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.
6 comments:
During this weekend, i had second thoughts on this blog. One of the factors that lingers in my mind is the consensus year end target by institutions. A careful analysis, along with friday morning's sudden up move, gave the clues. While i am of the opinion that we are going to see 1100 area again, it may not be in the timeframe that i published in the blog. Amid rumors that IMF is going to lend over $900B to Europe, ES futures has sharply shot up this sunday evening. I dont think this rumor will come to pass in the meeting on monday between President Obama and EU president.
Meanwhile, i had drawn a line at 1185 ES as the high end for this week, for a bearish view to hold good going into this week. My downside target for the week is around around 1130 or below. The downside target depends heavily on my view that the 3 bond auctions scheduled this week in italy, spain and france will not go well on tuesday / thursday. It would also hinge on the important economic data of the week (US), which is ADP/employment data in the second half of the week.
So, my trading plan for the week is to initiate some swing shorts above 1185, with stop loss at 1192.5 on the ES futures. The plan i created on saturday upon analysis is to turn increasingly bearish, as the futures climb substantially over 1180 (which was the support i published in prior weekend analysis). If news is confirmed that IMF is going to give substantial loan to europe, that would be strongly bullish, into the year end.
Having exceeded the initial resistance levels for this week, i think market is headed for a gap fill of last monday and could test the next level around 1216 this week. So, i am hedging my short swings, with a long call option to this level, trying to capture a potential move from 1192 to 1216 area. Volatility could be high this week, given that we have european bond auctions, important economic data in US and the month end/start of december, all falling into this week.
I took initial losses on shorting the opening of monday, because i got stopped out at 1192.5, even though ES declined further below that during the day. Having realized the bullish bias for start of the week, i took swing longs again at 1190 and 1183 going into tuesday. My expectation is that there is good chance to fill the gap of prior monday down opening, with ES reaching to 1214 area this week. Risks have only increased, and i continue to hold the theory that rallies into year end, will be sold off (resulting in high volatility). Until we hear from politicians something concrete, this situation is not likely to change; and i dont expect politicians to act as fast as the market is moving towards risk aversion. So, my plan is to cover my longs between 1208-1212 on tuesday, depending on momentum of the opening. After that, i will look for oppurtunities to short again.
This morning i see some negative headlines. Italian bond yields went through, but at higher yields (again over 7% and increasing). American Airlines filed for bankruptcy, which was a shock for me. EU finance ministers meet today, but i expect nothing out of the meeting. India announced decreasing growth, which confirms china's PMI last week, signaling global economic slowdown. Considering all these factors, i think the globex high on ES maybe the cap for today at 1206. Support is at 1186 for tuesday, and i am trading between these numbers for tuesday.
On top of all the negative news we had on tuesday, there is some more added for wednesday now (s&p downgraded many international banks and nothing useful came out of EU finance ministers meeting, as i expected). I was of the opinion that ES would test 1214-18 area, before a pullback begins, when i started monday morning. I still think this week could see 1214 area sometime, but if 1180 is broken, i will change my view. I am also expecting some support around 1184-85 going into europe/premarket for wednesday. News is not giving the needed support, but ADP data premarket will provide direction.
On the last day of november, there is a slew of good news addressing primary driver #3(economy) and #1 (europe), negating the negative news yesterday. ES has exceeded my target high of 1218 in overnight move. This has setup the bullish case again, proving that the institutional year-end target blog i did is valid still. I had bought some protection with 1140 puts when 1180 was exceeded to open this week. I beleive we are headed higher in december, before a serious correction can take place. So, the crash possibility scenario is out for december, but the chart is still useful. My next target for december is 1270 area, testing november 13th highs. I am not inclined to short the market atleast until 1260+, which i expect this week as a surprise, or next week.
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