Sunday, September 25, 2011

Trading Thoughts for Week of Sep 26

Next week is going to be pivotal for equities. I expect a test of 1100, breach, intraday reversal from lower level, and steady advance into the end of the week from that lower level.

Here is what I think will happen:

On Monday we will start the week with optimism about consideration of leveraged EFSF TARP/TALF-like plan to recapitalize banks in preparation of Greek default (per reports over the weekend). Then after initial brief rally the other worries: double-dip recession and prospect of lower earnings from that will take over. Market will have to deal with that weakness due to no solutions put forward at G20/IMF meetings over the weekend, as well as the fact that EFSF leverage is only being discussed, but has not been decided, and EFSF itself has not even been voted on yet. The risk of European Lehman-like skeleton in the closet is real and imminent, there is very little time left to "consider" EFSF leveraging. Which bank will fail, and how quickly? We have 3 days of votes on crucial bailout program in Europe starting on Tue. All nervous longs will jump ship late on Monday, just as they see the rally fading. I am looking for a retest of 1100 on SPX at this time, which may prove to be a head fake.
New home sales out this day - nobody cares...

On Tue we may see a turnaround. I am looking for short covering in US equities to take place and spill over into risky assets everywhere else. If you are a shorty, you do not want to take a risk through crucial EFSF votes, which will most likely be "Yes".  I am sure that no politician wants to be the one who caused the end of the world, it all gets approved in Europe, I say. All eyes will be on Papandreou/Merkel meeting. I think the word meeting originated in Europe. Also Italian bond auctions begin.
On US econodata docket we will get Housing Price Index, Richmond Fed, and Consumer Confidence. 
SPX may bottom on this day. Monday close may be slightly above 1100, Tuesday may open there and quickly dip below 1100, after initial weakness it may reverse and move up from there. I could be wrong on the day of the week, but strongly think 2011 bottom comes next week between 1080 and 1090 on SPX. We may not see these low prints for the rest of the year.
Since on the subject of bottoming. It is important to note how SPX has not made new 2011 low yet, even though most risky assets are already below 8/9 low. Most importantly, NDX is nowhere near 8/9 low, and looks like it will stay way above it on this retest. So once we have a confirmed bottoming formation, I am going to use NDX as a vehicle to go long, as it usually outperforms in this seasonally strong period.

On Wednesday traders may be scratching their heads and studying charts, as some may feel like they missed the boat. I want to see as many doubters as possible, steady rallies are created on the back of stubborn shorts and hesitant longs.
We will get more EFSF votes in Europe, I think in Finland (I really do not care, as it will all be "yes").
Durable goods orders report out in US. Oil inventories out as well. It has been a long time since I have mentioned oil. I think oil bottoms here and moves up with SPX. This will be a head-scratcher as well, as I think the dollar will not get weak (on this a little later).

On Thursday German parliament votes on EFSF, the most important vote out of all of them. You guessed it right - it will be Ja. DAX will go up like nuts.
In US weekly u/e claims (more pain there I am sure), final Q2 GDP (lets see if it gets revised down), and pending home sales (again nobody cares). Unless we get crappy GDP, rally continues. 

Friday is the end of quarter - window dressing. Fund managers will be shedding losers, as many others may be looking to get in front of Q4 rally. We may just see a chopville, but may get a push higher into the close at the end of the day, in preparation of Monday rally.
In US we will get PCE index (deflation is coming, according to gold's plunge), Personal Income and Spending, Chicago PMI (very important), and revised UoM.

A few words about US dollar. While some traders think that for SPX to bottom dollar has to get weak, I have a different view. Dollar has bottomed for 2011 and maybe even longer. It will have a bid underneath for many months to come. It will rally along with SPX on the view of US economy being stronger than Europe's and many other developed countries', hence weakness in DXY basket. It also will benefit from weaker commodity and EM currencies, due to lack of inflation and slowing growth. Do not short US dollar.


  1. "I am going to use NDX as a vehicle to go long"
    What would be the vehicle, an etf?

  2. Good question. I will use NDX futures - NQ. But you can also use QQQ etf and options, and NDX index options.

  3. "On Thursday German parliament votes on EFSF, the most important vote out of all of them. You guessed it right - it will be Ja. DAX will go up like nuts." Hi, do you confirm this about the dax for tomorrow? if yes i was thinking of entering this afternoon in EWG etf....
    Thanks a lot for your advises!!

  4. Unfortunately, I do not trade DAX. But I do use it for intermarket correlations, and can tell you that it is very closely tracked by SPX lately. I am going long SPX on pullback this afternoon. Hopefully this tells you what I think will happen with DAX.