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.
