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Wednesday, 18 April 2012

Flying (from the) PIIGS

The RSI divergences on the SPX 15min chart have been working very well in recent weeks, and that flipped to sell in the closing hours yesterday in the zone of strong resistance marked on the chart. My lean is therefore down today, though I'd normally expect a sideways to down day after a trend day in any case. As with the last signal the divergence is slight though:
On ES, as with SPX, the action in recent days has the strong look of a bear flag. The declining channel I was expecting to break yesterday obviously did break, and ES may find support at the retest of that broken channel resistance trendline in the 1376.50 area today. A break below opens up a possible test of rising support from last week's low in the 1362 area:
NQ rallied into channel resistance yesterday, and pinocchioed it slightly, though it held on an hourly closing basis. An hourly close over that trendline would look bullish, but until we see that there is some support in the 2700 area, stronger support in the 2680 area, and channel support is now in the 2645 area:
EURUSD was showing some negative RSI divergence on the 60min chart yesterday and has retraced since. I'm inclined to ignore the H&S unless we see a break downwards with conviction, but meantime EURUSD is still in a clear downtrend and I have a possible bullish falling wedge forming. It's worth mentioning though that these break down 31% of the time, and the wedge target would be close to the H&S target in the 1.25 area:
I posted the CL chart a few days ago suggesting that the next obvious move on oil would be to declining channel resistance in the 105 to 106 area. Oil is close to channel resistance now within a shorter term rising channel. A break over declining channel resistance would obviously be bullish, but until we see that I'm expecting a hit of channel resistance and then a move to the downside target slightly under 100. The overall setup looks bearish to my eye:
I thought that I'd spend a few minutes today looking at a couple of European markets that haven't had a lot of coverage, and those are the stock markets in Spain and Italy. The Spanish stock market rallied strongly with the rest from the 2009 low, but peaked there and is now close to testing the 2009 low. I've put the German Dax in the background of the 14 year chart to show the strong correlation before the end of 2010, and the massive divergence since:
As you'd expect, the Italian market looks even sicker, as the massive property boom in Spain 2003-7 was not shared in Italy, which has been in relative decline for many years. The 2009 low in Italy was over a third lower than the 2003 low there, and Italy too is in striking range of the 2009 low, and is currently at slightly over 20% of the level it reached at the 2000 high:
There is one powerful thing that leaps from this chart, and that is capital flight. Both countries have governments that are insolvent, and heavily dependent on Euro-area support to avoid bankruptcy. The ECB has demonstrated already in Greece that Euro-area support will wipe out private bondholders in any restructuring to avoid paper losses at the ECB, so there is no refuge in government bonds there for private capital.

Also governments throughout the western world are demonstrating a strong and growing willingness to appropriate private capital to support government spending, so private capital is fleeing the weakest countries. This is throwing up some impressive looking bargains for the brave, Spain's telephone utility Telefonica (TEF) is currently yielding over 14% on a P/E of 3.22, but the overall message here is that the markets are expecting these countries to default, and I suspect that the markets are absolutely right in that expectation.

In anticipation of questions about this appropriation of private capital in the western world that I mentioned, I'm referring to ZIRP, which is in effect a massive tax and transfer from savers to borrowers, and growing legislation to force private pension funds to buy government bonds, which is gradually wiping out private pension systems with low yielding assets, as well as stuffing them with doubtful debt that may never be repaid. As governments grow ever more indebted, I'm expecting more of the same, all for the 'greater good' of course.

I'm expecting a sideways to downward day today overall, and if a decline gathers momentum then we might see a retracement of much of yesterday's move. ES and NQ in particular hit key levels at the high yesterday, and if they should have a strong move up today we might see some very bullish looking breaks. Until we see that my overall lean remains bearish and I don't think that the retracement lows have been made yet.

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