Market Crash Imminent?

I'll start off blunt, there is a very high chance that we may see a 15-20% correction or more from current levels. There are many reasons for this but the way they all line up is just uncanny.

Dow Futures. Thomson Reuters

Almost identical pattern suggest a 15-20% correction, even the angled double top on the right shoulder is the same.

SPX today (green) vs SPX AUG 2011 (red). Bloomberg / Zerohedge

This chart shows how on and intraday basis the fiscal cliff has tracked the debt ceiling almost perfectly and lines up to the fact that we could see a 15% fall in next 8 trading days.

VIX Today (green) vs VIX Aug2011 (Red). Bloomberg/Zerohedge

The VIX, or Fear index is also tracking the previous VIX almost perfectly. And this also suggest the Stock Markets are going to fall. 

On the bright side, this correction could provide some great value around the world, especially in Europe, where the FTSE could down from nearly 6000 today to 5200 or lower, the DAX could once again Drop lower than the FTSE as it did in 2011.

Dow (RED) VIX (Blue). Thomson Reuters.

the relationship between these is clear and the VIX is pricing a much lower Dow.

All in all, the next 7-10 trading days could be extremely volatile but could provide real value.

Spanish Yield Analysis

Spanish Yield have been very strong in recent days and weeks and have touched a long term trendline which looks like it will be a decider in direction for the next few months.

Currently they have a coupon of 5.85% on the 10Y duration, but currently bid at 104.08, leaving a yield of 5.27%

With little development coming from Eurozone and none scheduled for a few weeks with major impact the fiscal cliff is the most likely risk mover. That being said no-one knows how that is going to end so its best not to speculate on that but technicals stand tough.

Spanish Yields, Daily 10Y. Thomson Reuters

From this a move to 5.8% is clearly possible if risk was to waver soon. but the main point of this is due to the correlation with many risk assets. Such as the IBEX which when inverted is very correlated.

IBEX, Orange (LHS) Inverted ES10Y, Red (RHS). Thomson Reuters

Furthermore there is another strong correlation to EURUSD rate when compared with the Spain  - German 10Y spread. A reasonable move from 5.3% to 5.8% would correlate to a move to 1.2820 EURUSD rate.

USDEUR, White. ESDE spread Blue, (RHS). Thomson Reuters

So here it goes, the Fiscal cliff is very important and the movement of Spanish yields can be very important for a variety of makets and as such are crucial to pay attention to.

Market Update

To start with, as expected USDSEK reached its target fairly fast reacting to the demand zone that had been in place for many weeks. It was quite choppy intraday but finally broke out into late Europe, most probably ending the day with a bullish engulfing, suggesting further gains.

USDSEK. Thomson Reuters

From ZeroHedge:

While Italian and Spanish sovereign bonds weakened notably today, the equity markets across Europe decided that the limit-down move in US futures was a storm in a teacup and ignored it. EURUSD has broken its inexorable 10-day linear ramp leaving the USD almost perfectly unchanged on the week. Italy and Spain equity indices are up 2.6% and 3% respectively while Italian and Spanish bond spreads are around 16bps tighter. Rather like what we witnessed this week in the US, Europe's VIX exploded today (biggest jump since July) as protection was sought in a hurry but the underlying indices did not drop as (just like over here) they are simply too illiquid to cope with the kind of selling that is desired. This leads to the game-theoretical first-mover dilemma - and the preference was to hedge via bonds, FX, and options as Europe closed - because think of the optics if Spanish stocks were to fall?

 Today's US session, while not over has been relatively uninteresting. Thankfully the Triple-Witching will mean some moves into the close which should be good. In FX today there were some clear losers, such as the NZD down 1.2%, GBP down 0.7% but the JPY was up 0.25% against the USD.

In europe Spain was a big winner with the IBEX up over 3% closely following Spainish yields upwards.

IBEX Orange (RHS) Invs ES10y blue (LHS) . Thomson Reuters

USDSEK Analysis

USDSEK has been very strong in the past few days but for many reasons I am Starting to get long the pair. The markets have been very unusual today with E-Mini's down 3.5% during asia to recover to only down 1.5%

E-mini S&P500 Futures, down 3.25% in 25 minutes. Thomson Reuters.

Normally stocks and USDSEK have an inverse relationship due to the Dollar and risk effect of SEK. These kind of flash crashes don't happen for no reason and I feel that we are due a major 7-10% correction in equities which would be very supportive of USDSEK.

USDSEK 4 Hour. Thomson Reuters

As shown in the chart above, USDSEK is in an area which has previoulsly acted as strong support and I fully expect it to do the same here. Combined with Stochastics showing short term oversoldness and the fundamental outlook of Equities I've Longed at 5.5050 with a near term target of 5.54

I would hope that this trade will take no more than 2-3 days at worse as 5.54 isn't far.

Trade Update

Well I am not surprised with this move but the speed of it is amazing, the VIX has rocketed up today, and my longs from yesterday are doing amazing, well did amazing as I covered at 16.55 for +5.4%, amazing for one day.

Previous VIX futures. Thomson Reuters

Here is the chart posted from yesterday (18th) showing where I bought and where I was targeting.

VIX futures. Thomson Reuters

Here is the updated chart of VIX futures after the impressive day move. While as I was sure it would rise, I expected it to do so on Friday. 

Well there you go. Still holding DAX and BUND shorts and am reasonably confident, well as much as one can be before the end of the world!

Market Update

A fairly light news day with little more than CPI data from the UK coming out. It came in at 2.7% vs. 2.6% virtually indifferent, however the £ is up 50 points today, that being said it was most likely down to USD flows, being shown by the relative unchanged day in EURGBP.

Firstly, I would like to update a GBPNZD trade I posted last week to wit, I longed at 1.91 and is currently trading at 1.9290. A simple and easy trade with probable higher moves likely.

GBPNZD. Thomson Reuters.

I've closed this trade for a profit of +200 points or about +1%. The reaction from the trendline was strong and this trade took only 3 strong up days to complete.

In other markets, European Equities had a strong day with the DAX pushing much higher into 5 year highs hurting my shorts. Spanish Yields dropped from 5.53% to 5.32% by the close.

Elsewhere, early morning news from Australia weakened AUD all day long meaning EUR/AUD and GBP/AUD where well supported.

E-mini's have also had a great day up +0.92% with it breaking through one resistance level, and pushing the 1450 psych level. However beware the triple witching event on friday could add some significant and because of this I'm looking at the VIX for my next trade.

Longing VIX futures at 15.70 with any upward move in mind, it may be the case that I close during friday regardless but that is undecided as of now.

VIX Futures. Thomson Reuters

DAX Market Analysis

Here are some key factors regarding the DAX and it's likely short/medium term movement.

To start with, we'll take a look at the DAX vs. German Bonds (Bund future inverted), these two assets are very highly correlated intra-day and in recent weeks they have diverged, this is key as it means there is a high chance that they will recouple. this being said the bunds "price in" a 7000 DAX or does the DAX "price in" ~1.6% 10y Yield.

White - FDAX Purple - FBund. Thomson Reuters.

For this reason it is reasonable to short the DAX, currently at 7610.00 and at the same time sell the Bunds at 144.85, These will likely converge in the area of 7300 DAX and 143 Bunds. This trade if weighted correctly will profit when the two lines get closer together and lose when they get further away. However as they're are very wide already it is a good risk:reward trade.

Next looking at the Daily charts for the DAX it is clear that it has overextended to the upside as shown by Moving averages and Stochastics.

All in all, daily charts call for approximately 5-7% pullback which is very simple considering in August 2011 it fell 25% in 8 days.

Daily FDAX. Thomson Reuters.

The DAX is up over 28% YTD compared with much more modest gains from the US, UK and other Major nations - S&P is up 13% and Dow Jones is up only 9%. This is clearly overvalued when you consider the situation in Europe and the risk that faces Germany.

When considering all the upcoming problems Europe has to face it is incredible that the Volatilty index is extremely low, the equivalent of the VIX for DAX is charted here and it doesn't normally stay this low for long. Furthermore nearly every move upwards is associated with DAX downside.

DAX 1 month Volatility. Thomson Reuters

Last chart for German Fundamentals is comparing PMI's, IFO and GDP. While the next GDP report doesn't get released for a while it is seemingly going to be quite a bad release if the other two are to believed. With the GDP likely to fall 0.5% to 1.5% This is the last point and I think while it won't be a reason short term it shows the weakness Germany is facing and it is suseptible to all the problems in the PIIGS.

GDP White (LHS) IFO darker green (LHS), PMI Light green. Thomson Reuters.

Due to this I'm Short DAX at 7610 looking for a move to around 7300 which is where a gap is located roughly along with the 50% retracement of the past few weeks move.

Short Bund trade is just a hedge from 144.85 to protect against DAX position.

ES update

E-Mini S&P500 have fallen nearly 0.8% today after comments from Boehner, Reid and Pelosi. The daily candle from yesterday that clearly showed bearish technicals came true as said Here.

ES Daily. Thomson Reuters

Lets just hope there is no VWAP Bull$hit into the close...

Because the market looks like it could reverse slightly (short cover) We have closed 100% of shorts from 1430.50 at 1417.50


EDIT : As expected ES ramped up towards VWAP into the close and rose nearly 0.5% on Fiscal cliff talks. However after market trading ES has retraced a lot of the move to end the day at ~1419 +- 0.5

UK credit rating put on negative watch

* 13 December 2012 17:18:05 RTRS - S&P REVISES UNITED KINGDOM SOVEREIGN CREDIT OUTLOOK DOWN TO NEGATIVE FROM STABLE; CURRENT RATING IS AAA

GBP tick. Thomson Reuters.

GBP Instantly dropped on the news by nearly 40 pips. Now all 3 major Rating agencies have outlook as negative for the UK and Bank Of England.

However, argubaly one of the most controversial rating agencies, Egan Jones, Downgraded the UK earlier this year.

http://uk.reuters.com/article/2012/06/04/uk-unitedkingdom-rating-eganjones-idUKBRE8530ZR20120604

Egan Jones has been about 6 months ahead of action from other Ratings agencies in the past so expect a formal Downgrade in the coming weeks from either Moody's, Fitch or S&P.

Unfortunately this is not great for GBPNZD long but AUDUSD is doing well.

EDIT closed AUDUSD at 1.0520 for +55

GBPNZD

GBPNZD looks ripe for a Reversal from these levels, not only is there strong trendline support but it seems that Credit spreads aren't responding in the same way and a divergence there is occuring. NZD has been going really strong recently and is due for a short period of short covering.

GBPNZD. Thomson Reuters.

Here is GBP-NZD 10Y spread overlayed with GBPNZD exchange rate, they have clearly diverged over the past few days and due for a recoupling.

GBPNZD (Orange/RHS) vs. GBP-NZD 10Y spread (white/LHS)

We recommend Long at 1.91 the levels we see are a move toward 1.9250/55 ( previous swing low which will act as resistance) or a stop on close below 1.8930/50 (previous swing low).

European Market Update

A relatively uninteresting range day across most of Europe with a small sell-off in the early trade before Buying the dip after decent US data.

• Unemployment claims - Actual 343K // Estimate 369K
• Retail Sales - Actual 0.3% // Estimate 0.5%
• SNB - Holding 1.20 Peg saying "it is prepared to buy unlimited quantities of foreign currency to enforce this".

Market Performance 

Forex:

EURUSD - 1.3097 +0.18%

AUDUSD - 1.0550 -0.01%

GBPUSD - 1.6136 -0.06%

Credit:

US 10Y - 1.74% +4 bps

DE 10Y - 1.365% +2.6 bps

GB 10Y - 1.977% +5.8 bps

ES 10Y - 5.4% +7 bps

IT10 Y - 4.63% +5 bps

Equity:

E-mini S&P500 - 1430.00 +0.2%

FDAX - 7603.50 +0.1%

FTSE futures 5936.50 -0.1%

Gold - $1699 -1.1%

Silver - $32.65 -3.35%

Here is an update of yesterday's chart, ES and AUD have yet to converge but it's getting close.

ES vs AUDUSD. Thomson Reuters

FTSEMIB (red/LHS) IBEX (orange/RHS). Thomson Reuters

Spanish and Italian stocks had a particularly good day with the FTSEMIB up 0.85% 

Its up nearly 5.5% since Monday morning

Risk FX - E-Mini Spread

The following is an example of How I like to trade short term between two normally highly correlated assets. Here AUDUSD is overlayed with ES and towards the close of New York there was an obvious divergence where AUDUSD didn't fall nearly as much as ES.

As shown by other periods on this chart these two lines do commonly diverge but frequently converge during fundamental releases. This is what I take advantage of.

As mentioned in a previous article, already short AUDUSD from 1.0575 and I expect the two lines to converge, if not fully at least a lot.

Here is where the form of hedging comes in to play, Once short AUDUSD you can open a long ES as a hedge. This will mean your profit and loss will come from the spread between the lines and it's very likely that the spread will tighten.

AUDUSD (red) vs E-mini's (yellow). Thomson Reuters.

In this case I have not longed ES as I am seeing some downside potential especially because of this.

E-Mini (ES) Daily reversal

ES has come hard of the intra-day / post FOMC high and is now negative for the day. As the most important risk barometer, a reversal in ES will lead to lower 10Y yields, Lower AUDUSD rate etc.

Using Candlesticks, if price was to close now (anywhere sub 1431.00) then the Technical pattern "An evening star" where a Daily doji is at the top of a swing high move signalling the top.

Furthermore, ES has pushed back below a daily trendline and this suggests a failed attempt at a move higher.

E-Mini S&P500 Futures, Thomson Retuers

Major Support Levels:

1424 - Last swing high
1415 - Rising trendline
1401 - 38% Fib and Pysch level.

Upside resistance levels:

1438.50/75 - Intra-day highs
1450 - Pysch level
1465 - Major Supply zone.

For this reason we Recommend Shorting at this point, 1430.50, Eventually looking for a move towards 1401 but 1415 is a good start

Post FOMC market Update

Following the Frankly unsurprising FOMC statement, Risk across all markets has decided to pick up. However it seems slightly unsustainable short term.

With Regard to earlier AUD analysis, A break of 1.0625 and close above it will be my sign for a breakout, until then I'm looking for a fakeout move and reversion to <1.05. With this in mind I suggest getting on the short side for the potential of a move down, 1.0575 seems decent value with 60 point stop and 75 point target.

Top left, Clockwise, E-mini, Us 10Y yield, EURUSD, Gold. Thomson Reuters.

Bonus chart -

E-mini and Us 5y Correlation chart, Thomson Reuters

The noticeable spike in correlation was clear after the FOMC statement, Suggesting that algorithms are ruling the market at present. This isn't just in E-mini's and Treasuries but across all markets with USD responding accordingly. 

FOMC Statement

FOMC -


Full Statement -
http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm

• 12 December 2012 17:30:00 RTRS - FED SAYS WILL BUY LONGER-TERM TREASURY SECURITIES AT INITIAL PACE OF $45 BLN A MONTH AFTER ITS 'OPERATION TWIST' ENDS AT END OF YEAR
• 12 December 2012 17:30:01 RTRS - FED SAYS WILL CONTINUE ASSET PURCHASES IF LABOR MARKET OUTLOOK DOES NOT IMPROVE SUBSTANTIALLY
• 12 December 2012 17:30:01 RTRS - FED-TO KEEP FED FUNDS 0-0.25 PCT AS LONG AS JOBLESS RATE ABOVE 6.5 PCT, 1-2 YEAR PROJECTED INFLATION NO MORE THAN 2.5 PCT, LONGER-TERM INFLATION EXPECTATIONS WELL ANCHORED

EUR up
ES up 
USDJPY down
Gold up.

EDIT

EUR Retraced
ES retraced 
USDJPY retraced
Gold Crazy.

E-Mini S&P500, Thomson Reuters

US 10Y Yield, Thomson Reuters.

XAU - Gold, Thomson Reuters

AUDUSD breakout?

AUD/USD on the Edge of a Large breakout, FOMC in 30 minutes should provide some direction. Daily ATR is extremely low and Rate of Change is very low and is due a test of the standard deviation bands in the near term.

Special note is the Vertical line where trendlines meet is Fiscal Cliff deadline day. As a Relatively High yielding Currency, it is very prone to risk off.