Tuesday, September 25, 2012
Consolidation Continues, Next Breakout Higher Awaits
The 1444-1445 level on the ES did result in a buying opportunity last week, but the gains were limited as the ES failed to break higher and out of its current consolidation range (about 1445-1460 give or take a couple points). Market is susceptible to a lower low from here, so longs have to be a little careful in the short-run. If ES can dip down to the 1335-1338 area in the coming days, that would provide a lower-risk long entry. It remains a very slow market with limited opportunities. The key is patience. It is important to remind ourselves to await good setups and not force trades. I continue to favor buying dips into support in anticipation of a break-out move higher.
Tuesday, September 18, 2012
Levels to Watch in Terms of Buying a Dip
The S&P 500 is showing a classic bull flag pattern right now as we consolidate here between 1456 and 1459 on the S&P Cash Index. There is support directly underneath (1450 on the ES Z December Contract for Futures) which makes this very tempting to buy if you are not long already. At the same time there is risk of taking heat on this trade if the bull flag pattern fails. Still a good long depending on how much heat you are willing to take.
Next support levels to watch on the ES (Z December Contract):
1448, 1444-1445, 1441-1442
These are all potential levels to buy (the dip), but if the ES manages to sell down to 1441-1442, that will be a very attractive level. Can't count on that though, we'll have to watch and see how this plays out.
The other option is that support holds at today's lows and the ES rallies up another leg from the current bull flag.
Next support levels to watch on the ES (Z December Contract):
1448, 1444-1445, 1441-1442
These are all potential levels to buy (the dip), but if the ES manages to sell down to 1441-1442, that will be a very attractive level. Can't count on that though, we'll have to watch and see how this plays out.
The other option is that support holds at today's lows and the ES rallies up another leg from the current bull flag.
Monday, September 17, 2012
What Latest Fed Intervention Means for the Market
The Fed's announcement last week is very aggressive. With a $40 billion/month open-ended MBS asset purchase program, Bernanke basically said that there is no cap on the amount of mortgage backed securities the Fed will buy. This comes at a time when many economic indicators have been positive (aside from employment) and the stock market is at multi-year highs.
Since there is not a definitive number in the Fed language, there is a certain amount of uncertainty in terms of the amount of stimulus this $40 billion/month represents. But if you listen to what Bernanke did say in his press conference you have to realize that the latest Fed action is extremely aggressive. I will quote Bernanke to emphasize this point.
The market has yet to digest this key point fully, but it will do so over time. What I mean is that the move up over the last two days is only the beginning. Yes, we can have retracements to the downside as the market moves higher, but this market is headed a lot higher.
We must also realize that the Fed will continue to reinvest its existing holdings through the continuation of "Operation Twist" which brings total asset purchases by the Fed to $85 billion/month. And we can't forget that the 0% interest rate policy was extended until at least mid 2015.
In my opinion this is a buy every dip type of market until the fiscal cliff situation comes into play. There will be some up and down action as we approach the November elections and speculation is rampant whether or not the Democrats will maintain office. More confidence that Obama will be re-elected will put some downward pressure on markets, but the path of least resistance will remain to the upside. This will be the case until the Fiscal Cliff situation comes into play following the election. If Obama wins (and this is highly likely), the fear of not resolving the looming tax hike dilemma will be greater and so the downward pressure on the markets will also be greater. There will be a lengthy conflict on whether or not to go through with the scheduled tax hikes as we approach the end of the year. As this Fiscal Cliff debate takes place, the market should finally undergo a correction. So, November will likely be a good opportunity to test the short-side of the market. If the debate over the debt ceiling is anything like the one that took place in the summer of 2011, there will be a healthy move lower in price. Eventually I think Obama will have to delay tax hikes and the debt ceiling will have to be raised to make that possible. Following a would-be sell-off, this will be the time to buy back into the market.
Getting back to the present situation:
Market will likely consolidate and inch higher heading into the first week of October when we get the first Presidential debate between Romney and Obama (10/3/2012) and the next ECB announcement (10/4/2012) and then the US Employment report (10/5/2012).
Since there is not a definitive number in the Fed language, there is a certain amount of uncertainty in terms of the amount of stimulus this $40 billion/month represents. But if you listen to what Bernanke did say in his press conference you have to realize that the latest Fed action is extremely aggressive. I will quote Bernanke to emphasize this point.
"We are not going to be premature in removing policy accommodation. Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more decisively, we're not going to rush to tighten policy, we're going to give it time to make sure the recovery is well established."
-- Ben Bernanke Press Conference, 9/13/2012
So while he/the Fed did not come out and say when these asset purchases would end, it is safe to say they will continue for quite some time.The market has yet to digest this key point fully, but it will do so over time. What I mean is that the move up over the last two days is only the beginning. Yes, we can have retracements to the downside as the market moves higher, but this market is headed a lot higher.
We must also realize that the Fed will continue to reinvest its existing holdings through the continuation of "Operation Twist" which brings total asset purchases by the Fed to $85 billion/month. And we can't forget that the 0% interest rate policy was extended until at least mid 2015.
In my opinion this is a buy every dip type of market until the fiscal cliff situation comes into play. There will be some up and down action as we approach the November elections and speculation is rampant whether or not the Democrats will maintain office. More confidence that Obama will be re-elected will put some downward pressure on markets, but the path of least resistance will remain to the upside. This will be the case until the Fiscal Cliff situation comes into play following the election. If Obama wins (and this is highly likely), the fear of not resolving the looming tax hike dilemma will be greater and so the downward pressure on the markets will also be greater. There will be a lengthy conflict on whether or not to go through with the scheduled tax hikes as we approach the end of the year. As this Fiscal Cliff debate takes place, the market should finally undergo a correction. So, November will likely be a good opportunity to test the short-side of the market. If the debate over the debt ceiling is anything like the one that took place in the summer of 2011, there will be a healthy move lower in price. Eventually I think Obama will have to delay tax hikes and the debt ceiling will have to be raised to make that possible. Following a would-be sell-off, this will be the time to buy back into the market.
Getting back to the present situation:
Market will likely consolidate and inch higher heading into the first week of October when we get the first Presidential debate between Romney and Obama (10/3/2012) and the next ECB announcement (10/4/2012) and then the US Employment report (10/5/2012).
Thursday, September 13, 2012
Fed agrees to increase policy accommodation by purchasing additional mortgage-backed securities at $40 billion per month
Well, we got the additional easing that I didn't actually expect the Fed to announce. I guess the $1.8 Trillion fund managing Bill Gross was right. The Fed did offer more QE...
Market is reacting positively as expected by this kind of news. ES saw an initial gain of almost 12 points following the announcement. It since sold off 10 points providing a dip buying opportunity (in the event of a pro-QE announcement) like I mentioned in my previous post. Lets see how the market reacts to what Bernanke has to say at 2:15 EST. Watch it here.
An (open-ended) $40 billion / month agency mortgage-backed securities buying program by the Fed is significant and you have to favor buying the dips going forward. That being said, this comes on the heels of an already rallying market, one that has seen consistent gains since the start of June 2012. Be careful chasing this market. We could see a sell-the-news opportunity in the coming days. If that happens, consider it a gift, it is a buying opportunity.
To QE or Not to QE? That is Fed's Question
But my question is how much expectation is there that the Fed will announce more QE. There has been much speculation that the Fed will offer a plan to expand its balance sheet by offering additional easing measures today and more pundits seem to be chiming in with this opinion than in times past. While I am ready for the possibility that this may be the case, I do not think it is going to happen.
Yes the employment situation is stagnant, but is buying mortgage backed securities going to change that? Highly unlikely. Another way the Fed could ease, is to lend dollars to the ECB so that ECB could then fund their own easing measures. The US "easing" in this case would be in the assumption that those European lent dollars would eventually find their way back into the US economy. Sounds like a bad idea to me and is unlikely to be announced today. The main reason why the Fed won't offer more QE today though is because the market is at its highest levels since early 2008 and other economic indicators (aside from employment) have been refreshingly positive of late. More QE now would be acknowledgement by the Fed that there is little hope for the economy. There is no way that the time is now to offer additional QE. Keep those tools in the shed Bernanke.
But hey the Federal Reserve isn't asking my opinion and all I can do is speculate on what is going to come out of yesterday's minutes. I won't worry about whether I am right or wrong, I will just be ready to trade the Market reaction to whatever comes out of the Fed announcement and Bernanke's press conference.
We will see the first reaction today at 12:30 EST when the FOMC announcement will be released. The Fed will leave rates unchanged and will likely extend guidance beyond 2014 to keep rates exceptionally low. If there is a new asset purchase program, it will be detailed in the announcement. If this happens, the market will react with volatility and I would look to buy the first significant dip. If there is some form of QE announced we may not even get a significant dip. If you are of the belief that there will be additional QE, then perhaps you are already long going into the announcement. But you have to be cautious playing that game as the market is already bid up quite a bit ahead of that potential news. That is why my biggest question is how much is or isn't additional QE already priced into the market. The market reaction later today should provide answers.
At 2:15pm EST, Bernanke will give his press conference. Again, depending on what comes out of the announcement, the market will be reacting to Bernanke's statements here and we can expect volatility. Ultimately, if there is no new easing/asset purchase program by the Fed, I'll be looking for opportunities to get short and sell any rallies. If there is a new easing program, I'll be looking to buy any significant dips.
As much anticipation as there is ahead of the Fed announcement, I think the bigger issue remains in Europe and not whether the Fed will ease further. I believe that money printing will come from the ECB before it comes from the Fed and likewise, markets seem to react more to what Draghi has to say lately than what Bernanke has to say...
I will comment more following Bernanke's press conference which you can watch here.
Yes the employment situation is stagnant, but is buying mortgage backed securities going to change that? Highly unlikely. Another way the Fed could ease, is to lend dollars to the ECB so that ECB could then fund their own easing measures. The US "easing" in this case would be in the assumption that those European lent dollars would eventually find their way back into the US economy. Sounds like a bad idea to me and is unlikely to be announced today. The main reason why the Fed won't offer more QE today though is because the market is at its highest levels since early 2008 and other economic indicators (aside from employment) have been refreshingly positive of late. More QE now would be acknowledgement by the Fed that there is little hope for the economy. There is no way that the time is now to offer additional QE. Keep those tools in the shed Bernanke.
But hey the Federal Reserve isn't asking my opinion and all I can do is speculate on what is going to come out of yesterday's minutes. I won't worry about whether I am right or wrong, I will just be ready to trade the Market reaction to whatever comes out of the Fed announcement and Bernanke's press conference.
We will see the first reaction today at 12:30 EST when the FOMC announcement will be released. The Fed will leave rates unchanged and will likely extend guidance beyond 2014 to keep rates exceptionally low. If there is a new asset purchase program, it will be detailed in the announcement. If this happens, the market will react with volatility and I would look to buy the first significant dip. If there is some form of QE announced we may not even get a significant dip. If you are of the belief that there will be additional QE, then perhaps you are already long going into the announcement. But you have to be cautious playing that game as the market is already bid up quite a bit ahead of that potential news. That is why my biggest question is how much is or isn't additional QE already priced into the market. The market reaction later today should provide answers.
At 2:15pm EST, Bernanke will give his press conference. Again, depending on what comes out of the announcement, the market will be reacting to Bernanke's statements here and we can expect volatility. Ultimately, if there is no new easing/asset purchase program by the Fed, I'll be looking for opportunities to get short and sell any rallies. If there is a new easing program, I'll be looking to buy any significant dips.
As much anticipation as there is ahead of the Fed announcement, I think the bigger issue remains in Europe and not whether the Fed will ease further. I believe that money printing will come from the ECB before it comes from the Fed and likewise, markets seem to react more to what Draghi has to say lately than what Bernanke has to say...
I will comment more following Bernanke's press conference which you can watch here.
Friday, September 7, 2012
Strength Confirms as Market Breaks Above Consolidation with Conviction
The market broke out of its consolidation triangle, but the move was not rejected like I thought it might be. The action was based on genuine strength, based on a strong reaction to Draghi's monetary policy statement and to positive surprises on Jobless claims and ISM manufacturing data. The almost 30 point move up on the ES without any sign of selling pretty much confirms the breakout to the upside. Yes, price needs to hold up here and see a higher close to officially confirm the move, but I think it is safe to assume that will be the case. We will likely get some sell opportunities in September, but I'm not expecting as much of a downturn opportunity as I had previously. Following yesterday's move, I expect the markets have further upside ahead of them leading up to the FOMC meeting next Wednesday and Thursday.
Gold has jumped $30+ /ounce following the employment numbers suggesting the speculators are putting higher odds on the possibility the Fed will announce some sort of easing measures following next week's meeting. Its funny that the QE speculation never dies. It has been talked about all summer and though we never get it, the market continues its rise nonetheless. I don't believe we get more QE after next week's meeting either, but more on that later...
Bias toward buying the dips is back on
Gold has jumped $30+ /ounce following the employment numbers suggesting the speculators are putting higher odds on the possibility the Fed will announce some sort of easing measures following next week's meeting. Its funny that the QE speculation never dies. It has been talked about all summer and though we never get it, the market continues its rise nonetheless. I don't believe we get more QE after next week's meeting either, but more on that later...
Bias toward buying the dips is back on
Tuesday, September 4, 2012
Will Markets Sell in September?
My view remains that there will be a downturn in September though there is no confirmation yet in the chart patterns that this downturn has begun. I am not holding short positions yet, but as I buy dips I remain cautious. Eventually the consolidation support will break down and if you expect that a bounce will let you escape a losing position unscathed, you will eventually find yourself panicking and taking a bigger loss than anticipated. So that just means that if you are continuing to buy support in this consolidation range, just know your exit strategy and stick to it.
About Jackson Hole
Bernanke didn't say too much new last Friday in his statement on Monetary Policy, but he did say just enough to maintain the consensus that the Fed can and will act when necessary. Like I said in my last post, this thought process keeps a bid under the markets. Economic conditions aren't terrible, economic reports have been more positive than negative and we all know that if things do take a turn for the worse, the Fed has repeatedly committed to using the "tools in its toolkit" to provide liquidity to the markets. This promotes a consensus that the markets are safe. This meddling with natural market behavior, unfortunately, will make markets less safe in the longer term. In the present though, the Bernanke Put continues to maintain support under the markets. At some point though (as a trader you must be aware of it and prepare yourself), the odor of what may be a cleverly concealed bluff by the Fed, will reveal its pungent smell enough to force traders away from the markets and into fresher smelling pastures. When that happens, you don't want to be long. For now though, I can't argue with playing the "Bernanke Put."
Today we have tested the lower consolidation range support again (mid 1390s on the ES). This is a safe long entry as now we await the Draghi/ECB statement on Monetary Policy that will be released Thursday, September 6th.
Lets see which way the market breaks. One scenario I am considering is shown in the E-mini S&P 500 chart below (ES U September Contract). Watch for a fake-out move above the current consolidation triangle which will be followed by a small correction in the markets.
About Jackson Hole
Bernanke didn't say too much new last Friday in his statement on Monetary Policy, but he did say just enough to maintain the consensus that the Fed can and will act when necessary. Like I said in my last post, this thought process keeps a bid under the markets. Economic conditions aren't terrible, economic reports have been more positive than negative and we all know that if things do take a turn for the worse, the Fed has repeatedly committed to using the "tools in its toolkit" to provide liquidity to the markets. This promotes a consensus that the markets are safe. This meddling with natural market behavior, unfortunately, will make markets less safe in the longer term. In the present though, the Bernanke Put continues to maintain support under the markets. At some point though (as a trader you must be aware of it and prepare yourself), the odor of what may be a cleverly concealed bluff by the Fed, will reveal its pungent smell enough to force traders away from the markets and into fresher smelling pastures. When that happens, you don't want to be long. For now though, I can't argue with playing the "Bernanke Put."
Today we have tested the lower consolidation range support again (mid 1390s on the ES). This is a safe long entry as now we await the Draghi/ECB statement on Monetary Policy that will be released Thursday, September 6th.
Lets see which way the market breaks. One scenario I am considering is shown in the E-mini S&P 500 chart below (ES U September Contract). Watch for a fake-out move above the current consolidation triangle which will be followed by a small correction in the markets.
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