S&P500 - In the Mouth of the Dragon

The S&P500 made a small but important move today, closing up barely two points for the day. The broad market index advanced as high as 1145 but gave up most of its gains before the closing bell. This is hardly surprising. The S&P is right in the middle of a strong resistance zone or, as I like to call it, the mouth of the dragon.

Without a question, selling pressure will be present at this level. First, there are those who bought just around the January highs and are now at break-even and just can't wait to get out and end their pain. And then, there are those who pledged to take profit at 1150 but didn't and are now getting a second chance. Lastly, there are still many bears out there. For them, this is a great time to short the market for one simple reason - they can quantify risk (i.e. they know where to set a stop and have a pretty good idea of potential reward).

We can also expect buying to be tepid at best. After climbing a "wall of worry", the market will need some encouraging data/news to break through the 1150 ceiling. In the absence of positive data or, worse, in the event of bad economic data, we can expect with a high degree of certainty that the stock market will succumb to reality and pull back.

There are, however, a few encouraging signs. First, the Nasdaq Composite Index has already closed above its January high. Technology is a favorite sector as many analyst predict it will lead the recovery. In addition, the DJ Transportation Index is also at its January high. As for the S&P500, despite its end of day retreat, it was able to pierce through the 1140 level which is the lower which is the lower boundary of the resistance zone (see the two red lines in the chart below).

We must also pay attention to the our fear gauges - the yen and the VIX, both of which declined today. The yen actually did not regain any strength, even after the stock market closed. This is a strong indication that fear has abated to some degree.

It is impossible to guess what will happen next. The chance of a pull back in stocks is high. Depending on its severity, such a pull back will cause the dollar and yen to rise. A strong break to the upside might also cause the dollar to rise, especially against the euro and GBP, and the yen will slide. The most critical reports this week, which are likely to impact the markets direction, are the unemployment report on Thursday and retail on Friday.

The Real Cost of Education

An old adage says that education will only cost you once but ignorance will cost you over and over again. Nowhere is this more true than in the financial markets, where ignorance will certainly destroy your account. Like so many others, I was caught off-guard by the crash of 2008. But instead of burying my head in the sand, I decided to learn as much as I could about trading and the financial markets. I began by amassing a mountain of books (all, I later found out, trading "classics") and reading them with absolute attention. I was determined to grow my knowledge, and I did.

But reading books did not satisfy me. I am a skeptical person by nature so I didn't know which author I could trust. In addition, the more I read, the more questions I wanted to ask - but you can't ask a book can you? Then one day, I met an old friend for lunch. We talked about trading, and the markets and I told him about my search for practical trading knowledge. He then told me about a trading school he heard about - a place that teaches you to trade hands-on, taking real-time trades in class. Immediately I was intrigued. When I got home, I looked it up. It was the first time I had heard about the Online Trading Academy (OTA).
After spending a few minutes on their site I made an appointment with one of their education consultants. I was temped to sign up right then and there but, as I already mentioned, I am a skeptic. So I took a couple of days to think it over and realized I was either going to spend my tuition on education, or give it away to the market with no return on my investment. I went back and signed up.

Once in class, I quickly realized I made the right decision. Just being around other folks who shared my goals was priceless. You can learn so much from other people's questions, their struggles, their mistakes and successes. One of the crucial factors in my decision to sign up was OTA's lifetime retake policy which allows you to retake a class, for no extra charge, as many times as you like, which means you can take the same class with different instructors. I knew this was an important feature and I was proven right. I took full advantage of the retake policy and learned something new each time I retook the class. The different instructors I came across had distinct trading styles and that helped me formulate my own personal style that suited me and my personality best. The staff at the OTA locations I attended was great so it was always a pleasure to go back. Retaking classes helped me internalize the most basic but most important concepts of risk management and discipline.

Another added benefit of attending OTA is their commitment to their students' success.On more than one occasion, I was able to contact one of my instructors for additional information. Just recently, I needed to clarify something I didn't quite understand and I contacted one of my instructors, Brandon Wendell. Within hours, he responded back to me with an answer. It's a good feeling to know you have a trader of his caliber in your corner.

Sam Seiden, OTA's Director of Online Education, can often be heard saying that trading is transfer of accounts from those who don't know to those who do. If you have any experience in trading, you know that's so true. So, on which side would you rather be?

For some free (but valuable) stuff from the OTA check out: Lessons from the Pros

A Market Climbs a Wall of Worry

 -----------------Weekly Summary------------------
1. S&P to retest 1150 - expected to consolidated sideways from 1150 or pullback to the 50 day MA.
2. USD - expect a pullback to 79.55-78.62 on easing concerns over Greece and a milder than expected NFP report.
3. Yen - expect to see continued weakness, especially against the Aussie and Canadian dollars.
3. Euro - may see a limited move to the up side but expected to be capped at 1.3850-1.4000
--------------------------------------------------

The S&P 500 finished the week up 34 points (3.1%) after rising six days in a row. Stocks climbed despite widespread concerns over Greece (and other "Club Med" nations), unemployment and dismal housing sales reports (new, existing, pending). But now what? well, we're about to find out.  The S&P has rallied straight into it's January resistance level. A confirmed break above 1150 is needed in order to see the S&P advances to new highs. But a retest of the 1150 level is more likely to end in sideways consolidation or a pullback to the 50 day MA.

DXY - USD Due for a Pullback
We repeatedly stated here that for the dollar, the worst case scenario is a lackluster, slow economic recovery with mild inflation. That is to say, a scenario in which risk levels are contained, but so are rate hike expectations. Last Friday's NFP number, although better than expected, was still negative. It was exactly the kind of "less worse" reading that is negative for the USD - enough to dissipate some fear, but not strong enough to invoke serious thought about interest rate increases.
Technically, the dollars bull run that started late in 2009 seems ready for a pullback. We should expect a pullback to at least 79.55 (10 day EMA) or 78.62 (38.2% retracement). A record number of short positions against the euro and GBP created the perfect set up for a short squeeze in either or both currencies. Any positive news coming out of either the UK, the EU or both, should prove negative for the US dollar, at least in the short term.

 

Japanese Yen

As usual, the biggest loser in a "risk on" environment is the Yen. The Japanese currency has several good fundamental reasons to weaken. You can check out Marc Chandler's blog for more information. If risk appetite prevails, and we see the market continuing to fade bad news, we can expect the yen to continue to weaken, especially against the loonie and Aussie.

Euro - licking the wounds

The Euro may finally get a few days of rest to lick its wounds as tensions over Greece ease a bit. But look at the following headline: 

"Greek crisis deepens as S&P downgrades sovereign debt" 

Sounds familiar, right? But consider this: the story is dated January 14th 2009 - more than one year ago! so what is my point? the point is that sovereign debt issues cannot and will not be resolved over night. It took months for the Greek crisis to peak but it was already well in play by early 2009. We can only assume that Dubai, California, and more relevant to the euro, Spain, Portugal, Italy, and Ireland will continue to dominate the headlines with a fresh supply of debt crises. Sovereign debt problems in the EU have had a more severe affect on the single currency due to the political and financial complexity of the EU. Neither German nor French citizens want to see their tax euros used to bailout Greece - and this is causing extra pressure on Merkel and Sarkozy. However, they cannot leave Greece completely neglected as inaction will undoubtedly increase the risk of contagion. The point is, again, there is no simple solution and euro rallies will be subjected to selling pressure. We should expect to see any upward moves capped at 1.3850-1.4000 level.

Commitment of Traders (COT) Reports - 03/02/2010

New Commitment of Traders (COT) graphs. This is the March 5th report (data as of Tuesday, March 2nd). Graphs display net positions for Commercials, non-Commercials, and non-Reportable traders.


CLICK ON THE GRAPHS TO ENLARGE

S&P 500 (e-mini) COT Report
Not surprisingly (considering a six-day winning streak for stocks), the e-mini's net positions graph still looks bullish. The levels of Commercial net long positions have not been seen since March of 09. The elevated levels of net long positions have been sustained now for four weeks straight. A retest of 1150 on the S&P seems almost inevitable at this point.

US Dollar Index (DXY) COT Report 
Commercials' net long positions are still in extreme positive territory.  It's very interesting to note a positive correlation between the dollar and the S&P continues to develop. When you think about it, it makes sense: the Fed seems much closer to invoking its exit strategy sequence than either the ECB or the BOE. And while US recovery is still spotty at best, the EU and the UK are plagued with political and financial problems that put both in a disadvantageous position relative to the US.

Euro COT Report
Net short levels for the single currency are still at extreme levels, though slightly less so this week. Remember, by Monday, this information will already be week old - any positive news coming out of the EU will produce a nice short squeeze for the euro.

British Pound (GBP) COT Report
No other way to put - the pound is getting pounded. It even performed worse than the euro. how about that?
no wonder then, to see a record net short positions against the GBP. 

Australian Dollar (AUD) COT Report
RBA raised rates earlier this week. The move was largely anticipated and the Aussie showed little to no gains immediately following the RBA's announcement. However, the interest rate differential has increased which should get some would be carry traders drooling. It is highly likely that the slightest easing of sovereign debt concerns will send the Aussie higher, especially against the non yielding yen.

Canadian Dollar (CAD) COT Report
Without a doubt, the loonie has been one of the best performing currencies against the strong US dollar and Japanese yen.

Japanese Yen (JPY) COT Report    
Surprising spike in net long for commercials. Again, we have to take into account that this report reflects positions as of last Tuesday, i.e. before the successful Greek bond offering and better than expected US NFP report.

 

Greece - a Trial by Ordeal

Wikipedia describes trial by ordeal as:

"...a judicial practice by which the guilt or innocence of the accused is determined by subjecting them to a unpleasant, usually dangerous experience."

Practice of trial by ordeal was prevalent in medieval Europe and one common ordeal was Ordeal of Cold Water in which an accused was submerged and proven innocent if he or she sank. Again, from Wikipedia:

"Ordeal by water was later associated with the witch-hunts of the 16th and 17th centuries.....an accused who sank (and usually drowned) was considered innocent, while floating indicated witchcraft."

Following the recent developments in Europe concerning Greece, one cannot help getting a sense that Greece is being tried by "ordeal of cold water". Drowning in its own debt, Greece was left to sink or swim as Europe's "high clergy" (Germany, France) watched from the sidelines, pledging to save Greece, if it actually sank to the edge of financial death.

The last round of meetings between the Greek PM and his German and French counterparts yielded more of the same. A pledge to help if and when needed but no actual details or concrete commitments. Nonetheless, there seems to be a growing realization that the EU must step up if it wants to survive. Failure to help Greece would, no doubt, exacerbate the already severe financial conditions faced by Spain and Portugal expose them to lethal market speculations that will, in a self-fulfilling prophesy, increase their debt costs to painful levels. 

Wild Card Friday

The S&P 500 has been trading in a narrow, 10 point range (1116-1125) since Tuesday. For the most part, the stock market has treated both good and bad economic reports with the same indifference. But Friday promises to end the week with a crescendo: US non-farm payroll report. The results of the much anticipated report and its subsequent interpretation are anyone's guess. Wednesday ADP report showed a loss of about 20,000 jobs in February, definitely not a good number but in line with a declining trend of job cuts. The NFP, which is calculated differently than ADP's, is expected to be adversely impacted by February's snow storms.

The S&P's daily chart looks bullish and a retest of January's 1150 high seems closer than ever. Still, signs of risk aversion are apparent, most notably in a stronger yen.

There are 3 possible outcomes for tomorrow's NFP report:
1. Inline with expectations  -should be positive for the stock market but potentially damaging to the US dollar and yen.
2. Better than expected - should, obviously, be positive for the stock market and negative for the yen. A slightly better NFP number could prove negative for the dollar while a much better than expected could lift the dollar higher (recall Dec 4 2008 NFP report).
3. Worse than expected - a slightly worse than expected report is somewhat anticipated and is already factored in. So if the number is only slightly worst than expected, the market might breath a sigh of relief and charge forward. In this case both the yen and the US dollar might pair gains. Having said that, a MUCH worse than expected will surely be negative for the stock market and support stronger US dollar and yen.

Another Friday wild card, with a potential for an upside surprise, is the Papandreou/Merkel meeting. The German Chancellor was quick to point out the meeting was largely symbolic in nature and not intended to discuss a possible bailout for Greece. Still, we should expected them to come out with some reassuring statements regarding the strength of the EU and its resolve to stick together in tough times.

In short, it's almost impossible to predict what will happen tomorrow. One thing for sure, it will not be boring!

S&P Closes (slightly) Up - but Yen Says, Fear is Here

The S&P started the week with a strong move up, closing above its 50 day MA for the first time in over a month. Tuesday morning saw a strong opening for stocks but weakness emerged toward the closing. As we mentioned in the weekly review on Saturday, yen strength is a red flag. Hopefully, the S&P will move higher and the red flag will turn out to be nothing more than a red herring but for now we must to stay vigilant The yen's strength today was evident not only against the battered euro and British pound but also against the strong USD, the loonie, and the Aussie dollar.

It's too early to say if the relatively strong yen is meaningful but we have to remember that in the past, it's been a bad omen for the markets. You might recall the days preceding the Dubai debt crisis in late Nov. 2009. In the days BEFORE Dubai hit the headlines, the yen soared with no apparent reason. Perhaps traders are betting on a weak ADP report on Wednesday morning. That would not be a complete surprise as recent news suggests. Or perhaps, more bad news from the EU or the UK is bubbling to the surface. And then again, it could be just a temporary state of nervousness as the S&P approaches a major resistance. Whatever the case maybe, we must not ignore the sign. Keep you stops tight!