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Friday, 9 March 2012

Fragile Uptrend and Greek Default

Obviously I was very pleased that my roadmap for ES yesterday played out almost exactly. Will this continue on to my bullish IHS target? Possibly, but the uptrend looks fragile here, and ES will need to break over yesterday's high soon and confidently to confirm that bullish scenario. Strong support isn't far below, and a break below that support would make the current picture on equities start to look very short term bearish indeed. Here's the setup as I see it on the ES 60min chart, and I have now switched to the June contract on ES, so the values are all 5.75 handles lower than on yesterday's charts:
It isn't obvious from the ES chart why a support break would look extremely bearish, but you can see the bearish setup better on the SPY 15min chart, where the high yesterday tested the upper trendline of a declining channel, the RSI is obviously short term overbought, and there's little room for retracement above the steep uptrend line. A failure here would open up the possibility of a move downwards to test channel support well below the low this week:
The potential NDX setup here looks more bearish still, with a potential double-top in place. Short term support has more room to retrace, but a move below 2620 would suggest a test of the recent lows, and a break of the recent lows would trigger a double-top target in the 2500 area. On the upside the high yesterday was 2543, 17 handles short of the IHS target at 2660:
The short term setups on the Dow and Transports indices are still bearish until demonstrated otherwise. Essentially TRAN needs to break above broadening descending wedge resistance in the 5200 area, at which point the lean there would switch to bullish:
Overnight we've seen some overbought retracement on EURUSD and a small IHS may be forming. The bias there is bullish unless we see a break below the rising channel from the January low:
The recent low on CL established a short term rising channel from the last low and my bias there is also bullish with a caveat. That caveat is that a lower low is in place short term and the 60min RSI is suggesting that we might be about to see a lower high. CL needs to hold channel support and break this downward trend. As long as it does that a test of the 2011 highs in the 115 area is still the obvious next target:
Gold has bounced strongly back to test broken support, and a lot of people are thinking that the low is now in. Possibly they are right. As with oil we are looking at a setup of lower lows and highs but on gold there is no supporting channel. This retest of broken support is also on very sharp negative RSI divergence. If the short term support trendline breaks then a test of the lows at minimum would look likely. A small IHS may be forming with a target in the 1750 area if gold can break up through 1711 with confidence:
Overall I still like the long scenario here as long as we see a break over resistance on ES and SPY at or near the open today. That long scenario looks very fragile as I mentioned, and without a confirming upward move very shortly the alternative bear scenario will start to look better. The key levels to watch on ES (June) are strong support at 1352 and possible double top resistance at 1362.50. A break with confidence in either direction should be respected.

Obviously the greek news was a damp squib overnight, and after all the buildup equities barely moved. There are some interesting points to note from my reading this morning, and they are firstly that the collective action clauses referred to for the bonds seem to have been inserted recently, and retroactively, which isn't an inspiring precedent for the next european default, most likely Portugal within three or four months. Secondly the total amount of credit default swaps on greek debt, now obviously likely to trigger payments, was apparently only $3bn, which makes all the agonising about these seem strange. Nowadays that's the sort of sum central bankers leave in their jackets when they send them to the laundry.

The third point, and the most interesting, is that in the grey market for the new, post-default greek bonds, these are trading under 20% of face value. Any bondholder selling these at this price after the 70% haircut already taken is accepting an overall loss of over 94% which is very stiff. For comparison the Ivory Coast defaulted on their sovereign debt last year, and that debt, still in default, is currently trading at some 60 cents on the dollar. This says two things about this greek deal. The first is that the price is assuming that the deal will fall apart quickly and that Greece will then be ejected from the Euro, defaulting on their remaining debts again on an even larger scale. The second point is that unless that perception changes, Greece will not have any further access to the international bond markets, leaving the ECB and IMF as the only buyers of new debt.

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