Capitalsynthesis

Its that the time of the week again for the Swiss team’s technical analysis of the major asset markets.

To summarize. They believe a near term low is close though likely later this week or early next. They have been surprised by the extent of EM weakness but insist this is likely to be a buying point for a bear market rebound and ditto for the AUD. They remain with their Euro bull recommendation and provide levels and entries but from supports and momentum on the Eurusd pair.

I’ll leave the detail to the report.

I would briefly comment that I tend to agree that a bounce is close. I don’t feel we are close at all to capitulation however. This sell off has disappointed me thus far as a price trader. In spite of an apparent volatility increase its all been very measured as can be seen by the volume numbers. Sentiment averages and leverage levels indicate this correction could be significantly more severe than it has thus far been. As the ‘early moves are always the fastest’ I’m in the ‘right’ but glass halve empty bear camp, thus far. The tipping point for the consensus bulls has not been reached at all. The 200 dma would be interested if we can test that level on major indexes. I would ideally like to hold shorts and hedges to see price discovery around these levels before letting go.

Sector wise the luxury brands are leading this move to the downside along with European oil producer cos. This is all about EM weakness here for both sectors. See the comments below re the team’s EM call. If you do accept the call then these two sectors are starting show entry points.

Re the team’s other major calls. They present quite a set of contrarian views which is great and to be expected from one the world’s best technical teams.

Consider, they present us a  long Euro, long AUD and commodities, long gold, long EM markets set of forecasts. This is far from consensus though this quite possibly makes it a good set of positions to hold!

But, perhaps more importantly, whatever you own system tells you here you have to recognize that, given the contrarian nature of the calls, this is a high return high risk in nature which simply plays into money management and instrument choice.

From a correlation perspective, I’d throw in here that these are historically positively correlation pairs. Ie AUD with EMs (2001 to 2008 + correlation but 2011 to 2014 correlation broken).  & Euro Gold + and good level of correlation but this pair can experience long periods of non correlation. (Eg the recent 18 month run up in the euro from 1.20 upwards).

Their comments are both directional and positive correlation assertive therefore. Both calls are contrarian. An interesting thing to do is to understand the market rational for such correlations. A strong euro implies a weak dollar basket. The dollar is a funding currency and a store of value. If the US$ weakens then its generally a time of increasing liquidity/credit and hard assets usually do well inc gold. Gold is also a super hard asset and alternative safe heaven so she sees inflows for this dual reason if the US$ is debased vs other FX pairs, most acutely the euro. (As the major component of the dollar basket value).

The Swiss team are forecasting a debasement of the US$ vs the Euro to continue. This is easily accepted as we can see on a relative basis that the US$ is being debased more rapidly than the euro mainly due to the actions of the FED. Credit is slightly increasing in the US as well as large monetizations by the FED. The combined result is debasement of the US$ relative to a fairly tight ECB which is contracting balance sheet at present as OMT is rejected and private sector lending contracts. Directionally the euro bull call seems reasonable if you ignore ECB jaw boning. If the ECB do act then the sustainability of the 18 month Euro bull looks unlikely in my view.

The team don’t provide a technical chart of the eurusd so here mine inc macd. (The team usually preference as a momentum price indicator on their charts. I have also added the CCI which is a price indicator I prefer).

You can see the fading macd momentum on the dec and jan euro moves creating significant divergence between price and momentum. You can also see the H2 2013 moves have also been weak momentum moves even as price breached a major cyclical bear trend line to the upside. Price breakouts are usually dramatic affairs of cyclical trends. They tend to attract capital inflows yet this has not really occurred for the Euro yet! This is a bearish technical signal therefore. Its not conclusive as yet as price has not confirmed the breakdown but the move is in play and traders will be very aware of the potential failed breakout and breakdown scenario here. Currently the CCI is not in an over sold area at all and shows momentum to the downside. Another wave is therefore very likely to the downside (a conviction technical trade if you will). And therefore the supporting cyclical trend line should get a significant test, at the least. I’m certainly playing for the 1.33 level area as the last euro bull stand price area.

I’d also like to add that, In my view, this is a truly news driven event, in the near term. The ECB report this Thursday. I would wait to see if we get monetary action from the ECB before meaningfully allocating to the pair. If we do OMT does not emerge, the long euro position or better still long $gold with borrowed US$ may be the way to go especially if market weakness persists, in my view. Alternatively euro equities funded by euro cash proceeds from a short $ position vs the euro could also be the way to go. Of the two trades the long $ gold with borrowed $s is the contrarian trade but therefore has the largest upside. Again this simply plays into money management and instrument choice.

The AUD – EM directional & positive correlation call appears more a corrective bounce within their secular bear markets. The team are not calling for an ending to their respective bear markets but they are calling for a corrective bounce in both. Rational wise the AUD is a major financial market with a depth of instruments and listings for EM exposed corporates, credit and commodity derivatives. If the AUD bounces higher vs the US$ it could signal that US$s are being sold to accumulate AUDs in order to fund the positions in the AUD instruments. The US$ is often a carry trade currency and especially so where their is an over night interest rate spread.

In terms of other correlated instruments to the AUD like the other commodity currencies, eg CAD and NOK. There are some signs of life in the CAD from her over sold level vs the EURO but little more at present. The NOK is close to a wash out technically, although a very illiquid pair that said. The Euro is usually fairly positively correlated to the AUD but again this has broken down in recent years!

This is why, although I very much appreciate technical methods I never blindly follow historic instrument correlations without thinking through the macro events needed to sustain or underwrite the correlations moving forward for the duration of the trade I am considering. That said, for short term trades a technical perspective can be all you need!

Anyway without more waffle and delay here the guy’s regular report:

Wklytech-4-2-14

All the best

Rich