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.

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).