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.