Sunday, November 15, 2009

GLOBAL MARKETS OUTLOOK 11/16-20: Ominous Double Tops on S&P 500, EUR/USD

NB: The following is a highly abridged version for a quick overview. Those seeking details on the assets discussed should refer to the full length version at:

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As always, we begin our weekly preview of global markets with a look at the S&P 500 stock index. International forex and commodity markets tend to move according to stocks, and no single index provides a better single picture of overall market sentiment than the S&P 500. Just note how similar most other major international stock or commodity daily charts match that of the S&P 500.

The key points to note about the chart:

• The possible formation of a bearish double-top pattern forming around the 1100 level

• The relatively low volume on the rallies to this level compared to the much higher volume at the tops and on the pullbacks since the beginning of September until now. The red line on the volume histogram is a 10 day Simple Moving Average of Volume that clarifies how volume is relatively low on the rallies and higher on the pullbacks.

S&P 500 Daily Chart With Volume With 10 Day Moving Average for Volume

04 Nov 15

For perspective on the significance of the 1100 level, we zoom back to a weekly chart of the S&P 500 for the past 5 years. Note how this level has served as minor multi-week support resistance. Thus if the past is any guide, the rally will need to pass the 1100 within the next few weeks or risk losing credibility. If that happens, then risk assets are likely to either consolidate in a horizontal range or stage a long awaited normal pullback. Note that a drop of 100-300 points would be a perfectly normal retracement and markets would still be in a firm overall uptrend.

S&P 500 5 Year Weekly Chart with 10 Week Moving Average for Volume

06 Nov 15

Again, note the declining overall volume of the rally since April, suggesting a lack of believers in this rally. The bright side is that there may be a lot of cash still available to fuel further rally if the recovery becomes more convincing. The downside of this low volume rally is that it suggests they buyers were short term hot money that will be inclined to sell if the recovery falters. That in turn will depend on whether economies can begin to hold up without massive new stimulus, and if they can't, whether governments will be able to continue providing it, and for how much longer.

If one can answer those questions correctly, then they'll know whether to be long or short these markets and virtually every asset traded. We believe a pullback will come sooner than later.


Crude Oil


Earlier in the week, WTI crude oil price did attempt to pierce the 80 resistance. However, both industry-specific fundamentals and macroeconomic data were not strong enough to sustain the breakout. Release of bearish US inventory data and reduced consumer sentiment triggered sharp selloff towards the end of the week.

Natural Gas


Gas price slumped to 4.287 as the Energy Department reported +25 bcf (consensus: +20 bcf) rise in gas storage to 3813 bcf in the week ended November 6. Although the level of increase tightened the year-over-year surplus and the surplus as compared to 5-year average, it sent the absolute gas storage to a fresh record high. The benchmark NYMEX contract climbed +0.5% from Thursday but recorded a weekly drop of -4.4%.

We remain bearish on natural gas price as demand is still bottoming while supply continues to stay at record level. Warm weather serves to worsen the already-weak fundamentals and this should result in delay in recovery.



Gold continued its journey to uncharted region and reached a fresh high at 1123.4 Thursday before retreat. However, the strong rebound at NY session Friday signaled investment demand for the precious metal remained robust and we expect the long-term uptrend should resume after consolidation.



Comex silver slid to as low as 17.03 before strong rebound Friday. The benchmark contract ended the week flat. Gold-to-silver ratio declined to 60-ish from above 80 at the end of last year. Although current level represents modest increase from 58 in September, it's still above historical average and suggests silver is modestly overvalued. While recent rally in silver has been driven by upsurge in gold, its fundamentals remain weak.



The economic calendar heats up with a tremendous amount of data from across the globe and speeches by Fed officials. The major currency pairs are ready for a breakout and there is certainly sufficient catalyst to trigger one. The only question is, will these event risks kill the rally or pave the way for more gains.

THE event to watch this week: does the S&P 500 and EUR/USD form bearish double tops at their respective resistance levels and begin a period of consolidation, normal 10%-20% pullback, or something more severe.

Other Events to Sustain or Kill the March Rally –See Full Version for Details

The most important: the U.S. retail sales report and speech by Fed Chairman Ben Bernanke on Monday.

If October retail sales are very weak or Bernanke talks up the dollar, the rally in equities and high yielding currencies could come to a screeching halt. However we believe that the chances of this happening are low.

--First, it's usually the Treasury Secretary and not the Federal Reserve Chairman that comments on the USD.

--Second, the Fed has been USD dovish.

--Retail sales may surprise despite the grim labor market


Possible S&P 500 Double Top Signaling the Risk Aversion Needed for US Dollar Rally?


US Dollar Outlook: Bullish if stocks drop, bearish if they don't

- Key Events: Monday-Core Retail Sales, Retail Sales, Tuesday- PPI m/m, TIC Long Term Purchases, Wednesday-Building Permits, Core CPI m/m

- S&P 500 possible double top around 1100 forming?

- IMF pegs the US dollar as the top funding currency for a yield hungry market

- Sharp rise in the trade deficit, drop in consumer confidence contradict the recovery story

- The US dollar to finally reverse course or once again collapse? COT reports reduction in USD shorts.


This past week the dollar made its strongest rally in months against the euro, its prime counterpart, but the move faded. Lacking any reason to boost USD demand, the market kept the USD in its eight-month old bearish trend channel. To achieve a sustained reversal, the USD will need either:

• A sustained period of at least consolidation if not reversal in global stocks and other risk assets that drives up demand for safe haven currencies as carry trades unwind. The S&P 500 has twice backed off from the 1100 level. Failure to break through soon could lead to at least a consolidation period if not outright reversal.

• A fundamental improvement in the US economy that brings recovery in the critical jobs, banking, and housing areas, quite possibly in that order, that provides reason for markets to believe USD interest rates will rise sooner than currently expected and thus lift the dollar out of its current status as a prime funding currency for carry trades.

• A selloff in the EUR, because for every 3 Euros bought, a USD is sold, thus any selloff on one automatically helps the other. Since March, this relationship has been a key driver of the EUR's rally.


Euro Remains Below 1.5050 - Is It a Double Top to Confirm that Forming on the S&P 500?


Euro Outlook: Neutral-Bullish if USD Continues Down, Bearish if Stocks Consolidate or Fall

- Key Events: Monday-CPI y/y, Thursday- Trichet speaks, Friday German PPI, Trichet speaks

- The German trade surplus expanded to 10.6B in September

- German GDP rose for a second straight quarter in Q3, but exports struggling under high EUR

- Euro-zone GDP figures worse than expected but better than Q2 and do show EZ growing again-Does ECB raise rates or leave them to help smaller nations still in recession?

- Did the EURUSD form a double top? The S&P 500 is forming one around 1100, and this pair strongly correlates to it. If it fully forms, this will be THE event for global markets in general, not just the EUR.


Yen Likely to Range Trade vs. the US Dollar Given Lack of Market Moving News


Yen Outlook: Bearish/Neutral

- Key Events: Monday-BoJ Gov. Speaks, Tuesday-Tertiary Industrial Activity, Friday-BoJ Press Conference

- Yen looks increasingly vulnerable with growing risk appetite

- Yen outperforms against British Pound despite its lower yield

- Forex crowds pointed to potential for USDJPY losses


Bullish Pound Forecast Versus Euro Subject to BoE Surprises?


Pound Outlook: Neutral

- Key Events: Mon.-Rightmove HPI m/m, Tue.- CPI y/y, BoE Inflation Letter, Wed.-MPC Meeting Minutes, Thur.-Retail Sales m/m

- GBP rally stops on Fitch concern on UK sovereign debt rating

- Similar caution from the Bank of England also hurts Pound, more could come from news this week

- Technical support still there for the GBP


SNB Pledge to Maintain Policy Suggests Range Trading Ahead, But Sudden Risk Aversion Might Overwhelm SNB Efforts to Keep the CHF Low


Swiss Franc Outlook: Neutral

- Key Events: Tuesday-Retail Sales y/y, Thursday-Trade Balance, SNB Chairman Roth Speaks

- Swiss Investor Confidence Weakens in November

- Producer & Import Prices Unexpectedly Contract in October

- Continued Dovish Policy May Leave the CHF Range Bound Barring any Positive Surprises From The Above Events


Canadian Dollar Continues To Move With Oil, Then Stocks, Then Events-So Watch If S&P 500 Double Top Forms


Canadian Dollar Outlook: Bullish Barring Stock Pullback

- Key Events: Monday-Manufacturing Sales m/m, Wed.- Core CPI m/m, Thurs. Leading Indexes m/m

- Is USDCAD bound to strengthen? Much depends on S&P 500, which drives oil


Australian Dollar Continuing Higher Barring New Risk Aversion-Watch S&P 500 For Warning Signs


Australian Dollar Outlook: Bullish unless the bearish Double Top Forming on the S&P takes hold

- Key Events: Tues.-Monetary Policy Meeting Minutes, Wed.- Wage Price Index q/q (expected increase may fuel further rate increase expectations, AUD strength)

- Growing Interest Rate Advantage Feeding AUD Carry Trade Demand, AUD to rise with stocks

- Australian economy unexpectedly added 24,500 jobs in October, equaling a six year high, renews rate hike expectations, and AUD rally

- Westpac Consumer Confidence Fell for the first time in six months by 2.5%

- Consumer inflation expectations fall to 3.2% from 3.5% in October


New Zealand Dollar Fundamentals To Overwhelm Risk Appetite? If Risk Aversion, Could Fall Hardest


New Zealand Dollar Outlook: Bearish

-Disappointing retail and manufacturing indicators bear out RBNZ Governor Bollards economic concerns

-Is NZDUSD setting up a bearish reversal of its eight month bull run? Watch to see if the S&P 500 rolls over at the forming bearish double top around 1100


Watch the S&P 500 carefully to see if a sustained retreat or range trading stage below the bearish double top beginning to form around 1100 causes this to turn into a truly bearish formation. As noted above

The low volume nature of the March rally suggests there is plenty of short term money that is ready to take profits. If that movement develops, we suggest readers do the same and /or go long safety currencies.

If news events surprise to the upside, risk assets could once again hold on and move forward. Betting against the resilience of the market has been an expensive mistake overall since March. That's why we wait for various forms of confirmation of trend shifts before trading them.


Long risk assets when they hit support levels but be ready to close positions and go short if the double top in the S&P 500, EUR/USD, and other charts holds firm and develops into a pullback.


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