. The USD moved higher on the back of the NFP report which would usually trigger a sell-off in equities or at least a retracement of any initial drive higher. However, this wasn’t the case on Friday as equity markets sustained their moves higher. The reason for this was that even though the USD rose, it only did so against low yielding currencies. This indicates that the USD price increase was not down to a “flight-to-quality” move (flight-to-quality describes a situation when investors reduce their exposure to risk assets and switch to the relative safety of assets such as the USD).  It is down to traders to identify these patterns, focusing upon both low and high yielding currencies, to detect the correct correlation with their own markets. Equity traders in particular should understand the current behavioral patterns surrounding the USD. These patterns provide a very effective gauge for how their own market will act on a daily basis, particularly in response to key global fundamental drivers.

Interestingly, the week’s trend going into this particular figure was strength in the equity markets and weakness in the bond markets. Once again, the markets used the data release and specifically the lower unemployment number as an excuse to amplify these moves i.e. in their preceding direction. A sound appreciation of the markets’ backdrop in advance of such important figures is essential for all traders.  Friday’s release was one more example of this fact.

On Thursday we will witness the Bank of England’s interest rate announcement which also includes information regarding the Asset Purchase Programme. The expectation is for both to remain unchanged but as always we must be prepared for the unexpected. A withdrawal of the Asset Purchase Programme or a hike in interest rates would cause a huge reaction in the markets and a host of money-making opportunities.

The key tip from the senior traders this week focused upon the accurate identification of price patterns. By accurately using such patterns to define the criteria you use to enter a trade, you will learn to remain patient. Such patience and the correct application of price pattern identification will limit the number of times you find yourself quickly offside or worse getting stopped out. Traders should treat the market as a friend and let it guide their trading approach using the information that it provides. If you can build a relationship with the market and let it confirm/deny your own trading ideas, you will become more profitable.

The key to making money comes from being right.  However, sometimes in trading the most frustrating days come when you are right but you somehow manage to take a loss. This is why a trader’s timing is one of the most essential components of their trading artillery. A good example recently has been the way in which upon selling-off, the German 10 year Bund has witnessed sharp, strong buying causing aggressive spikes in the market. These spikes have made staying short difficult and have increased the importance of entry timing. You must know your market inside out and have the ability to gauge when such spikes are lightly to appear. Armed with this experience and information, you can adjust your technique to fit the conditions.

Summary

There is plenty to focus on despite this being a somewhat quiet week with regards to scheduled economic releases. Using the tools discussed in this week’s session, and in previous meetings, the traders should use this week as the perfect opportunity to enhance their price pattern identification and macro-market understanding.

Overview

This week’s Strategy Session focused on the identification of specific price patterns in the market, how to avoid enduring big losses and the importance of having a big picture view of markets you trade.

Thoughts from the Trader

Last week, as global equity markets generally sold off, the Euro Stoxx 50 remained relatively bullish as the peripheral sovereign debt crisis stabilised. The stabilisation was as a result of the introduction this week of the European Financial Stability Facility (EFSF) Euro Bond and the expected demand from Japan and China for the new asset. Their support of the bond led to a positive expectation surrounding this week’s auction. Highlighting this strength was an atypical correlation between the Euro Stoxx 50 and both the Dax and FTSE 100. As and when selling pressure dried up in these two markets, the Euro Stoxx 50 strengthened immediately, sparking the rally we saw throughout the week.

The opposite was witnessed in the Bund market which sold-off last week, putting the Bund under further pressure going into this week. Yield spreads in the Eurozone continued to tighten aggressively and even the political unrest in Ireland failed to trigger any further widening. Credit Default Swaps (CDS) also shrugged off the news and appear to have fully priced-in the whole Eurozone crisis. With regards to the state of the Eurozone, the EUR/CHF is a key market that traders should be well aware of. This currency pair acts very much as a lead indicator and its recent rally indicates a level of stability and certainty regarding the Eurozone. Interestingly, the Bund witnessed increased volumes last week after the quiet conditions over the Christmas period.

Looking forward to this week, our Senior Traders emphasised particular strategies/patterns that all of our traders should be paying attention to. They also reiterated the importance of remaining patient in the market. They reminded the forum that being able to consistently extract 2 ticks/hour from the market would be enough to enable you to grow your account over time. The forum was also reminded of the importance of having a sound understanding of the big picture of the markets. It is a trader’s responsibility to gauge the big picture and how it changes over time in order to spot cross market correlations and lead indicators. For example, the behavior of both the Dax and FTSE 100 Index last week aided our Senior Euro Stoxx traders.  The associated strength in the EUR/CHF along with the tightening of European yield spreads were sound primary indicators of an increased desire for European risk assets and the diminishing appeal of Bunds as a safe-haven.

Further to the Bund’s weakness, both the Schatz (German 2-year Bond) and Bobl (German 5-year Bond) sold-off throughout the week on heightened fears of impending interest rate hikes. These fears triggered a flattening of the yield curve. The sustained selloff in the Bund was interspersed with strong blips as a result of aggressive buying as traders executed spread trades, selling particularly the Schatz and buying Bunds. It is imperative that Bond traders are aware of these sorts of price patterns and the accompanying logic behind them. With knowledge of such patterns, traders should exercise caution when selling into aggressive breakouts due to the recent trend of the Bund retracing strongly back into its previous ranges.

The increased volatility in the Bund market provides both opportunity and risk. As a result, ensuring stops are effective and kept relatively tight is of paramount importance. Slack stop management and a lack of discipline to take effective losers can quickly result large losses and being stopped out for the day. As a trader you must live to fight another trade and must continuously ask yourself “is the reason I entered this trade still valid?” If this is not the case, you should immediately exit your position.

In terms of fundamentals, this week we have the FOMC meeting on Tuesday evening with no action expected to be taken by the Federal Open Market Committee. As a result, this increases the chance of a significant price shift if any action were to be taken, as it will not be priced-in to the market. Sound preparation is thus vital to seizing such rare opportunities. On Friday the US GDP report will be released and the market reaction to both a strong or weak figure will be fascinating for traders. A weak figure will be linked with the high possibility of the introduction of more Quantitative Easing.  A strong figure, even though positive, could be associated with the market’s current inflation fears and increase the chance of interest rate hikes. In the UK we see the release of the Bank of England Minutes on Wednesday which will be of particular interest due to the current elevated level of inflation. The Minutes may reveal whether the Monetary Policy Committee has become more hawkish and when the expected future rate hikes can be expected.

Summary

Once more Futex traders have had their attention focused on the importance of “the big picture”. Going into this week’s trading their ability to spot those markets which are lead indicators and are going to present them with opportunities is of key importance. With the FOMC meeting, BOE minutes and the US GDP figures being announced this week, opportunities are expected to come thick and fast which means all round knowledge and thorough preparation will be essential in the quest for profitability.

Overview

This week’s Weekly Strategy Session reviewed the reaction of the equity and bond markets to last week’s Portuguese and Spanish debt auctions and considered the market sentiment going into the third week of 2011.  High on this week’s agenda for our traders is the release of further important fourth quarter earnings in the US and key German sentiment data.  Also, our traders are still very aware of the state of affairs in the Eurozone and will be keenly watching the Spanish auctions to gauge sentiment and seek out trading opportunities.  Our leading indicator throughout the European debt crisis has been the peripheral sovereign yields.  We will continue to monitor these closely to help us pre-empt impending market instability and the volatility we thrive on.

Thoughts from the Traders

Last week witnessed market uncertainty on Monday morning with high peripheral European yields and question marks hanging over the future of the Eurozone.  This state of affairs was ahead of Wednesday’s Portuguese debt auction and Thursday’s Spanish debt auction.  Monday evening brought back a level of certainty to the markets when Japan announced that it planned to buy into the European Financial Stability Facility (EFSF), injecting much needed confidence back into Europe. This was the first of a chain of positive events for the Eurozone which included successful bond auctions in Portugal on Wednesday and Spain on Thursday, demonstrating that investor confidence had returned to the Eurozone and market stability was renewed.  A key beneficiary was the Euro currency which strengthened against its major partners, as well as Portuguese and Spanish yields which dropped and stabilised.

This renewed stability painted a calm backdrop for the ECB Interest Rate announcement on Thursday which saw rates being left unchanged at 1%, as widely expected.  However, it was Jean Claude Trichet’s press conference which turned out to be the key market driver as he commented upon Eurozone inflation increasing from 1.9% to 2.2% and the ECB’s bond buying programme.  Trichet’s hawkish tone, highlighted by his use of the key phrase “monitor closely” when referring to the current level of inflation in Europe, caused a general sell-off in core European bond markets.  New traders must familiarise themselves with such key phrases and words.  Their use by the ECB in the pre-prepared statement, or during the press conference, has historically highlighted to the markets an important shift in policy thinking/strategy.  Such preparation is key to trading successfully as it allows you to rely upon your trading instincts safe in the knowledge that they are built upon a sound foundation.  The mental clarity that this affords will make executing effective trading decisions much easier giving you the ability to recognise market trends and patterns swiftly, providing you with money making opportunities.

Going into this week we currently see stability concerning the state of the Eurozone as a whole.  However, following Thursday’s ECB press conference we know that any hawkish or dovish comments/news concerning Eurozone inflation and/or interest rates has the potential to unsettle the markets.  With this in mind, our traders will be paying special attention to ECB speakers - both scheduled and unscheduled.  It is your responsibility to research which ECB members are hawkish/dovish in order to provide you with an advantage upon the release of any relevant comments.

 Aside from the Eurozone debt crisis and ECB comments, a key driver of the markets this week will be fourth quarter earnings.  Traders should pay close attention to price patterns upon the release of earnings from sector leaders or other important companies, as these patterns often repeat in the markets on the back of subsequent earnings releases.  A profitable trade historically for our traders has been to fade aggressively the release of Goldman Sachs’ earnings.  This pattern and trade concept is very difficult to execute accurately whist containing your risk but will be something we will be paying close attention to this week.  Such trade ideas do not always endure over the quarters so you have to be quick to spot them and fearless in your execution of them.  The markets’ reaction will also give you an indication of overall market sentiment.

On the third Friday of every month we see final positioning before the expiration of standardised options contracts.  It is important that traders are aware of such events as they can produce volatility and thus tradable, short-term price movements.  Good traders will again identify repeated patterns in the markets around these specific events and develop money making opportunities as a result.

Summary

This week witnesses plenty of fundamental market drivers which should provide daily opportunities in the markets.  Bond traders will be very conscious of ZEW and IFO from Germany, whilst equity traders will be looking extremely closely at fourth quarter earnings and the markets’ behaviour in advance of options expiration. The Eurozone crisis has once more faded slightly to the back of our minds, but with the Portuguese yields now settled around the 6.8% level, it would not take much for them to breach the key 7% level once again and for the crisis to return to the forefront of our trading.

Overview

With the ECB’s latest interest rate announcement due on Thursday together with an array of peripheral European Government bond auctions in the early part of this week, the financial market’s focus is very much back on the Eurozone. Our Weekly Strategy Session included an assessment of last week’s Non Farm Payrolls figure and how the markets responded to the surprising news. We also look to draw conclusions from the associated price action to provide us with clues as to how the markets will move upon next month’s release.

Thought from the Traders

Last Friday witnessed a Non Farm Payroll figure of 103k versus analysts’ expectation of 150k. This disappointing news was countered by positives in the shape of an improved unemployment rate of 9.4% versus a prior 9.8%, and a revision to November’s Non Farm Payroll figure taking it from 39k to 70k. The markets’ sense of disappointment came after optimism was built up during the week as a result of an extremely high ADP Employment Change figure and a further decline in Initial Jobless Claims. Bond markets saw a strong rally on the back of the figure, whereas equity markets saw an initial drive-down and a rally going into the close. The movement in equity markets was to be expected and follows a pattern which has been seen in previous months i.e. a decline in the USD leading to strength in equity markets. This is something to keep in mind at the next Non Farm Payrolls; the USD has the ability to drive the equity markets giving you an opportunity fade the original move or exploit the momentum supported by a move in the USD.

As has been typical for the financial markets in recent times, the focus has quickly shifted from the US back to Europe and Monday morning witnessed a drive higher in peripheral European sovereign yields as the Eurozone crisis came back on the agenda. Irish yields remain at 9%, Spanish yields are up to 5.5% and Portuguese yields climbed to 7.5% sparking concerns not just about the state of the peripheral European sovereign debt markets, but the durability of the Eurozone as a whole. The key concern for market participants is whether Europe has the ability to bailout Portugal and Spain if things take a turn for the worse over the coming weeks. This negative sentiment is driving both Bonds and Equities down across Europe in the run up to Thursday’s ECB rate announcement and press conference chaired by ECB President Jean Claude Trichet. Throughout the press conference traders should be aware of the key points Trichet will discuss regarding ECB bond buying, escalating inflation and the ECB liquidity REFI operations. It is essential as a trader that you have a clear and concise plan detailing how both the market and you will respond to Trichet’s comments based on previous meetings and the condition of the markets leading into the meeting.

As illustrated in last week’s Weekly Strategy Session, it is your responsibility as a trader to establish which markets are correlated to the market(s) you trade. It is also vital to establish which factors are causing your market to behave in the manner which it does. This gives you additional profit opportunities and assists with risk/reward identification. Currently, European peripheral yields are leading indicators for both bond and equity markets.  Increases in peripheral European yields, as a result of growing concerns around the state of the Euro, are frequently causing declines in both of these markets.

The main focus for the novice traders this week follows on from last week’s strategy planning. This week they will be paying close attention to important technical levels/areas and the markets behaviour (price action) as when such levels are retested.  Previous significant highs and/or lows are of particular interest and value for our traders currently. Such levels present relatively low risk/high reward trading opportunities and are ideal for both our intra-day and long-term traders.

This time of the year also heralds the earnings season which is kicked-off by Alcoa, traditionally a bellwether for the rest of the market. This release, together with other early releases, gives a sound gauge of the economy as a whole and what effect subsequent releases will have on the markets. They give traders a good indicator of the type and size of the market reaction and how to approach the figures released over the rest of the period. N.b.  JP Morgan and Intel earnings are releases later in the week and are key for the markets.

Trading Tip of the Day: When trading you must continuously be asking yourself 2 key questions:

1. 1.       What is the market trying to do?
2. 2.       How successfully is the market achieving this?

 All our best traders ask themselves these questions before, during and after every trade. This constant analysis and reflection gives traders the ability to recognize the right opportunities to enter the market, when to exit and when to remain patient; all key traits in a profitable trader.

Summary

Gauging the sentiment of the market by paying close attention to the peripheral debt auctions on Tuesday, Wednesday and Thursday, as well as peripheral sovereign bond yields is essential to build a picture of the whole market. This is vitally important to allow you to build a foundation before Thursday’s ECB rate announcement which looks sure to provide trading opportunities for those that are well prepared.

Weekly Strategy Session

Overview

With the latest Federal Open Market Committee (FOMC) meeting taking place on Tuesday evening, this week’s strategy session turned from the peripheral European sovereign debt crisis to the current situation in the US.

Thoughts from the Traders

The previous FOMC meeting saw the introduction of Quantitative Easing Round 2 (QE2) by the Federal Reserve. Our traders do not expect any further action on Tuesday as there has been insufficient time for the markets to fully digest this latest policy move. However, government bond yields in the US have risen in the last few weeks which could cause the Fed to introduce further QE in the not too distant future. Discounting the latest Non Farm Payroll Employment Data, the smaller US indicators have been strong/stable causing growth expectations to rise and the perceived threat of deflation to no longer be a leading concern.

Sustaining growth in the US by keeping bond yields down is very much at the forefront of the Fed’s intentions, hence the introduction of QE (and QE2). However, fears have grown following suggestions by Moody’s credit rating agency that the AAA credit rating given to the US could come under threat as a result of the ever-growing budget deficit. These comments followed the decision to extend the Bush-era tax cuts for a two-year period.

The US Government yield curve has steepened as a result of rising 10 and 30 year bond yields. In the past, a steep yield curve has been witnessed at times of economic growth. Therefore, this phenomenon is of less concern to the market than a sharp rise in short-term yields which would cause a flattening of the curve. Such a move would be of significant and something to be very aware of as it will be interpreted as a leading indicator to further Fed action.

Another area of concern to be addressed by the FOMC is the unemployment level which has risen to 9.8%. The low unemployment levels of 2007, around the 7% mark, seem to be a distant memory. With the unemployment rate increasing towards 10%, it is becoming a factor in need of serious attention by the US Government and the Fed; something traders must remain well aware of.

Trading Tip: When trading you must constantly be searching for the indicator(s) which leads price movement in the markets you are trading. For example, we previously discussed how strength in the USD was correlated to weakness in the equity and bond markets. These indicators come and go and it is your job to identify them swiftly.

The current mood surrounding equities remains bullish and therefore clever money, leading up to January, will be looking to buy any dips and then sell at new highs. December is known to be a time for rallies in equity markets so this must be the sentiment after the first week.

Returning to the situation in the Eurozone, these events (e.g. concern over peripheral Sovereign debt) are producing regular news, albeit in small doses. As a result, their influence over the market comes and goes. This week, the focus for the Eurozone is the vote on Wednesday in the Irish Parliament on the EU/IMF financial aid package and Tuesday’s vote of confidence concerning the Italian Prime Minister. The Irish vote is crucial for the markets because a rejection by the Irish Government of the bailout package will raise questions surrounding the credibility of the Eurozone and undermine confidence across other European nations. In Italy, a vote against the current leader could lead to an election which would delay austerity measures and lead to further climbs in Italian Government bond yields. In turn this would escalate fears that the Eurozone’s third largest economy will become the next country to require bailing-out.

Summary

The situation in the US should take centre stage this week with the focus being the FOMC meeting, speculation regarding the QE programmes, tax cuts, unemployment, the budget deficit and increasing yields. The primary focus for the first time in a few weeks is no longer the Eurozone crisis but it remains essential that the situations in both Ireland and Italy are monitored closely and that the German economic indicators remain positive so as not to reignite concerns.

Overview

Our weekly strategy session this morning sought to gauge the market’s backdrop and sentiment going into December following Thursday’s ECB Rate Announcement, Trichet’s press conference and Friday’s Non Farm Payrolls figure.

Trader Thoughts

On Friday we witnessed significantly worse than expected Non Farm Payrolls data from the US. The headline figure was expected at around the 140k mark and in fact came in at just 39k. This immediately triggered a sell-off in equities and buying in bonds. However, the market’s initial drive quickly wore off with equities recovering their losses to remain bullish. This in turn led to bonds giving-back the majority of their gains. This behaviour underlines the importance of being aware of the market’s big picture/macroeconomic back drop in order to safeguard against getting caught on the wrong side of big price movements. The equity markets interpreted Thursday’s ECB rate decision in a bullish manner and strength thus moved from the bond market to “risk” trades. This is typical of the market at the moment as the Eurozone peripheral sovereign debt issue is the driving factor. Therefore, we predict that Thursday’s sentiment, which was evident on Friday, will be carried forward into trading in December. This leaves the equity market with a feeling of bullishness after the opening week of December and thus we expect market uncertainty to be met with smart money buying of any dips.

It is essential for every trader to be able to spot correlations between different markets as they are useful indicators of future price movement. Correlations come and go, but at present the equity markets are closely linked to the USD. This correlation was evident on Friday as the poor NFP figure coincided with a selloff in the USD due to both the uncertainty around the QE programme and concerns that the poor NFP figure, combined with other disappointing US data, could lead to another round of QE occurring sooner than markets expect. If you were aware of this market sentiment during the equity sell-off after the NFP release, you should have been well prepared for a market recovery and for the bulls to reappear once the initial, bearish momentum wore off. The USD is considered a “flight to quality” asset. Therefore, when weakness appears here, money tends to flow to riskier assets such as equities and commodities, often until stability returns to the USD.

On Thursday we witnessed the long awaited ECB rate announcement followed by President Trichet’s discussion of his future plans for the Eurozone. The peripheral debt situation in the Eurozone has caught the attention of the markets recently with speculation rife concerning the future of the Euro currency itself. The market reacted positively to Trichet’s revelation that the ECB would extend liquidity provision and that they are willing to step into the market, if required, to reduce yields on peripheral Eurozone debt and aggressively back member states. After long periods of uncertainty in the equity markets, this event brought the stability the market was looking for and a strong bullish sentiment. Yield spreads between those countries most affected by the sovereign debt crisis (Spain, Ireland and Portugal) and Germany narrowed as peripheral yields fell to weekly lows. The question now is what will the next chapter be in the ongoing Eurozone saga? Will the peripheral sovereign debt spreads and yields continue to fall? Will the Euro strengthen once more against the dollar back to a stable position? Or, will the troubles surrounding the peripheral sovereign debt come back into the limelight causing a renewed sell-off in equities and continued Euro weakness? Traders should be well aware of the answers to all these questions as it is these answers which will provide the platform on which to trade effectively.

A trader should also be well aware of seasonal factors when trading. Markets in December often have a bullish sentiment and uncertainty often evaporates until January when both uncertainty and volatility tends to return. The Bund has been bearish in December for the last 3 years.

This week is important in terms of gauging market sentiment for the rest of the month. Bears will be looking to put fear into the markets with regards to the underlying problems in the Eurozone in an effort to halt the current bullish drive. In contrast, bulls will remain confident the uncertainty surrounding the Eurozone has calmed and they will look for a gradual climb to take back some of the losses from the past month.