Devastation Over For Now – Inter Market Analysis

Risk On

  • Ignore China limit down as Short covering goes underway in Europe and US equities
  • Taiwan come to rescue with NT 500 billion Financial Stabilization Fund for the first time in four years
  • Oversold play in the market after several limit down scenarios – Europe opened higher with German final GDP q/q came in line
  • End of month profit taking and positioning of new funds
  • Japan Hamada says BOJ must ease further if Q3 GDP fails to grow
  • USDJPY managed to claw back higher – US dollar found support should apply pressure on commodity currencies and Euro (unwinding safe haven trade)
  • VIX is trading much lower – Bunds selling off (see analysis below)

Risk Off

  • Concern about Chinese growth engine linger but looks to have dissipated
  • Alarms about financial crisis or lack of liquidity in the market place put deal making under threat (but this is not 2008)
  • De Beers “cuts diamond prices” on weak demand – luxury sector hard hit
  • BHP says full year profit slumps 52%
  • Devaluation spreads to Pakistan Rupee
  • All negative vibe priced in now but margin calls and dead cat bounce is still in the cards
Dead cat bounce, potential end of month short covering, profit taking, positioning of new month, fund flows – watch out as the VIX remains high-though there is certain alleviation of safe haven trade

Extra Stimulus has yet to kick in but wary of the build up to Santa rally

Multi Time Frame Analysis

USD index

Daily

4 hour

Sell-off in the equity market and the dollar looks to have finally abated. However, we are not ruling out a dead cat bounce of a potential wave 4 out of 5 – meaning more downside to come as we approach September. Daily chart show a potential fractal – thus not ruling out a bounce in the dollar index followed by a retest of previous low or creating new low. This could well fit in with an expectation of a rate hike in September or some sort of disappointment of any hike. The odds are favouring a strong dollar in this short term bounce.

German Bund

Daily

4 hour

As per last week analysis – Bunds made a blow off top and close negatively – allowing us to position for the downside move. We added DAX on the 4 hour chart to confirm the potential turnaround and any retest of the breakout line is another opportunity to short. A close today below the 20 dma confirms a bearish view that Bunds could pullback further.

Eur/Usd

Daily

4 hour

Analysing is all about increasing the odds of winning in your trades and as in the case of Euro spiking to 1.17 before a blow off top is not something everyone anticipated – except those shorts who are rushing for an exit. Point here is that there are too many shorts and it is an overcrowded trade – safe haven play has also beset Euro as the place to be. Is this done yet? Well we think a pullback here is healthy but the consensus remains that there are more squeezing to do and one should not be surprise to see a 1.18 to 1.20 euro back in play. As for equities, we remain steadfast this correction is not over yet.

German Dax

Daily

4 hour

Dax registered a low of 9340 – confirming the end of the QE induced trade – bringing a lot of wealth managers into question – especially those banks that were busy pushing out brochure that one should invest in Europe as they are QE induced. They have a point though but investors often lack the knowledge and tend to suffer the most. Dax shall undergo a bounce – may even go higher than what we envisage but the damage done means there could be more pain ahead first before a Santa rally.

Gold

Daily

4 hour

Despite further selloff in equities and a weaker dollar index, gold failed to break above 1171 and that means bulls gave up which ends the period of short covering. As long as 1171 holds, we see a pullback in Gold – similar fate as the EUR/USD as both of them play a safe haven role. Pullback is healthy as we have not seen any impulsive selling. Instead, this looks like very co-ordinated steps for a healthy market to correct before potentially heading higher. We cannot rule out a retest of previous low or even a break lower than 1080.

Silver

Daily

4 hour

Is this the end of the dead cat bounce that we envisaged after the double bottom? It could well be since silver made an impressive attempt higher but find resistance at 15.66 levels and since then broke lower due to the nature of an industrial metals. With poor outlook on the global economy, price action suffered a volatile recovery then sell off. Daily RSI divergence gave a clear sell signal and the current outlook has a potential view of much lower prices to come.

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