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Thursday 27 October 2011

Euro Area Bailout Deal

Just a quick post today as I have to do a lot of offline stuff, but obviously my doubts about the reversal this week were well founded, and ES has leapt to new highs overnight. The big news overnight of course was that the terms of a Euro area bailout were agreed, and that may kick the Euro area problems a few months down the road. You can see that story on Bloomberg here. The EU has arranged a 50% 'voluntary' writedown of Greek debt, though how that can be effected without triggerng CDSes still seems a bit doubtful. It strikes me that any holders of greek debt who refuse the writedown could make a lot of money here at the expense of other bondholders, and if they are forced to accept the writedown, then the writedown isn't voluntary. It will be interesting to see what happens. It seems likely though that the main bondholders, the banks, will be strongly encouraged to accept the writedown, and that they will probably accept the loss for fear of a formal default and/or loss of official goodwill from their governments, who have been effectively underwriting the banks since 2008.

The plans to lever up the EFSF look sensible, within the insane logic of the growing government debt mountains, as rather than borrow money to lever up the plan is to insure debt through the EFSF, which should at least double its firepower, at the risk of wiping out the fund altogether in a default situation where other PIIGS get into trouble. This isn't the end of this story in all likelihood, but the sovereign debt crisis may now have been kicked down the road while sovereign debtors everywhere in the developed world continue to amass fresh debt.

The US GDP figure is also out today so we could see a very wild news-driven day. If ES holds the current levels over 1260 there will be a huge gap up on SPX and a decent US GDP figure could deliver another trend up day. This is definitely a day to consider caution on either side.

I'll have a look at related markets first today. The first thing to note is that EURUSD has reached the major support/resistance trendline that I've been looking at in recent days, and that the line is holding so far. If it holds then EURUSD is in a rising wedge in my view, though as some of the touches on the upper trendline were part of the previous trend more classical technicians would disregard those. Either way this is a very important support/resistance trendline, and a break above would be very bullish:
30yr Treasury futures (ZB) are still kicking around in the recent consolidation zone. If ZB makes a new low I'd be expecting a hit of the 135 support area, which is also a possible H&S neckline:
Copper has ontinued rising and is approaching the very important resistance level at 365. Declining resistance is also there and if it's going to reverse, that is the likely area. If it breaks up with confidence that would be very bullish:
On Vix I'm still watching the possible bear flag there. If we see a new low the flag target is in the 24 area:
On the equities charts I'm going to do something different today. Firstly I've marked up the ES 15min chart to show the long signal at the low yesterday and have added my amateurish wave count for both the retracement and the move up since. As you can see, it's possible that we are seeing a wave 5 high at the moment, though it's also possible that we're still in wave 3. I'll expand on the wave 5 possibility in the next chart. Please note the postive RSI divergence on this chart yesterday though, and have a look at the clearer divergence on the 60min chart if you can.  The lower low yesterday was with strong positive divergence on the 60min RSI, which is generally a good point to get cautious on the short side:
The reason I was counting the waves up from the low yesterday however is that a very nice rising wedge has since formed on the ES 15min. The support trendline is now slightly over 1260 ES and if it breaks down then the bulls might get a nasty surprise today. Always worth remembering though that these wedges break upwards 31% of the time and that there's often an overthrow or false break in the opposite direction to the one that it then plays out. Still if the GDP disappoints, we could see a gap fill at the least:
Not much to add to that really. If the GDP is good this huge gap might be the prelude to a trend day. If my wedge breaks up then the upside target would most likely be in the 1310-20 area so be careful on the short side if that happens. If EURUSD breaks over my trendline with confidence then that would also be very bullish for EURUSD and equities.

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