28^th February 2011

Equity Indices

Overview

Last week equities traded sharply lower as they looked to correct after strong monthly gains over the course of this year. The S&P cash made lows below the key 1300.00 handle. The market retraced a good chunk of the week’s losses on Friday, a follow through from the bounce seen on Thursday evening.

Thoughts from the trading floor

From a technical perspective the S&P 500 future continues to look bullish in the short-term. Support at 1291.50-92.50 is important and as long as the market can hold above here, a challenge of resistance at 1343.00 (recent high prints) remains on the cards. The market found a floor late last week below the daily trend line, which is at 1301.00 today. The market was unable to force a daily close below here, which should aid the cause for the bulls. The 1320.00-1322.00 remains the major stumbling block, in the short-term, for bulls. Another key failure around this level may result in an extended sell-off targeting a break and close below the daily trend line and thus a deeper correction. A move back above here in the next day or two should then target the recent highs.

This week traders will continue to follow the political developments in the Middle East. Recent days have seen an escalation of violence in Bahrain and Libya, which resulted in the Middle-Eastern indices suffering further losses yesterday to fresh 9-month lows. The overriding fear is that the unrest spreads to Saudi Arabia. In this scenario, equities would come under severe pressure whilst oil would spike significantly. Currently, this remains a tail risk; howeve,r market investors hate political instability and further tensions will cause headwinds.

Tomorrow is an important day for the markets as Fed’s Ben Bernanke makes his key semi-annual speech. In this event, Bernanke will outline the Fed’s strategy going forward. As ever, the outlook for the economy and the FOMC’s policy towards their Q.E. package will be the highlight. We have started to see a raft of voices from the Fed suggesting that some members have started to turn hawkish. However, Bernanke has maintained that the Fed’s mandate towards employment will need to be fulfilled before they head towards a sustained exit strategy. Dovish comments may be taken as a green light to buy equities and other risk assets. Notably, the USD has continued to show weakness, and dovish comments may thus result in further selling of the USD and buying of risk assets. Alternatively, a hawkish speech may result in another round of panic liquidation of risk assets and thus force a deeper correction in equities heading into the Non-Farm payrolls report on Friday.

Important events this week.

• Monday: Chicago PMI report (US)
• Tuesday: ISM manufacturing report (US), Bernanke’s key monetary policy report.
• Wednesday: ADP employment report (US)
• Thursday: ECB monetary policy announcement.
• Friday: US Employment situation report.

Bull View

As long as the monetary stimulus is in place, Bulls will remain confident of an ongoing medium-long term rally. Their next target in the S&P 500 is 1441.00.

Bear View

Bears will continue to look for further catalysts for a deeper correction and will be hoping weakness last week can follow through this week.

Futex View

We would back further weakness this week. The market has started to show signs of some short-term weakness and we would back further declines heading into the rest of the week.

Equities were generally subdued on Friday.... (more...)

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.

The Eurostoxx continued to surge higher yesterday.... (more...)

The Eurostoxx traded lower yesterday...... (more...)

The Eurostoxx pushed further higher yesterday.... (more...)

The Eurostoxx surged higher yesterday.... (more...)

The Bund saw a capitulation sell off yesterday... (more...)

The Eurostoxx moved higher yesterday..... (more...)