The Precise Take – ES testing contract highs as earnings season is underway

Leaders Analysis:   Gold has advanced with equities overnight on the Alcoa earnings surprise.  As we wrote yesterday (free registration), we don’t like to chase gold, but it will likely advance strongly as long as equities do the same.  However, strength in 30 Year T-Bonds and the Yen, especially in the EuroYen cross (still hugging the 200 day moving average), continues to refuse to confirm the moves in equities and gold.  They may simply be lagging, waiting to see if the S&P 500 can break through its September’s closing highs.

Medium Term Analysis:  As we have been writing, it is best not to get too aggressive with shorts while the Fed liquidity spigots are on, even with dismal fundamentals, such as yesterday’s Consumer Credit report.  Having said that, the longs have been put through some pain as well.  Such is the volatility we expect in October as a result of the distortions and strong contraction in money supply.  The ES is close to, but has not yet cleared the 1067 resistance level (two week’s prior point of control), which is the last major holdout to new highs.  Longs will want to have cleared it and made new highs prior to next Wednesday’s Retail Sales report, which is likely to be dismal.  With a three day weekend ahead, all the better if the shorts are scared out entirely by Friday. 

Trading Today:  As we write, the ES is attempting to break through the lower boundary of strong resistance from 1065.75 to 1068.00 on a bullish Jobless Claims report.  If it cannot break through pre-market, we would still be buyers at the 1059.75 to 1060.75 daily R2’s support area.  Longs will want the daily R1’s at 1056.50 to 1057.00 to provide support to continue the rally this week (we would still consider buying here as well, though not as aggressively); however, only a close below…

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Veteran gold traders can attest that piling onto breakouts, especially in highly leveraged futures, can quickly become a losing proposition on a reversal.  While yesterday’s surge in gold was confirmed with gold priced in other currencies (especially impressive with the confirming moves in the commodity currencies of the CAD and AUD):

…there is a slight seasonal negative at work here until the end of October:

Traders should recall that the second week of October 2008 began a painful slide after a strong September.  The forced deleveraging from all instruments on margin call mania exacerbated the move last year, to be sure.  But it seems prudent to wait for a move back to the 1025 to 1031 area (basis Dec 09 contract), which is the 61.8% to 50% retracement box from the breakout of last week’s highs at the 1011 area.   Gold could even retrace to the 1010 (61.8% off 985.50 low) with the medium term bullish trend in tact.

In our opinion, better to be careful and potentially miss a move than to get caught up in the euphoria of a market that has burned many short term leveraged traders.

The Precise Take – ES consolidating at resistance

Leaders Analysis:   As we updated yesterday (free registration), gold’s strength has been confirmed in other currencies, including the CAD and AUD, despite the Australian central bank’s tightening announcement yesterday.  We are still seeing Yen strength, with the USDYen and EuroYen in danger of breaching strong support.  For equities to continue the rally, we would like to see a definitive move away from support in the Yen crosses.  Perhaps the global risk/carry trade is being delevered from the Yen and primarily into the USD, but we see no inherent strength in the Yen or BOJ tightening ahead that would cause this.

Trading Today:  Yesterday’s rally traded into last week’s market profile value area and sold off sharply, only to see an impressive late day rally to recover much of the early gains.  We would be buyers down to the combined session pivot at 1047.00.  There is still the risk of selloff, so we would…

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10:57 am EDT:  True to form for 2009, we are in the midst of another short squeeze, the ultimate success of which will likely be determined by a close over confluence resistance of September’s ES settlement of 1053.00 and weekly R1 at 1054.25.    We will cautiously buy pullbacks to as low as the 1047.00 level, but not below, as there is still the possibility of shorts defending this last outpost and reversing the week’s upward move.  Certainly, we will not fade short strength on new highs.

Gold has broken out strongly with the Dec 09 contract piercing the 1040 level.  Though the USD is down materially today, we are still seeing the gold move confirmed in all the major currencies, including the AUD, which is impressive in light of its monetary tightening actions this morning.  30 Year T-Bond futures have finally traded below the critical 122 level again.  Only the EuroYen forex cross refuses to behave and confirm the other moves, however, we will give it a day to catch up before drawing any further conclusions.

Updating our previous posts in this theme, below is a chart of gold priced in the Euro, Japanese Yen, Australian Dollar and Canadian Dollar.  Gold in Yen has intraday broken above its Sep 03 09 closing price, though gold in the commodity currencies of the Australian and Canadian Dollars has not.

Update 1:27 pm EDT: Corrected “Gold in Euros” to “Gold in Yen”, above.  Gold in Euros is below its Sep 3 09 high.

10:41 am EDT:  EuroYen has reversed up and 30 Year T-Bonds have reversed down, which both now confirm equities and gold strength.  Though fading the 1053.25 resistance area on the open into the gap was a profitable trade, we no longer look to short at these levels.  We will likely not take a position unless and until the day session range is broken (1047.75 to 1053.25)  and then trade in the direction of the breakout.

The Precise Take – Equities maintaining strength in the midst of heavy news week

Leaders & Medium Term Analysis: Gold shot up to 1023.30 overnight (basis Dec 09) on continued US Dollar weakness, which also has helped fuel the continued surge in equities.  As we have been writing, we have a very good probability of a top either today or tomorrow, but need to see confirmation with a close below 1030 in the ES by tomorrow.  Overnight, the ES has maintained strength by yesterday’s highs, but 30 Year T-Bond futures are up slightly and the EuroYen forex cross down materially, which are both non-confirmations for equities and gold strength.  The ideal top will by a spike up in equities on one of the pre-market reports this morning with a distribution day that closes below 1030.  Alternatively, tomorrow’s two 8:30 am reports could be the bearish catalyst.  If this scenario does not play out, there is very little overhead resistance above 1066.00 until we get to the 50% retracement of the entire down move at 1126.25, with other Fibonacci resistance at 1144.75 and 1160.75.

Treasury Analysis:  Tomorrow, Treasury will announce next week’s auction schedule.  Last month, the continued upward trend in auction amounts was halted, and we expect this month to be on par with to slightly less than last month.  We do not expect the same nervousness in the bond markets that we had in previous months as recent long term auctions have gone well and yields are testing support rather than on the verge of breaking through upside resistance.  If we do get the reversal in equities this week, the 30 Year should be finally able to break through its resistance (and yields through support) and we would likely see a short covering rally up to at least the 124-125 level.

Trading Today:  As we write, the markets have reacted tepidly to CPI and the Current Account reports at 8:30 am, and there are still TIC and Industrial Production before the market opens.  We are willing to cautiously buy strength between 1042.50 to 1046.00, but become intraday bearish below, mindful of the strong possibility of a longer term correction.  Therefore, we will not…

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Below is our updated chart of gold priced in other currencies.  Clearly, today’s move up in gold is reflected best as US Dollar weakness.  We still have yet to see last Thursday’s high taken out in the other currencies.  This may help explain the correlation breakdown with equities and Treasuries.  Equities may be benefitting short term from a devaluation in the Dollar, while Treasuries continue to advance on the strength of this week’s auctions.  History has demonstrated, however, that this correlation breakdown is likely only temporary and that there will be a rebalancing next week.

The Precise Take – Overnight, the eMini S&P 500 tests contract highs to the tick

Leaders Analysis:  Markets had priced in strong demand at yesterday’s 10 Year auction and equities closed strongly.  30 Year T-Bond futures made a hammer bottom on the daily chart, spiking nearly to the 61.8% support.  Gold continues to back off from the 1000 level and the US Dollar index is respecting trendline support.  Nearly all the market leaders are pointing to lower equities; however, equities refuse so far to obey.  The lone dissenter among the leaders (or at least neutral) is the EuroYen forex cross, which is at its 50 day moving average, but is not yet showing reversal signs to confirm the other leaders.  The two most likely possibilities are:

1)     The majority of the leaders are correct and equities will correct today.   This means we either have a perfect double top at 1038.75, or we will get an extension beyond the highs, which will be reversed late day.

2)     The majority of the leaders are correct, but will tread water while equities head higher and eventually reverse next week.

3)     The majority of the leaders are incorrect and equities will continue to post new material highs with the leaders reversing into next week (gold higher, Treasuries and the Dollar lower).

1 is the most likely, but 2 is gaining ground quickly.  Everyone seems to expect a September correction, which we believe will come, but will likely cause considerable pain to the shorts before occurring.  Currently, we don’t believe the shorts have hurt enough and believe an extension to the next upside target of 1053.50 (a major 50% retracement on the continuous futures chart for the ES) would be sufficient to cause this.  Today is a full news day and a 20 point extension upwards is at least conceivable. 

Trading Today:  As we write, the ES is advancing on the 8:30 am Int’l Trade and Jobless Claims reports.  Overnight, yesterday’s highest point of control in confluence with the combined session pivot point served as support, and longs will need to keep price above this low of 1028.75 to get another extension.  We will not fade short any strength until late afternoon, if at all, as it is dangerous to…

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The Precise Take – ES continues to accept value near highs

Treasury & Overall Analysis:  Yesterday’s 3 Year auction went well, with markets relatively unimpressed, either looking ahead to the 10 Year today and 30 Year tomorrow, or already pricing in strong demand.  A poor auction today (1:00 pm) could boost equities; however a good to great auction will likely not be a market mover again.  30 Year T-Bond futures hit the 50% retracement from August lows overnight and, therefore, have entered the zone in which we would expect to see a potential reversal in both equities and Treasuries, should one occur.  This zone extends from 118 6/32 to 117 4/32.  After watching yesterday’s price action and taking into consideration tomorrow’s heavy economic calendar, the time horizon for a potential reversal is extended to tomorrow.  Should it not come, we would expect to see a test of the next upside price target in the ES of 1053.50 into next week, where there is a much greater chance of reversal after having squeezed out the new shorts.  This target could also possibly be reached today or tomorrow, but that is unlikely.

Gold:  Gold has not yet confirmed the breakout when priced in other currencies, with yesterday being a down day in all but gold in the USD.

Trading Today:  As we write, the ES has broken yesterday’s combined session range to the upside, as well as day-session-only R1.  Key in early trading after the open will be to watch yesterday’s market profile point of control in confluence with long term point of control at 1024.50 to 1024.75.  The ES has committed to building strength at higher value levels, and a failure to make new highs and drop below 1024.50 is…

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