Reading the Tea Leaves

The new Administration may have its hands full with a total lack of bipartisanship, the new good bank bad bank policy, and a total lack of confidence, evident by the record money on the sidelines and violent selling, showing little signs of stabilization. We expect investors to stay defensive, but when money starts being committed we anticipate some coming into commodities. Being that the infrastructure plan should support in addition to the coming inflation. Furthermore, we expect emerging markets to show more resiliency than most.

The US Commerce Department said that real GDP was down an annual rate of 3.8% in the Q4, the worst quarter in 26 years, but not as dreadful as expected. Equities suffered their worst January in history. This to me shows a total lack of confidence in any of the government programs that are supposed to help stabilize the economy. The Dow finished 77 points lower at 8091. The S&P gave up 6 points to 826. The NASDAQ was flat at 1426. On a breach of 7850 in the Dow look for a test of the lows and for the S&P a trade below 790 would likely mean the same. As January goes, so does the year. That may in fact be true but looking at the statistics this is a much more accurate predictor when January is higher; on weaker January history is not as compelling; about 50/50.
The FOMC concluded its meeting and kept the federal funds rate unchanged, as expected. They expect “exceptionally low levels of the federal funds rate for some time,” noting that since they last met, “the economy has weakened further.” What was disappointing though is they didn’t talk about an inflation target or how they intended to get the rates lower on longer term debt. In an effort to encourage the markets, the Fed said that it will “employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.” Easier said than done. March 30-yr bonds gave up just short of 3 basis points missing our objective by 1 tick at the low. Last week’s low at 126’09 should support, but if we see support give way next stop is 123’16. Resistance comes in at 129’28. We would recommend the sidelines. The March 10-yr note lost 1’07 ticks last week closing below the 50 day moving average for the first time since mid-November. The 50 day moving average should now become resistance at 124’08 with support at 121’14. We advised clients to book a profit on the march Euro-dollar puts and are now recommending June 99.00 puts. Additionally, we are advising clients to get short March10′ Euro-dollars.
The RBNZ reduced its interest rate from 5.0% to a record low 3.5% last week. Perhaps more than the market was anticipating because on the week prices were off 215 ticks making a new contract low. The last 3 week prices have come off 13.5%. Any one taking our long recommendation should have gotten stopped out at a loss between $750-1,000 per contract. We will shop for another long entry once a low looks like it has been established.
The March Aussie dropped 205 ticks on expectations that the RBA will cut the interest rate 100 basis points to 3.25%, when it meets on Tuesday, the lowest levels since the mid 60’s. Over the last 4 weeks prices have come off 12% and it doesn’t appear support comes in for another 3-5%. We have recently suggested bullish option plays for March and if in you are down; we would not add to this position but will stay in at least this week to see how the market reacts to the RBA decision. Ultimately once a low is established we expect to see a trade up to 70 but we are still working on the timing.
The March Swissie has lost ground for the last 5 weeks giving up another 68 ticks last week trading at a 7 week low. We see the next support at .8525 with resistance at .8775. We currently have no exposure and being the trend is down we should see prices continue south.
The March Euro tried to rally last week but failed closing 184 ticks lower and now has been lower for the last 5 weeks. Now that prices are below the previous week’s low we could see a trade down to 125.50. Resistance comes in at 130.50. The trend remains down and unless Trichet can put a remarkable spin on things at the ECB meeting, we would continue to sell rallies. The ECB is expected to hold but we expect a cut by 25 points, currently rates are 2.0%.
The BOE meets on Thursday as well and is expected to cut rates 50 basis points from 1.50%. All 5 sessions last week yielded higher pricing in the cable which allowed us to trade out of our 1.50 calls for clients at a 36% net profit. We currently have no exposure but would expect a setback after the recent 7% advance. Resistance is at 1.4500 with support at the 9 day moving average at 1.4085 followed by 1.3900.
The Loonie gained 19 ticks last week though 180 ticks off its weekly high. Being that we expect a setback in metals and not a whole lot from energies we will likely see a pullback to .7800/.7900 this week. On the upside, resistance should come in at .8200 followed by .8315.
The March Japanese yen lost 145 ticks last week and looking at the weekly chart had an inside week. That alone should forecast a down week but investigating further we see an ascending triangle and as we start the week it appears we are breaking out to the upside. Just under 111.00 the yen should find support with first resistance at 1.1290 followed by 1.1380. If we see a sharp contraction in equities we could see a new contract high this week. We should have some suggestions on some bullish March option plays this week.
The dollar index only gained 20 ticks last week, although the trade buoyed prices from lower levels as we closed almost 2 ½ cents off its weekly low. This was the 5th consecutive positive week as momentum has shifted hands from the bears to the bulls. The 100 day moving average at 84.05 should support any pullback, on a trade above resistance at 87.25 we could see an additional 100-200 points. Prices will most likely rally early in the week, but depending on the BOE, ECB and Non-farm payrolls Thursday and Friday could reverse or heighten that move.
April gold jumped up $28.40 to $928.40, the highest close since early August, with ongoing support from low interest rates and poor economic news. Over the last 2 weeks we have seen an advance of 11%. Prices have remained in a $75-$100 trading channel since Halloween and we’re approaching the upper end of that channel so the resiliency of gold may be tested this week. The last 4 occasions we hit the upper end of the channel, prices have backed off approximately $30. The trend remains up and if the environment remains the same we would except to see a trade above $1000 in coming weeks. The Federal Reserve statement suggested that the Fed is willing to print money. The overall sentiment is inflation is a forgone conclusion and not a question of if but when. The flight to quality/safe haven buying should also lend support. Trade idea; we still like April and June $100 call spreads in addition to building a position scaling into longs in June. We have many clients that are waiting for a pullback but in the meantime are on the sidelines with no exposure missing a sizeable move higher. One must use $20-40 setbacks to get long because a $100 correction may not come. Seasonal indicators point towards a decrease in prices for gold in the month of February but could this year be different? We see resistance at 930 followed by 948 in April with support at 88 followed by the 200 day moving average at 862.
March silver gained 62 cents last week trading as high as $12.66, the highest level since the 1st of October. Much like gold we are approaching the top of the $1.50 trading we have been in since mid- November. We hit our target in the futures at $12.50 that we forecasted some 12 weeks ago. Read our HI-HO silver report written in November where we forecasted this level before the Super bowl when prices were trading under $9/ounce. We advised clients to lighten up on the December $15/20 call spreads at 100% profit and hold onto the remaining positions looking for higher prices to come. The logic is that we could gain exposure on a pullback but we didn’t want to leave the position because we feel it is unlikely that we could get that entry price again. This is an example of disciplined money management and what we feel traders will need to do in 09′ to be successful. Currently we cannot rule out a $1-1.50 pullback at any time but as long as March stays above $10 we favor long exposure. Recent trade recommendations include building a long futures position in May in addition to buying July $3 bull call spreads; contact us for exact pricing. Next resistance in March is just above $13 with support coming in at the 20 day moving average at $11.40.
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One Response to Reading the Tea Leaves

  1. Lori Bembanaste February 3, 2009 at 1:34 pm #

    Great Insight, look forward to next week.