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.