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Tuesday 8 November 2011


I have a bearish bias that I have to struggle with. The source of my bearish bias is that I've read an awful lot of history and economics, and have always been skeptical about the existence of the Tooth Fairy and Santa Claus. I don't believe that well-meaning folly results in happy endings as a rule, and current world economic policies look like slow fiscal suicide in historical terms.

However I try to put that bias aside as far as possible because history also teaches us that hubris can last quite a while before nemesis arrives to set things back on the proper path, and this collective delusion of the developed world that anaemic growth caused largely by too much debt, can be corrected by amassing more debt to grow our way out of it, might continue for a while longer. Ultimately this period should end with the bond markets demanding high real interest to lend to governments who have become doubtful credit risks, and a consequent change in policy that corrects the problem through austerity to return government finances in the developed world onto a sustainable long term path, and possibly also default, either by classical or inflationary means.

When will this happen? No idea, but the signal will most likely be when bonds and equities start to fall together while bond yields rise sharply into real terms positive territory, and we're obviously not at that stage yet. Meanwhile I'm not particularly concerned which way markets move as long as I am on the right side of them.

Why the preamble about this today? That's because I've found a very nice quality rising channel on ES from the October low, and that's good news for bulls. It's also (though less immediately) good news for bears as the channel support trendline gives us a decent signal for when the current uptrend is in trouble. Channel support is at 1234 at the time of writing:
NQ broke up nicely yesterday and I was gong to give the 2390 area as main resistance today. However that level has been taken out while I've been writing so the key areas today are the 2400 and 2410 (October high) areas:
On TF immediate declining resistance is at 749. TF has been the laggard in recent days while NQ has been strongest:
On SPY yesterday's close was at resistance and a break over that this morning would suggest a run at the open gap above and the October highs not far above there:
The other big rising channel I'm watching at the moment is on GBPUSD, which broke above 1.606 resistance yesterday. The move up has been a little anaemic so far and I'll be happier with the strength on this once GBPUSD can take and hold 1.61:
So all bullish then? Not quite. EURUSD has been lagging equities this week so far and is barely holding its shallow support trendline. The setup still looks weakly bullish but a break below 1.37 would invite a retest of the recent lows:
30yr Treasury futures (ZB) are also still in no man's land. A conviction break of 140 would be equity bullish but if ZB can get back above 142 and hold it then that would be equity bearish. This setup might be a bull flag but looks too messy to me so I'm not treating it as one at the moment:
It's the Vix chart that looks really interesting at the moment though, and that is the chart that most illustrates why we may see this move up on equities fail here, and that any break up or down from here could be very major. On the Vix chart the main support level at 30 is being tested again and a conviction break below would look very bullish. On the bear side though it is entirely possible that Vix is forming a huge IHS pointing at the 50/51 area and I've marked that up on the chart. If the ES channel support trendline were to break then we could be looking at a massive bull failure here:
Last chart of the day is the gold futures (GC) chart, where a decent looking rising wedge is forming that strongly suggests a retracement at least before the 1800 resistance level is broken with any confidence:
The big news today is likely to be whether the government of Silvio Berlusconi in Italy falls this morning. The crucial vote to establish whether he remains in power is at 11am EST I understand, and it's obvious from recent days that if his government falls then that would be very bullish for EURUSD and equities generally. I personally rather like Berlusconi as he's great entertainment value, but Italy needs a strong leader capable of implementing unpopular reforms and he's obviously not that guy.

I'm looking for SPY to open over resistance today while Vix opens below 30. That would look very bullish, subject to the vote in Italy. Anything short of that and there's still a very serious chance that this move up will fail, and everyone should be watching for that failure in case it happens.

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