How will markets celebrate christmas of 2011 ?

Market  Commentary:

I have been updating my thoughts frequently, in the 'comment' section,  but this week has enough importance to start a new article.   Unlike the usual christmas time quietness, we may see more action this christmas week, because the week's calendar is packed, as follows:

1. On monday, there is EU finance ministers meeting ahead of
2. Tuesday      meeting of  EU leaders. 
3. Wednesday, ECB is performing the first of its 2 LTRO operation, which will move the market.  
4. Thursday is  US Q3 GDP final release.
5. Friday          US economic data again.

I am expecting a market move of atleast 2%  in each direction, yielding atleast 4% during the week, for the smart trader.  Most of the risk is during the first half of the week, and so my guess is that market is likely to be  more unidirectional after 21st/22nd into year end, but without much volatility.

Most news articles i saw described how this is a liquidity operation to supply free money to the struggling european banks.  I view these LTRO operation,  both as a liquidity  as well as a monetizing operation, simultaneously.  I have not seen any analyst or blogger address it in the way i view it.  Ingenious move, if you really ponder about it.   I suspect there would have been some closed door discussions between ECB, European banks and leaders during the past month, on how this free money can be used by the banks.  There has been a rumor for past 3 weeks that one of the big banks of  europe is near collapse. So, its clear that the banks need the money for their own survival; but also, the governments need the money to fund their bond operations and functioning of the governments. So, it is quite likely that the individual governments will pressure the local banks in their country, to use ECB given money to purchase their soverign bonds. And hence, my theory is that, this free money from ECB will be split between  banks and the soverigns.  There was a drop in soverign bond yields last week, which partially supports my theory.  So, we are seeing yet another move (in addition to the coordinated central banks intervention on Nov.30th),  to provide liquidity to european banks.  This move really adds support to the markets, atleast until mid January (when other bigger events will unfold).   The monetizing effect of this ECB move is seen in the sharp weakening of euro last week.

I have scoured numerous websites over last week (as usual) to prepare my blog. But if you have copious  amounts of time, here are couple of links (that provide opposing views) on the above topic i discussed:
http://www.ifre.com/banks-resist-european-pressure-to-buy-government-debt/1620695.article
http://www.businessinsider.com/why-the-european-debt-crisis-might-be-over-2011-12


My position is that the above business insider article is wrong.  I see numerous risk events ahead in Q1 2012 (for brevity reasons, i do not want to bring them up in this article). So, until i see evidence that a strong directional bias has been taken by market for 2012, i will only consider one thing as assured; that is volatility in the markets. The proof is seen in US treasuries' charts.  30 year treasury yield index is near the extreme  level seen during 2008 crisis. What does this mean, when intrest rates are so low ?  It shows that world financial markets are  highly risk averse, going into 2012.  There are few places to hide the money in the world (hopefully i will remember to discuss this, at start of 2012) and  US treasuries is one of the safe havens.  I have been watching US treasuries closely last week, expecting a breakout.  Upon the breakdown in yields on friday, i immideately issued a  comment/email informing about my entry into a intermediate timeframe position in  US treasuries.  Take a look at the 30 yr yield index chart presented  below. It is quite possible that yields could rise into january to test one of resistance lines i have shown in red and cyan colors;  but i would be adding to my positions at those places, as further low risk entries into US bonds. As discussed above, i see enough risk ahead in Q1 2012 in terms of fundamentals, to support this view. 

Technical  Analysis of  spx futures :

While many technical analysts were calling for a bullish santa run during 1st half of december, i have been neutral to bearish (on a weekly analysis basis) for past 2 weeks. The reason is simply that i can see the risks coming ahead, in this news driven daily market.  Considering the risk ahead for monday through wednesday (that i listed at top), ES is already moving down from friday's close. As i write this article, ES is at 1203.   Last wednesday premarket and during NY session, i commented  "1194 as possibility within days"  and  "70% probability that a bottom for the week will be hit between 1180-1200."  While we did see below 1200 last week, it was not during NY session.   This forecast holds good for the week ahead, as well.  There is strong support for ES in the zone of 1180-90, and if  we are going to get  the  much expected  santa rally, it would likely start after a test at this level.  This expectation will be invalidated by a  daily close above my support level of 1217(mentioned in last blog) , which would signal that it is time to investigate into santa rally, which could go to our neutral area of 1242-44, for the year end.   So, 1217 close is the key number i am watching this week.  As usual, i will update my views in the daily comments of this blog, as the week progresses, because monday's close will provide better directional bias to trade.

Status of  Trades :

All the forecasts i made on Dec 1st  produced big returns last week.

• Gold   and  Oil :   Recommended short  from 1755 and  100+ respectively.  Currently gold is trading around my recommended short cover number of 1595.  Oil  has reached the  entry point i was looking for below 94, but i want to see crude behaviour at support of 90, before deciding on long entries again. The entire moves are 9% in gold and 6% in oil, but some of the profits were locked in a bit early,  thus unable to realize the full potentials.  Currently  no position in these two, but looking to initiate again near year end.
• ES  futures :  I read through all the comments i posted in last blog. 90% of the entries have produced a positive return, if one took action immediately upon seeing the comment, and closed out the trade at the next  level of support/resistance numbers i had given in prior blog, during the next  open/close time.  The negative bias on the market, posted on dec 9th, immediately after seeing the EU leader summit news, proved that analysis of ECB/EU news was correct.
• Bonds:   On dec. 7th, in last blog, i mentioned that bonds will provide better volatility and trades than ES.   30yr yields made a 8% move since that comment, but unfortunately, i did not take a position in bonds earlier,  since i wanted to wait for a more solid confirmation of  directionaly bias ( like the one that happened last friday ).
• So we have well over 25% return on my December forecasts, across these asset classes, but some of the gains were locked in prematurely.

EU summit - Dec. 2011

 Market commentary

Markets are waiting for news of next 2 days from europe. Within hours, ECB is expected to announce a rate cut of 0.25% and anything more than this would be a boost. What the market is really looking for is further measures that ECB could provide as a short term solution to the crisis.  ECB providing short term solutions to the crisis, and EU summit providing a long term framework to address the EU crisis,  is the two prong approach that is unfolding. Due to positive comments from various top officials during this week, market is exhibiting bullish behaviour so far. The short side of the weekend plan has been only partially useful to identify the resistance levels, but ES did not breach the neutral level around 1244.  I am viewing the bond move  this week as a possible hedge, before the crucial announcements. If one can correctly identify the market reaction to news, bonds might provide better volatility trades than stocks.

Technical analysis of spx futures

On December 1st, the analysis pointed to 1245 area being the neutral point considering the year end targets. The strong first level of support at 1242-44 is confirming our analysis.  I am keeping the support levels for swing trading around the same levels with a 0.5pt change as indicated below. Above the neutral area, i am identifying resistance levels with small changes from Dec 1st.  Day traders might find intermediate levels between what is mentioned. In addition, day traders must find more precise numbers (in nearby area) for futures trading. But, these levels serve for an initial guidance. These levels are chosen incorporating risk management strategy (for swings) in mind.

Supports: 1217, 1224, 1230, 1236, 1242-44.
Resistance: 1250, 1258.5, 1270.5, 1279.5 (for this week).

ES is range bound, between 1244 and 1264.  A clear break in either direction will give clues to trade the coming days.  Year end analysis indicates that the breakout  has high probability to be on the upside,  within days. But a break below 1230 would signal the need for reevaluation of  market condition/sentiment/news.

Status of Trades 

Gold forecast from 1750+ to 1700 was good upto 1705, and the trade exited due to  trailing stop. We may get another oppurturnity next week, to enter gold trade, in either direction. This trade  captured over 45 points in gold.

I got stopped out on monday and tuesday from short trades, initiated last week  at 1255(average).  These were perfectly good trades (had i let them run without stops into closeing hour). Due to this volatility, i have switched my swing trades into intermediate time frame, with january options as instruments. This gives me some flexibility and time to adjust my trades in either direction.  Day trading between the support/resistance levels has provided some cushion against the losses in swings.

Trading plan for Dec. 2nd week

Market  Commentary for the week ahead:

Last week's trading started with a wrong bias on ES, which was published on thanksgiving day.  But, after taking the stop losses immediately, the rest of the week has been highly  successful,  as  ES moved between my  support and resistance numbers.  So, overall i am considering last week to be successful blog articles. (Note that i publish intraday or daily updates as comments.  I put in these comments in the last 2 blog articles every week).  Since members do not get  'auto-update email'  when a comment is published, i have decided to send out a group email, whenever i update with a comment.

As of this sunday afternoon, there is no major news releases that could move markets in a major way.

1. On monday there is a  lunch meeting between german and french leaders, in preparation for Dec. 9th meeting of  EU political leaders. 
2. ECB meeting could potentially release some form of action, if there is an accord from the monday meeting of  french and german leaders.
3. In the US, there is no major  economic data, until  thursday/friday.  On friday US trade data, which is the biggest piece of economic data for this week, in USA.

So, it is quite likely  that the major move of this week will come in the second half of this week, rather than monday/tuesday. I have not checked the major news expected out of asia for this week, since i am not associating much weightage to asia right now.

So, for this week, i am presenting my trading plan for the week ahead.  My support and resistance levels (published on Dec.1st)  have not changed.  As i noted in that article, i am more precise with the support levels  but the resistance levels may have a few points of error (as witnessed in  last friday's  NY session).  But, my trading sticks to my numbers (for reasons of  risk management properly).

Technical  Analysis:

I beleive that market is bullish for december to test highs.  My year end estimate of 1290 on ES will be seen sometime during december (even if we do not finish year end there).  The central bank intervention last week  puts a floor below ES  for this week near  my support level of  1216.5.    Note that this is exactly the target for my longs, as declared in a comment on monday, november 28th at 11.30am, (when ES was 1192 and below).  If you continue reading those comments, you will see that i was considering  shorts if  ES pushes above 1260.  This happened on friday, and following the resistance levels posted, i am holding short 1260 and 1249, going into second week of  december.  So, even though i am bullish for december, i am trying to play a potential down move, before any push higher is possible.

Capturing Short side of the market:

During monday NY opening, if  market takes a bullish direction and ES reaches 1260, my swing shorts from last week will take a 5.5 point stop loss. This is acceptable, since my risk/reward criteria is justified with a potential move to my second support near 1230.5.  I am planning on covering these shorts near 1230.5 support area, depending on market  action on monday/tuesday.

Capturing  Long side move:

I plan to  wait and see market action around 1230-1226 and assess news breakouts on monday,  to get ready for a  potential move up. Buys will be initated near my support levels near 1217 and 1225, which will be sold at 1269.5, as my  high probability (80%) trade of this week.   IFF  i am able to get entry near 1217, i would consider holding half of  this long position for higher level resistances for year end target of 1290. I will make a decision on this, based on developments during the week.  I will take the long positions using January options, to capture the potential  up move as much as possible.

Stop loss for these longs = 1208 area in december.
Futures market is not yet open this sunday evening, and ES is  at 1244,  friday's close.

Gold/Silver forecast

I have initiated a short gold trade today's opening.  This can be done on silver too, due to correlations.  My thoughts are to short gold between 1750-70 with a target below 1700 by january.  I will run a careful analysis this weekend, to  find exact numbers, but wanted to publish my trade as soon as i had time. The chart below explains my logic, along with the  ES discussions in  yesterday's article.

Will santa bring me gifts this december ?

December 1st was a doji  on  spx futures, but  support and resistance that i published 20 hrs ago (yesterday night) caught both extremes of the doji in past 24 hours, and  2 round trips of about 15 points each direction were possible in this range. 

December historically has been an up month, and with the joint action by top central banks around the world, everyone believes that the stage has been set for december. While this does not address the fundamental problems in europe, this does buy some time for politicians to  figure out a solution. By injecting free money into the banks through short term loans,  the central banks are essentially providing liquidity to global banks for the short term.  The last time central banks acted in concert  was during the japan nuclear crisis in march; they were able to stabilize  yen and thus prevent market meltdown on top of nuclear meltdown.

So, essentially central banks have put a floor under the markets and the "crash possibility" has been erased for december.  The next important meeting is on Dec. 9th,  EU leaders summit, where they are expected to announce some form of funding from IMF and ECB together, to purchase bonds of  the troubled countries. 

On the positive side, we have been getting good economic data in US, even though data from asia is disappointing lately (auguring slowdown of 2012 global economy). This has helped put a floor under the markets since august.  But, i think we have started december closer to the ceiling rather than the floor.  (Why ?)

I produced a consensus year-end target for spx, in mid november and my research created 1290 area as target (http://tradersams.blogspot.com/2011/11/plan-for-building-long-term-portfolio.html). One data that i did not mention in that article was that i also expected that a bearish finish for the year would create spx 1195 area.  Add to this one more piece of data (that i gathered today), from bloomberg survey of analysts, which gives year end spx target of 1295.  Please note that my target of 1290 is on the ES futures, which agrees with the spx number from bloomberg.  So, this validates the research and conclusion of Nov. 16th.

All this data presented here, helps create  a ceiling and floor for trading december. This data  highly relevant right now, because we are right smack in the middle of  ceiling and bottom (1295-1195 / 2 = 1245).  Those of you who have followed me for much of 2011, know that i reserve a 5 point margin of error on big ranges like this.  This theory partially explains why market capped at 1245 area after a big rally in last couple of days. So, we have established that we are in the middle of the range, and awaiting news and ready to go either direction in next few days.

The last factor why i think we are closer to ceiling than floor is because of the uncertainity sorrounding the Dec. 9th EU leaders meeting. How much funding will they be able to put together is still unclear, and risk aversion will prevail until then.

Yesterday's post mentioned that i am fairly confident of the support numbers i mentioned for  next couple of weeks, but was not as accurate on the resistance levels.  Notice that on Dec 1st, ES exceeded my first support and resistance by about 0.75 points.  This is the kind of margin of error one should expect for day trading ES, and so asserts the validity of the first level of support/resistance.  Today i am trying to establish the resistance numbers on ES more accurately.

1258.5, 1269.5,  1274.5 are my resistance estimates for next few days. Yesterday i mentioned the plan of buying the dips. Going into next few days, i have switched to the strategy of sell the resistance highs, as it is safer, as we approach the ceiling level for the year.  I think a pullback is due soon, possibly to the bottom level of supports.

I have confirmed this analysis, with a intermarket analysis. So, following risk aversion, i think it is more likely to see other markets like oil and metals pulling back, along with ES.  Another factor that supports this theory is the 2008-2011 chart i presented  on october 18th (http://tradersams.blogspot.com/2011/10/q4-2011-outlook-and-beyond.html). The 42 days i expected are over as of December 1st.  

Happy holiday season starts - Dec 1st trading.

Within a few hours after i posted the previous blog on euro, pointing out that euro is reaching a critical shaded support zone, where a crash is imminent, we got action. It is as if  the central bankers knew that they were on the verge of a serious crash, worse than august event.  So, now we have the "best 3 consecutive days since 2009".  The best  buy points were already bought before - and i suspect that some people already knew that this policy action was coming (just like how it was recently revealed that some hedge funds already knew the action that was coming in 2008).  So, while wednesday was all around good news in economy as well as in european crisis, it is time to buy only pullbacks.  While i see further gains ahead within few more days, i will be terminating my longs in these days ahead, and start building  short swings (because  this is too much of a rally, for a band-aid solution to europe, which fixes it for few weeks).

My thorough analysis today didnt reveal anything that was not obvious.  I am interested in buying the dips for next couple of days, and my support levels are evenly spaced out.  So, depending on your risk management criteria, one can pick one of these numbers as buy point.  My target numbers are not as precise as supports, because im interested in exiting longs sooner, rather than later, depending on market momentum. Notice that the supports can be used as stop loss numbers too, depending on risk management criteria one has.

Supports:  1216.5, 1224.5, 1230.5, 1236.5
Resistance:  1249.5 (high as of premarket europe), 1259 and 1269.5 area.

I am planning to exit my longs around 1259 and watch market action before making further decisions.  I keep open the possibility of starting a short swing entry, above 1260.  I am planning to buy the supports until then, with a stop loss at 1215.5.  Europe just opened, and ES is now at 1241.

Long term Euro outlook

Today the EU finance minister's meeting concluded with one more vague plan on how EFSF would be leveraged to support the trillions needed for EU banks/countries.  While politicians are making progress, market seems to be moving at lightening speed, with italian bond auction today producing yet another "higher than 7%" yield. This is the fourth such event within last 3 weeks. Market wants instant action, while politicians have the timeline of next year's elections on their mind.  There is a disconnect in timeframe of choice between these two groups, and the effects could show up in charts in the months ahead. Given the high correlation of global markets to the EU crisis, it is good to keep an eye on this chart. I have pulled up a macro view of Euro in the chart below.  Take a look at this weekly chart. It  reminds me of   ES daily chart from October to mid November, though not exactly  same formation of triangle that we saw in ES, couple of weeks back. 

Fundamentals are not pointing towards a prosperous EU  in 2012, but a recession and potential breakup of  EU are  being forwarned by policy makers.  So the speculative crowd has already  piled up on short euro, as central banks and other policy makers prepare  contingency  plans for the collapse of Euro.  Is this a repeat of 2008 but in another continent ?  In my assessment, all plans, currently under consideration, are simply a measure to buy more time for policy makers - perhaps another year, atmost. This would make sense, since policy makers around the world and central banks need some time to prepare for this global shock.  An uncontrolled  and sudden breakup of  EU would have global economic impact, and so world governments would be inclined to buy more time, and prepare for this event.   It seems only a question of time, and EU breakup seems the most logical solution, since no one can pamper the weak economies with freebie euros forever.  It will only drag france & germany, down the path that US is currently progressing in (viz. credit rating downgrade from AAA).

So, from a long term perspective, the speculative crowd definitely has the right argument, but timing this trade is the art.

Technical View:

The chart shows proper areas to initiate long/short  swing entries into euro. The red line has provided a safe area above which i will be looking for swing shorts. Alternatively, if one wants to attempt a contrarian trade with long euro, this triangle formation gives entries  below green support line (i like the shaded neckline support zone) with redline as the target zone.  But going long would be a high risk trade for the following reasons.

• From a technical perspective, when euro entered this shaded neckline zone, back in october 2008, a global crash followed.  This was again repeated in 2010 may, in both euro and global equities.  So, this could happen again in 2012 when we enter the shaded neckline area ?
• European credit markets are validating the fundamental views and future expectations.
• Last week euro tested the green support line and is currently bouncing back. How far this can bounce, depends on the measures taken by Dec 9th, EU leaders meeting.
• So, the only time to think about a long euro, as a contrarian trade, would be if  global leaders come up with a big bazooka to fire at the speculators, who have piled up on short euro trade. Given the unity we  see in washington and in G20 meetings, we can rest assured this is not going to happen soon. World leaders have a process that is very time consuming.  (Meanwhile, the bond vigilantes are targeting their bazookas at italy, spain and belgium, in the next round of fireworks.)
• So, the only reason i would be watching the  highlighted neckline support area is to alert me to a macro situation developing, for a potential crash in equities again (a repeat of  the magnitude of august 2011,  within this year, seems unlikely - i have come to expect these events  as once a year  routines :-)

Crash possibility - continued .....

Market Commentary for next week:

Fundamental news that supports my drastic analysis is found in headlines; Not much analysis was necessary to prepare for next week, given that all the primary drivers that i listed in last weekend commentary have turned negative now.

• Italian bond yields have gone over the 7% mark for the 3rd time this month. German bonds are also taking a hit.
• It seems certain that there will be a breakup of  EU in coming months.
• Recession that i forecast is arriving probably faster than my initial estimated timeframe of Q1 2012, into europe first, which will spread globally. The manufacturing data out of china, released this week shows the lowest reading in about 3 years. This is the leading indicator.
• The two factors that are capable of stopping the downfall now are fed and ECB  quantitative easing.  In my opinion, fed is unlikely to act this year. Empowering ECB is not in the best interests of germany, and this is the question mark going into the EU leaders meeting on December 9th.

Amid this fundamentals, i keep open the possibility of  a late rally in december, which would give some credibility to the consensus estimates of institutions, that i pointed out in prior posting. GS estimate is looking good now compared to others. :-)

Technical Analysis:

The crash possibility has come true. In prior blog chart, we have gone from one trendline to the next within days. With clear break of another support line, we are in danger zone again, like august. With the break of 1160 support of last weekend forecast, another down week lies ahead. I am forecasting continued selling, with a high probability go to 1100 area, by December 9th. So, the outlook remains negative,  for next  week. With high volatility, i am also expecting some support numbers between 1160 and 1100 area to play out.   So, i will pick couple of numbers in between,   which have acted as support in october, for day/swing trading purposes. As i post this note, ES is at 1157.

Crash possibility

After some rest, i reconsidered the news releases, and macro issues.  Reconsideration of charts, in view of the macro risk analysis outlined in the prior post revealed a new outlook. Given the technical support levels outlined in the prior post,  a breach of critical support level is due this week.  Take a look at the chart below and the highlighted oval areas.  Here are the salient features i notice from this chart.

• Whenever  the support or resistance line in this zone is challenged in 2011, market has reacted very sharply in the days ahead.  The reaction in the days ahead  was strongly positive when it happened on Feb 1st, March 21st and october 14th.  But there are more incidences when the reaction was strongly negative, within days, upon break of the upper end support of this mid zone. 
• This chart creates the possibilty of a drop to 1160 within days, and increases the probabilities given in the prior blog. 
• The chart also tells us NOT to panic in the event of a crash day. Why ?  Because, it also tells us how to react to such a crash.  Controlling  emotions on a crash day is a critical part of trading successfully.
• How can you control your emotions ? By knowing a high probability event that is likely to follow in the event of a crash. Notice that, in each case, highlighted in the chart,  either the midpoint or the upper end of the crash day was tested within days.  So, this gives us a great way to play the volatility of a crash in both directions.
• It also reminds me that as long as i control my risk with moderate position sizing, i can endure the number of days that i need to endure to play the reversal test.
• It also reminds me that if  i am aware of the chart  comparing 2008 to 2011, predicting a turn  around  end of November/start of december,  then big institutions would know this type of analysis too.  So, the major turn around could be initiated with a drop, followed by a subsequence buy reaction in december. 
• The chart  gives us high probability support lines underneath, as i still beleive that we are in a bullish trend since october 4th, going into end of the year, as outlined in the blog with spx targets from institutions.  World leaders could step up anytime, to support markets, and market is not likely to go to 666 within weeks.
• If the scenario is to unfold, then we should see further decline of ES on monday. On the other hand, if there is a rally on monday, in the face of negative news, that would signal that the week is likely to head higher from the support area. So, this chart tells us how to prepare for a move in either direction.

Wishing you a happy thanksgiving week....

Past Week's performance:

While last weekend comment of " I see high probability(80%) for reaching my support levels during the week, and low probability(30%) for exceeding 1292."  proved to be right,  the expectation for later part of the week to close higher was not correct. Even though the bias posted on November 16th was incorrect, that 15 min chart on ES provided exact turning points, with 3 round trips between support and resistance, within the new triangle formation, within 36 hours of that post.  The long term plan got stopped out, while the crude oil trade did not trigger, since oil pushed higher without going down to my desired entry point.  Overall, i consider last week ideas to be successful, and somewhat neutralized the bad calls i had before couple of weeks.

Weekend Market commentary:

Europe continues to be the primary driver #1 for the markets, with US debt/spending cuts emerging again as primary driver #2 for the weeks ahead. On both these fronts, the news over this weekend is negative.  In europe, we have a greek leader who is balking at commiting to prior agreements.  In US, we have news that no resolution on the US budget cuts has been reached (WSJ). I will address these primary drivers in this weekend market commentary.

Current analysis on primary driver #1 is as follows:
During last few months, greece was the focus of european crisis with european leaders focusing their efforts on building a firewall around greece to protect italy/spain/france. But due to their delay in action, the contagion has already breached the non-existent firewall and italian  bond yields hit the 7% mark twice within the last 10 days. With this event, the focus now has shifted from greece to italy, spain and france. Last week, i also pointed to an analysis that forecasts a bailout of italy around christmas time.  But, this is unlikely in my opinion. Italy is a much bigger economy, and it would take longer than the 55 days that it took for portugal to receive bailout funds. There simply is no infrastructure and funds in place right now, to initiate italian bailout. News releases show that as a temporary measure, ECB bought italian and spanish bonds during last 2 weeks.  Overall, we can clearly see that the situation is worsening and not improving in the last 2 months. European banks are starting to feel the pressure, and the open credit line to european banks from ECB and fed is their only hope, since interbank lending  has diminished over this period. The failure of  MF global due to their european exposure  has created a fear and question of how much this will affect the US financial system. Data indiacates that US banks are not likely to take a dramatic hit like what happened in 2008, but market sentiment on this issue is what matters.

Analysis of primary driver #2 is as follows:
Headline released sunday says the supercommittee in washington did not reach an agreement on the 1.2T  that needs to be raised, according to their agreement back in august. This clearly indicates divided political interests, going into next year's election. US leaders are more focused on the elections, rather than saving the country, in my opinion. World is obviously  going to see this partisan interests with a negative bias for the weeks/months ahead. The automatic spending cuts on federal budget has been triggered with this move, since an agreement by wednesday was required. These spending cuts will be across the board, affecting state budgets and numerous jobs. I want to point out that back in july, US debt issue started the downtrend in the markets. I also want to bring back our attention to the chart i posted a month ago, on October 18th, comparing 2008 to 2011. This chart indicates that November 30th would be a crucial turning point. Given all these factors, i expect the week to start on a negative bias, in asia. But, on the positive side, historicaly during thankgiving week, stock market has ended positive, and this data can be used to trade the volatility of the week ahead.

Analysis of primary driver #3 :
Back in July, my emails considered US economy as primary driver #3 for markets.  GDP estimate of Q3 is due on tuesday. While US economic data has been lately positive, showing  a recession is not immediately likely. This pattern is reminiscent of 2010 when many economists (and myself) were expecting a recession in Q4 of 2010; that did not materialize. Instead, US economy slowed down  dramatically in first quarter of 2011. I expect a similar pattern to emerge, with a slowdown showing up in first half of 2012, during which fed is likely to initiate QE3, in my opinion.  So, there is no immediate threat from primary driver #3, and reaction to GDP could be muted,  when compared to other macro issues driving the markets this week. Historically, during thankgiving week, stock market has ended positive, and this data can be used to trade the volatility of the week ahead.


So, in conclusion, we have two of the primary drivers giving negative bias and the third one giving us a neutral bias, with GDP likely to come in near expecations. Hence, my bias for this week is negative. The initial question to start the week is how low market will go this week, and what kind of a bounce is likely, if any.

Technical  Analysis of ES:

The  green support line in my intermediate term chart (see prior blogs) dates back to october 10th.  A break of this support last week is the trigger for further selloff, from a technical perspective.  I am estimating initial supports at 1185 and 1175 areas (as usual, allow about 2 point margin of error).  I am averaging these two numbers to arrive at 1180 as my first target for the week ahead.  I am associating a 95% chance to reach 1194 first, and a 75% chance to reach 1180.  The probability of reaching resistance levels of last week (1257 and 1270) are low at 20%. Intermidate resistance of 1238 ES is a possibility, if the market turns bullish near end of the week, with only a 50% probability for this number. I conducted the weekend analysis  and I  arrived at these numbers prior to the open of futures market on sunday, but unfortunately could not publish it earlier (typing up the market commentary took time).  Within the last 30 minutes, ES has sharply dropped to 1205, as i write this. Some people in the group have discussed with me a crash scenario for this week. In which case, you can see the inital support at fibanocci area of 1160-1155. But, i am neutral on this idea, given the chart i mentioned earlier, predicting november 30th as a turning point. In addition, serious support lines have not been broken yet, on my charts, to create the possibility of a crash in thanksgiving week. If i see signs of a crash developing, i will post it in the comments area of this weekend commentary.

Trading the opex of November

Volatility can be expected to increase on wednesday and thursday, due to options expiration.  Here is a chart i prepared that maybe of use in trading the rest of the week. The chart shows a neutral bias technically, in the symmetrical triangle.  I think there is more than 50% chance that the week will close above my support level of  last weekend analysis (1247), if the europeans dont drop a new bomb this week.  If the extremes of the triangle are exceeded, consult the green and cyan areas marked in the previous blogs.

I had not prepared this chart, at the time of prior comment on long 1242. But, once i saw this chart, it was clear, why the lows had to be tested near 1238, before pushing higher. Pardon my jumping the  gun, earlier :-)   Headlines in europe are not happy news today, and there is good chance that NY session will test below 1238  on wednesday futures.

A plan for building long term portfolio of 2012

I update my daily thoughts in the "comments" section of the weekend market commentary. In tuesday's comment, i expressed my desire to add to my long term portfolio. The reasoning is explained in this blog entry.  Last weekend, i  touched on the study i did on  2011 year-end target of  various institutional strategists.  I dug up some more into this to get further clarity, and here are my findings.

1. GS                      1200         (1300 in a year)
2. Wells fargo        1250-1300 (averaged to 1275)
3. credit suisse       1270          (1340 for 2012)
4. morgan stanley   1238
5. BofA-Merrill Lynch  ??       (1350  for 2012 end)
6. JPM                   1475
7. Barclays            1420
8. Blackrock          1350  (possibly revised lower recently)
9. citigroup            1325
10. oppenheimer      1325 (held all year long)
11. HSBC, Deutsche bank, UBS ???

Removing  extremes of  JPM, barclays and GS, the average of rest = 1297.  As you can see from the charts, market is in coiling phase, as it awaits news from europe.  It could break in either direction, but  it would take serious news to break to the downside hard. Based on the above facts, and  my own analysis, my conclusion is that market will close the year at 1248 or better on the spx futures, as high probability (70%). Even though serious risk remains, as discussed in weekend market commentary, with proper risk management strategy, it is possible to build a bullish position for 2012 january earnings season (and beyond).

We had 2 days of Market hiccups, with about 28 point ES swings between my weekend analysis numbers each day. (1271-43, 1234-62 at closing of tuesday).  Market is trading   with a strong support at 1214 on the ES.   News out of europe needs to be monitored everyday, since  a breakup of  EU is on the table and a crash is possible, any given day. I assume that atleast 50% of the risks are already factored into market prices. All it would take is a piece of news from europe, given the high risk fundamentals.  But, one must take risk, to get the reward. Keeping cash in portfolio does not get us anywhere, given the intrest rates.  I see more volatility in bond market lately compared to equities. So, for a long term portfolio, equities offer better value.  My plan calls for additions to my long term portfolio at equally spaced intervals until the strong support.  This means, i will add more longs in november when ES reaches 1214, 1224, 1234 with a stop loss at 1212 area.  The target for this trade  is a minimum of 1248 ES, with a high probability to reach the consensus estimates of the institutions, by january earnings season. I have to mention that i see 1214 ES as a low probability (20%) for November.

Meanwhile, my swing/day trading  strategy remains  the same -  buying the green zone and selling the cyan resistance.  Volatility is a double edged sword, rewarding those who have the right analysis, and punishing those who dont have the right analysis (like JPM :-)

Crude Oil - next target

On october 25th, my post called for a long crude position.  Some of you may remember that i had mentioned 2 months ago  that a long crude position can be considered only if  $89 was broken to the upside.  Soon after breaking this critical level,  crude oil tested the $89 level one more time and pushed higher. This was the first signal. But i waited for confirmation and issued the buy idea later on, with a minimum target of 97.  Last week this target was exceeded and crude closed near  the next critical barrier of  $100 level.  This level has acted as a pschological barrier several times in the past.  As i write this, crude is retreating from $99.4 high that was reached last week. I am closing out the crude position on monday, to possibly re-enter the long side at a later time.

Long entry  for swing trades = between $96 and 95, spread.
Stop loss  on this next long entry = 94.5.
Target =   initally  at 104-107 range,  for year end. This will be fine tuned later.
Gain on previous trade = 99 - 92 / 92 = 7.6%  in 3 weeks.

Global power shift in our lifetimes....

Market  Commentary:

European crisis continues to be the focus of global markets.  Soon we can expect the US debt crisis added to the headlines.  I spent the weekend researching into european bond yields.  As you can see from the headlines, italian bonds are now the target of bond vigilantes, with the 7% mark seen as the symbolic level, which was hit last week. I expect this to be continued focus of markets over next few weeks. So,  I thought of an idea of correlating this 7% signal  with past incidences of 7%  yield level hit on greece/ireland/portugal. 

On friday, i discussed with some of you,  this idea of seeing how the time lines evolved from this 7% signal day  into the point where these countries had to take bailout fund from the ECB/IMF/EU.  Because this would tell us when we can expect  some kind of resolution (through bailout) for italy. Someone in the email group was kind enough to give me a web link, where another person had thought of this same idea and published his analysis. Even though i do not agree with his conclusion that we can expect italian bailout to happen around christmas time, i liked his research. Rather than presenting my own analysis, i give you the link to his research here. If you are interested in  what we can expect over the next 2 months, check this webpage at http://ashraflaidi.com/articles/charting-euro-macro-yields-libor-spreads.asp.

Paul  krugman of Princeton University said "This is the way euro ends - not with a bang but with bunga bunga". I find it to be an appropriate assessment, and looked further into the debt levels of  European banks and countries.  Rough estimates are 26T of bank  assets in europe and 10T of  government bonds.  With a simple assumption that some of these banks will fold (like dexia), we are looking at losses of trillions in banks, without even considering the 50% haircut of greek bonds.  So, to cover these losses, how much have the political leaders have come up with ?  1T of  funds in EFSF,  combined with a few hundred billions in  ECB and IMF.   During last G20 meeting, france requested china to contribute. China may give 100B, according to current rumors, but only if western powers agree to elevation of  china in  world power (3 different options have been put on table by china towards this, in past few years). They might drive a tough bargain on this demand, going  into  the next few G20 leaders meeting. So currently there is no help from G20.   Even if they contribute, there is a huge gap between the trillions needed and less than 2T in credit available from all sources (EFSF, ECB, IMF, G20).  In summary, this presents the gravity of the situation going into 2012.  This structurally weak economic situation  of the western nations can not be rectified with  monetary band-aids.   In my opinion, we are witnessing global economic power shifting  from the west to east, until a proper balance is reached in economic and trade realities (through currencies), hopefully over this decade.

Naturally, top economists and strategists agree that ECB needs to print euros sooner or later, to cover the rest of the debt. ECB printing only means that germany and france would bear the burden of  this as the strong countries.  There is strong opposition in germany against these forms of help to other countries. Without external funds (read china, G20, ECB), in the long run, there is no way to get out of this bad debt situation. 

The only other option is a smaller  EU, without the weaker economies, which is currently being discussed.   So, in either case,  the pundits conclude that euro is going down, in value.  Market seems to be highly short euro, already.  Now, if we want to join the bandwagon, at what point in euro should we join these big speculators ? I took a look at euro chart, and decided to take some long term position of short euro, as this is as high probability as it gets, in trading a long term trend.  I will publish my euro chart in the next blog by tonight.

Meanwhile, here at home, earnings season has ended. While earnings this quarter have been better than expected, beating the expectations of past 3 quarters, the revenues have fallen dramatically overall.  Also, i noticed that since 2009, this is the first time earnings overall have been guided downwards by companies.  This shows that the majority of companies are likely to see their earnings come down in 2012 (recession fears in europe showing  up in international company balance sheets).

Technical analysis of ES: 

S&P 500 is near its 200DMA which is monitored by lot of long term retail investors and smaller money managers. All of  spx stocks are near overbought area, in my opinion.  I spent some time searching into analyst expectations for year-end target of spx.  Since earnings season just finished, these numbers came out just in last 2 weeks, as updates. They range  from 1250 to 1325 in the sample of about 11 institutions that i looked into.   I am guesstimating a consensus of around 1290 (throwing out extreme numbers).  My weekend analysis, has this assumption, built into it.   This number can be fine tuned as we progress week by week, since news out of europe will trump everything else into the year end.

Short term chart shows resistance at 1292, 1273 areas.

Short term chart shows support at  1247 area and 1232, in the green zone area. 

So, 1273 will be the stop loss area for my call last  thursday/friday (short around 1266). The initial target for these shorts are around 1247 and 1232 as high probability.  Given this projection, if monday morning session rises up above 1271, i can take bearish bias and if  monday is a downday going towards supports, i can take a bullish bias, either monday close or tuesday.   Going into the week, i obviously have a slightly bearish bias, as per my call last friday.  I see high probability(80%) for reaching my support levels during the week, and low probability(30%) for exceeding 1292.

Keep in mind that my record over the last 4 weeks is 2-2 on the weekly calls, at a reduced win ratio of the prior 11 weeks (90%).   Also, my daily calls have been over 60% inaccurate, due to market volatility, and have performed worse than my weekly predictions. I will publish my euro chart in the next blog by tonight, for a long term trade.

November 2nd week trading plan

Market  Commentary:

I wish i had posted this earlier on Sunday, for the benefit of futures traders of overnight session. By the time you will read this, you will already see ES dropped for europe open, and now it is around 1239, as i write this.  Not only we have some headlines that will create uneasiness among traders, the market has been overbought to end the october to remember.   Among the headlines that create uneasiness in me (and perhaps for short term traders around the world)  are the following:

• Greece has created a comma and continue, as opposed to the ending period that the world was expecting after the G20 meeting.  There is going to be a new government, and an election in greece, which creates the possibility of a default sooner than expected by markets.  So disorderly default is the very scenario that european  leaders are trying to avoid, since it creates the possibility of euro collapse, without a firewall around greece, and banks taking serious hit from the default.
• G20 has not done anything really, to create stability and assure global markets. China, as expected by me, is refusing to step up to the plate, and continues to extract juice out of the western nations, in the form of currency manipulation. US has its own debt to deal with and does not have the resources to help Europe. So, who is going to play ball ?  Lack of unity among world leaders is what i see, for now.
• France  and Italy are in the headlines as they create further austerity measures, to keep their bond markets stable; but this is going to affect their economic growth in 2012 and beyond.   Italy is already getting headline attention, as its CDS and bond yields climbed higher in recent weeks, and political instability becoming a possibility in italy, due to the austerity measures that are required.
• But not all is gloomy, since there are some positive things home front.  US companies are continuing to show the earnings, and fed stands ready to do further stimulus plans, if  things  worsen  in 2012.  So, the question is which dip should one buy ?

Technical  Analysis of ES:

I still standby  my bullish view of  1350 ES by  April, 2012 (as posted on oct. 30th).  But, for the short term, my analysis shows that market needs to work off the overbought conditions and  stabilize.  At  levels of 1250-60, i  was thinking that the downside risk is more than the upside potential;  My estimate is that  ES will see 1220 this week as high probability with a possibility to go lower.  At 1280 and above i will be a seller with swing trades for this week.  If i see 1190 area, i will be initiating long term buys, with due consideration given to news of that day.

The last blog posting forecast a test of the cyan line, creating a head and shoulder pattern, which did not happen, because the news changed within 5 hrs of posting that, and Greek PM withdrew his call for a "referendum vote", upon pressure from european leaders.  But, the probability is higher this week, for a test of that cyan line.   At the minimum, i am expecting a test of the  bottom green line, in my previous chart, and that area would be an area to watch carefully during intraday trades.  And i will be a seller at the top  yellow  line in the same chart.   As i finish writing this, ES is already at 1235, with a fast drop, and is near the top green line.

Grimm reaper moves to europe

Market  Commentary:

Volatility is the only thing grimm reaper assured for 2011. My expectations for a positive november is in jeopardy due to the shock given by greek PM, ahead of the G20 summit.  I dont know if it is just a political ploy ahead of an important meeting, to influence world leaders. Or it could be a political ploy ahead of the confidence vote on Mr. Papandreou  due on thursday. Early news bits on wednesday was already dire, in my opinion, and was not given enough importance in wednesday headlines;  because ADP employment data came out positive and Mr. Bernanke has assured that fed stands ready to act fast with further help, if needed at any time. So, market was able to hold the green channel on my chart, for wednesday.  The situation just turned even more serious tonight, with Sarkozy saying  greece will not get the aid it needs in november (because the greek PM wants the people to vote on it, and it is currently scheduled for December 1st week).  Keep in mind all this could change in next couple of days, if the G20 pressure  greece PM and the opposition. I expect some serious pressure on greece during  G20, to settle down things fast.   Italian bond yields are already  soaring, as the next target, and G20 needs to stabilize the markets and investor confidence. Will china step upto the plate as the top economy of coming decade ?

On a seperate note, marketwatch pushlished an article which shows that when 1st day of  november is down 2%, the rest of november corrected an additional 1.5% or more. I am not giving up my bullish view target of 1350 for Q1 2012 yet, since additional  news and developments out of  G20 meeting in next couple of days would be crucial for market direction. If the referendum indeed will happen, and only in december, then it would be risk off mode, until that time.  With a new development out of europe almost every single week, this is an ideal futures/currencies  trader's  market, because only they can take advantage of the 24hr markets and news releases.

Technical Analysis:

The previous blog chart, with its buy ideas were successful for Nov. 1st and 2nd. ES came within 1 point of that bottom green line support, which was ideal buy. I viewed the action of  Nov. 1st as  consolidation, and i was expecting a push upto the yellow line on tuesday.  Tuesday didnt see any serious buyers step in, and i saw more of consolidation rather than serious buying following the consolidation of 1st. So, given the news, i expect more selling to happen, atleast to the cyan support line as first target for thursday/friday. If that line breaks, technicals would be damaged, for next week. I will  reaccess  news breakouts, once the cyan support line is reached. When i started writing this note,  and completed tonight's analysis  ES was at 1224, and it is working towards the short term support at green base now, around 1211, which was support on November 1st.

All other markets are highly correlated these days, and can be expected to react to this news.  US treasuries have already made a sharp move down over past 3 days.

Happy halloween

Market  Commentary:

Grim reaper visited wall street and the offices of  MF global  today, to set a festive mood for the kids and jobless of america.  Hopefully, by thanksgiving, we will be giving thanks to god, for giving us this oppurtunities for re-entry, in case there was not enough accumulation during the phase-I of  bull market.

Headlines pointed to concerns about europe resurfacing, but i think the main reasons for monday selloff were two fold.

1. A high percentage of stocks had reached overbought area and the big boys were not willing to buy at those levels.
2. BOJ intervened in currency market, sending USD up and euro down, which in turn affected all other markets.

Meanwhile, MF global became the second big name (after dexia) to fall because of heavy bets in european bonds.  This did not help sentiment on the CME floor, which denied entry to all MF global personnel.  There is important economic data coming this week, and there is FOMC meeting.  In addition, this week also has the G20 leaders meeting, where i expect  currency issues as well as european situation to be the dominant topics.  So, we can expect some risk aversion to continue into tuesday, to test further lows below 1246.5 which is the support established in NY session. 

Technical  Analysis:

As i write this note, ES is at 1240. I am watching 1236.5 area as first level support for tuesday opening.  At this level ES has entered my swing buy area, which is in the chart below is an extension of  last week's work.

About couple of weeks ago (i dont remember the date), i mentioned gold short idea, scaled entry from 1665?-1697, with stop loss at 1699.   I was not actively trading gold, so didnt see the chart till today.  It looks like gold reached a low of 1605,  within days of that email.  And it has bounced up strongly within a week. The chart pattern is not clear on it for swing trades yet, but day trades seem to be in clearly defined pattern.

For tuesday,  crude oil looks to be in a critical junction, in the area of 92-92.5. Recent news indicates that crude oil supply has increased.  But also my research indicates that hedge funds have been betting on rise of commodities in general, and accumulating in october. So a long bias seems better probability,  as my  previous  crude oil blog indicates. A break of the triangle would indicate a decision on this, and a big move is my expectation either tuesday overnight session or on wednesday.  I would take entry on either side, upon the breakout.

News just released tonight that australia cut interest rates.  Though i am not a currency trader, my guess is that AUD would head to test the 1.02 level in november.

An october to remember

After  my forecast target area of 1065 in ES was reached, the next day, on October 5th, when i sent out an email  titled "Red October turning green?", i expected green, but not a 20% gain, within a 3 weeks !! As you can see from the headlines, this is the best October, since 1974. About 10 days ago, i started a poll for members of my blog titled "Does this market remind you of 2009 bottom?" To my surprise, all the votes that came in said "NO".  If you are wondering who was that one person who said "YES" in that poll....that was me ! Even though this is a small sample of general sentiment of the public, this is not far from truth. I have looked at various market sentiments and polls conducted within the past 2 weeks.

The consumer's assessment of current conditions is at its lowest point since December while consumer expectations are at their lowest point since 2009. From a long term perspective, NFIB small business optimism index is lowest since 2009. Meanwhile, the weekly  AAII sentiment index shows a jump up of 7% in number of bulls, which probably increased by friday's close. Still the number of bulls is way below the 75% bulls that was seen at market top in 2011.  NAAIM survey of money managers showed that over 50% of them were still bearish, as of last week.

These sentiment readings confirm my long term assessment of market. Market will continue its bull run into early 2012, until an extreme value on these sentiment indicators are reached, with minor corrections along the way. The fundamentals are in place to support this view, as listed below.

• European leaders have stalled the debt crisis, with various tools, and bought at least 6 more months, if not more, before we see another episode of this debt crisis continuation from PIGS of Europe;
• Fed in the US has initiated policy measures that help stability with a bond re balancing program that has been equated to 0.5% interest rate reduction (this on top of the assurance that interest rates wont be changed until 2013); 
• US is working on programs for job creation as well as debt reduction (although i don't expect much from the divided government);
• China is not showing any serious slowdown or housing problems, like many pundits were predicting for past 1 year;
• Earnings are coming in better than expected again, in fact better than past 3 quarters.
• And, best of all, the latest GDP number in US came in at 2.5%, easing the fears of  many (including me) who were expecting a slowdown to continue from Q2 into Q3.

So,  while i maintain my long term forecast of  increased probability for recession in US/europe in 2012, the intermediate term looks good for at least 6 months more. I notice that the revenue figures are in fact down during this earnings season, even though companies have beat expectations handily.

Considering all these factors, my kudos to those of you who bought long term holdings at my forecast bottom of 1065 area; you can be very proud of yourself for being brave. Now, after 4 weeks, it is pretty much clear to all technical analysts where the market is heading.  My Q4 targets have already been surpassed, and in a private email i indicated next target of 1300 area. We are close to it, all within 1 week.  I am increasing my long term target to 1350 area now. Also, I expecting this number to be surpassed by the end of Q1 2012. As indicated in my chartwork (comparing 2008 to 2011), the highs will probably be set 42 trading days from Oct. 4th, which takes us to end of November.  So, with minor corrections along the way, i am expecting this long term run to complete its first leg by early December.

Last week's  analysis (and comparison to 2010) forecast 3 days of down days last week, but we got 2 days of lower lows, and then  broke out higher on the news from Europe.  This week's  chart  is directly linked to the poll i started 10 days ago to see how many of you catch the dimension of this bullish move.  This chart adds to the probability and forecast shown in prior chartwork, that gains will continue into end of  November;  but the time to be aggressively buying is gone, so think about money management and buy points (which i may address in my next blog, during the week).

End of euro crisis 2011

Tonight, during the euro leaders summit, all issues seem to have be resolved, so that the politicians have bought more time, to get into next elections safe.  As, pointed out in my weekend blog, 50% losses is to be absorbed by the banks. I made an error in weekend analysis that 50%  of greek debt (340B euro), is all on the banks.  Thanks to david, who pointed out that 1/3 of greek debt is on  ECB/IMF  and another 1/3rd is by  greek  banks.  So,  only 1/3 of the  greek debt is being shouldered by the big banks of europe, outside greece, and this would amount to about 113B  euros.   Notice that this number is pretty close to the  bank recapitalization that has been announced during tonight's   summit.  They have given european banks 6 months more to recharge 106B euros, which will bring the liquidity problem of the banks  non-critical, buying more time for this drawn out process.  EFSF  has been leveraged about 2 times, from current 440B to 1T euros, which again, buys some more time, to deal with soverign bond purchases.   Much of this news was already available on wednesday's  trading session, except for the bank recapitalization news.  So, that sums up the rally we saw in the second half of  wednesday.  Now that we have bullish news,  what does thursday's trading hold in NY session ?  The chart below gives my idea of where to buy and what prices to sell for the reminder of the week.  As i post this note, ES is near the low end of my  Q4 projection (1256). I am giving a 90% probability that by thursday's close, this number will be exceeded (possibly into the upper red line in chart). 

Crude Oil update

About 10 days ago, i mentioned in the email that I am watching oil for a good trade emerging in it. Winter is  near, and  its the time of year for demand to increase. I was looking at the chart of  oil last weekend, and it was already breaking out;  I was lazy and tired late at night, to discuss it at that time.  I apologize, because  oil  made a strong move over 4% on monday, oct 24th, to confirm the breakout.  It was a clear buy day, if you had been watching the news or looking at oil chart.  My first target on oil is 97 area, which will be reached by year end, if not in near future.  Crude oil has had a good degree of correlation to  ES  in last 3 months;  so if  crude move is any indication, we are looking  for  break higher in  ES  for tuesday NY session.  But i am also keeping in mind the possiblity for this week, given by the previous  ES chart posted.

Continuation of greece/bank debt analysis

Couple of weeks ago, my weekend email presented an analysis of the current greek debt and global bank exposure to EU. I  am continuing with that analysis this weekend. As a reference,  the previous  set of facts  are attached at the end of this blog entry.

Market  Commentary:

When it comes to the analysis of current state in EU, the focus of the market is on  4 different fronts.

• Short term:  Will greece get its next tranche of  funding by november ? This is a moot point now, because  last friday at closing market hour, news broke out that greece has been given 8B  euros (explains the closing rally on friday?) For all practical purposes, the november funding has also been assured by EU leaders.
• Intermediate term: The proper leveraging to be applied to EFSF and the resultant amount of money that will be available,  to purchase further  soverign debts of PIGS of europe.  This is being the current point of contention between france and germany.  But today news has broken out that progress has been made at the EU leaders summit. There were already talks of  leveraging  EFSF to over 1T euros.  This assures that the banks will not be squeezed again, like summer 2010, for atleast 6 months more.  This is my gut feeling;  without further research into PIGS, it is hard for me to forecast the exact time duration.   This  intermediate term factor, also ties into the  'bank recapitalization'  factor that is on the  discussion forefront. I will get into this more after ....
• Long term:   EU leaders are working on putting together a grand plan, that addresses various problems (soverign  budgets and auterity measures,  the ultimate amount of funds that maybe needed to save the banks and countries, how much each component  viz. ECB, IMF, banks and countries,  have to contribute to saving of euro,  political and techical restructuring of EU so that a firewall maybe built around greece to protect other countris,... etc).  For now, market is unconcerned about this, imho,  since this pertains to timeframe longer than 6 months.

There is one other point of contention, which is the burden of greek debt that will be placed on banks and other private funds that have bought up greek debt. There is talk of increasing the losses that these private parties have to shoulder (from 21% to near 50%). The banks have opposed this measure 10 days ago, but an increasing is coming. In my opinion, this is irrelavent in the short term to the markets. My logic is simple: as discussed 2 weeks ago, total greek debt = 340B euros. 50% of this = 170B euros, which is to be placed on bank losses.  But there is recapitalization of the banks (through EFSF, ECB loan gurantees for a year, private equity like warren's investment in BAC etc), which would inject much more than this 170B euros, in the short term, into the bank balance sheets.  So, in the short term, this problem disappears, to resurface again, when other parts of EU are in a crisis.

In conclusion, the EU problems have been fixed to an extent that political and financial leaders have  more time to deal with the broader issues like the economic depression that will surface out of this, in europe. In addition one of the other primary drivers i mentioned weeks ago (global economic slowdown), has been postponed into 2012.  So, in the last possible time, they got their act together and risk taking is justified in the eyes of the pros.  In all likelyhood, my initial target for Q4 will be exceeded against this background news, with a potential to reach 1300 emerging.

 Technical  Landscape:

After forecasting the buy at the bottom near 1060-70 ES,  the proper sell area was not
 identified properly in last two weeks. 1180 proved to be only a temporary resistance, resulting in bad calls during last 2 weeks.   At present levels whether you want to buy or sell, depends heavily on your timeframe, given my forecasts for Q4.   Continuing the chart i presented 2 weeks ago comparing 2008 to 2011, i am presenting another comparison this week.(2010 and 2011).

This chart is suggesting that we will top on monday/tuesday and have a pullback after that.   So, i am forecasting this week to reach around 1247 (90% probablity) and the supports are in the vicinity of 1185, 1202 and 1209, should a pullback take place. A proper strategy to trade this plan involves one's  timeframe and risk management criteria. As i post this blog, futures have not opened, and ES close last friday was at 1234.75. I wish you all successful trading week ahead.

(Below is a copy of the email and facts i presented 2 weeks ago, for reference here.)

In this week's  market analysis, i present the research conducted  to nail down the state of  greece debt  and related  issues.   The results were stunning to me, because  i realized  that, if i  had conducted this study  about a month ago, it would have been  of  great help  to us, in  having the proper  fundamental  bias  towards  that range bound market of  last 2 months.  I provide the summary of my research below, in order to avoid  boring you with yet another long email, as many of you wont have time to read even this summary :-)

• I started with a simple question : How  much  exposure the world has to greek debt ?
  business insider.com published an article that shows a study by  BIS (Bank for International Settlements)  and  he exposure of various countries to greek debt.  As of  march, 2011, the total world exposure is 124.7B usd, not counting US and japan, which hold 8.7+1.3 = 10B.  Since  these numbers are about 2 quarters old, i expected the current world  exposure (mostly by european banks),  to greek debt to be higher, which is proved by the next bullet item.
• Next  i asked myself, how much the greeks owe to the world ?  I found out that Total greek debt in bonds = 340B usd. (Sept. 26th reuters). This figure surprised me somewhat, because  it is more than double the  125B that came out from previous bullet item.  Keep in mind that greek banks hold a bunch of  their government debt and some of the debt could be attributed to  big  wealth funds of the world, and other private funds, but still  340B is an aweful lot more than BIS  estimate, back in march.  So, naturally, we have to assume that the current european bank exposure is a lot more than 125B, and quite possibly the banks are not admitting to all of their exposure.  
• The above two facts clarified a lot of things, because i already knew from previous weeks that  germany passed a vote  on sept. 29th, to increase their contribution in loan guarantees to $287B.  This already covers a huge chunk of the  340B  that greece owes to the world.   And there are other contributors  like ECB,  IMF  and france etc.  would  easily  surpass that  340B  number.   So,  in these  hard facts, one can clearly  see that  greece is not the issue, because there is enough money to fund greece into  2013. 
•  On sept. 15th, The European Central Bank said it will co-ordinate with the U.S. Federal Reserve ,
   the Bank of England, the Bank of Japan and the Swiss National Bank to offer
   three-month dollar loans to banks through the end of this year.  In october, ECB extended
   these loans upto 1 year term for european banks.  So,  we can conclude that banks  have been  well funded for the short term, with  essentially  unlimited  liquiditiy.
• So,  when  france and germany  agreed last sunday  to come up with a plan to help greece buy some more time, that is a temporary  bandage  applied to  the bigger  wound  of  European  crisis. As long as the greece does not default,  european banks  dont have to write it off  as  losses  and  face  liquidity  crisis.  As you have read in headlines last week,  the troika inspectors passed greece, and  the next installment of  funding has been scheduled to  be released soon  to greece.   So,  all  is well for now,  because  the  band-aid   buys  the market some more time to deal with the core issues.
• The core issue, which  was underlying the  market  sentiment for past 2 months  is  a lack of  confidence  in the  liquidity  of  European  banks.  This will continue to be an  issue  into 2012,  because  a contagion of sovereign debt  crisis  into  portugal, ireland and other EU countries seems inevitable, once  greece defaults (2012?).
• IMF estimates that broader  problems (like contagion/CDS etc.), have increased european bank exposure by about 300B euros. That is 300*1.35 = about 575B usd.   This is just  the conservative  estimate  from  IMF, i think,  because  private  estimates  have  put a price tag between  1-2 Trillion  usd,  if  the debt crisis  spills over into  other EU countries. There are  estimates  that Global banks have raised  about 100B usd in private funding in 2011, but this is peanuts compared to what they might hold in the debt of  AAA rated countries like  France.  Imagine what would to these bank  debt holdings,  if  france  lost its   AAA rating.  They have to write down lot more than the 100B they have raised :-)
• European officials were discussing ways to strengthen the 440 billion euro   that is  available  to  the  main  bailout  mechanism  being put in place -   European Financial Stability Fund (EFSF)- possibly leveraging it to the tune of 1-2  trillion euros. But germany is opposed to this, given the public sentiment towards further bailouts. I expect this  discussion  to go past  G20 summit in  november, because i can already  see  complacency  again  in the  G20  finance ministers  meeting that  was held  this past weekend.   Nothing  came out as  action item,  but only  a news release that  G20 agrees that  europe must solve its  problems;   duh, we already knew that, and we dont need G20 finance ministers to tell us that:-)  Reading between lines of the initial text released, i  suspect  the  currency war is  taking  center stage again, given the tension mounting between  US and china (but that's a seperate topic).
• So, bottom line is that the band-aid will work until  2012, when we will face european bank crisis again, in my opinion; after all, WSJ published on oct. 7th,  that U.S. Bank Exposure to Europe Could Be $640 Billion,
  as Per Congressional Paper. (roughly 5% of bank assets).  Thats  relatively  minor risk at 5% of assets, and you can imagine the number for  european banks, which hold  much bigger  exposure to  their  sovereign  bonds. If you want to read more about  the long term problems,  EFSF, and defense against contagion,  then i will point you to a  well written article here at http://www.alterforex.com/4-ways-to-leverage-up-the-efsf.

Oct. opex and outlook for start of next week - ES.

Market commentary:

   Wednesday and thursday had some bad news out of europe, which is driving the market volatility lately.  Just take a look at the correlation between  euro and ES, and you can see the proof  of europe being in control of market direction;  you can pretty much predict the short term movements of  ES, with this correlation;  this is likely to continue until  2nd week, when the G20 leaders summit is over and we get definitive announcements, for the short term, about how much debt is loaded onto the banks, and how funded EFSF is going to be.

    So  the bad news out on wednesday/thursday is that merkel and sarkozy are not getting along.  Sounds like a bad marriage to me, and does not bode well for 2012 relationship.  Each party involved is asking "what's in it for me?"  rather than asking the question of  " until death we dont part ?"  So, the decisions involved on a day to day basis, in such a tough marriage are likely  to be pretty  tedious and drawn out.....this implies, it will take  more time to make even simple decisions (which probably take a day to make in china, because no one can question the central committee).   Western civilization is facing serious  challenges to the  current form of  capitalism - Big banks are global in nature, whereas there is no global  policy system in place, to control  these banks'  predatory  profit seeking nature.  Consequently, derivatives and wreckless trading by global banking system has resulted in destruction of many banks in US and europe, and passed on the virus now to europian nations. I am digressing.

Back to europe..... the headlines are pointing out the meeting this weekend between germany and france, and the meeting of  European leaders has been postponed to next week.  Sounds like bad news, but hidden inside is the fact that they seem to have agreed that EFSF funds will have to be leveraged to over 1T euros. This leveraging was initially rejected by  germany, but that stance has changed in last couple of days, and is the fundamental reason for some bullish moves lately. 

Technical  Landscape:

As i  starting writing this blog, emini spx futures (ES) is at 1215.25. Please see the chart, as it summaries my  outlook for  friday as well as the week ahead.  I think the highs of the week are already in.  Also, notice that in august as well as september, the direction reversed after an opex week.  People who are buying now are somewhat late into the action(on a short term basis) and we could see a pullback monday/tuesday. Clearly we are range bound, between 1180 and 1230. There is more downside risk than upside risk.  Considering all these, it seems better to find places to short, which will give a better risk reward ratio (always look for the risk reward ratio after you take a bias). I am forecasting a close on friday below 1210 on ES, with a good probability given to 1205 or below (due to weekend risk aversion). 

USD is likely to rise from current levels into tomorrow, as yen will be devalued by japanese announcements. It may be a useful tool for currency traders, to keep this bias.

Q4 2011 outlook and beyond ?

There was a lot of discussions during august and september comparing current market behaviour to 2008 crash. So, i took a closer look at emini spx futures on both these times, and surprisingly, we have a very close correlation in market cycles.  Take a look at the charts presented below.  By comparison,  i deduce that ES will meet first resistance somewhere between 1256 (some of you may remember that i called market bottom in june 2011 at this number) and 1266.  I like to give 5 point margin of error and fine tune the numbers as they appoach, maybe intraday basis. So, this remains my first target for Q4 2011, with a possibility of a downtrend starting soon after. It is also quite likely that this target maybe reached around early december, given the count of days in 2008.

PS:  I did not add all my past email updates of last 2 months into this blog. If time permits, i will add them later, for  keeping all my thoughts together in one place.