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Morning Market Brief: Greek Fears Subside

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    February 21, 2012

    Good Morning.  So apparently a Greek deal has been reached for 130 billion euro. Honestly this is the type of report that is quite frankly going to be denied by the time I write this post. There are a number of open items apparently in the deal including the biggest. There is no PSI (private sector involvement) or debt forgiveness deal.

    Without that you still have the Greek forced write down through a collective action clause which then triggers credit default swaps (CDS) and there in lies the problem. Interesting the response in equity futures and currency other the EUR/USD is far more muted that one would expect. Obviously that can change as well by the time you read this post.

    The reality and something that took me a while to understand in my own trading career is that the market is already in motion. Whether it goes higher or lower Greece at this point is just the headline to put on the charts. If the markets sell off the headlines in the media will read “Fears over Greece grow.” If the markets rally “Fears over Greece subside.”

    In last week’s Market Video (found here) I discussed the growing list of divergences. It will be very interesting to watch the price action in tech, specifically AAPL. HYG and the divergence with LQD aka “the risk aversion” trade will be another important asset class to watch.

    The vix pulled back late last week and whether this is a failed breakout of a multi-month descending wedge or simply a backtest will be known in the coming days. Treasury futures were not open on Monday so it will be interesting to see if they confirm or deny Monday’s bullish price action in equity futures.

    Speaking of which EMD, mid cap futures put a nice reversal off the May, July 2011 downtrend. But before getting too excited even though these are two consecutive failures it is only 3 handles (points) away as I type. Oil continues to look bullish all of a sudden partly or totally because of the Iranian imposed EU oil embargo and escalation out of Syria over the weekend. Lots going on to say the least and plenty to cover in future posts.


    One thing that has led to a lot of confusion and wild price action has been the multitude of price patterns on various indices such as the SPX. There were head and shoulders and inverted head and shoulders both of which had the same neckline. Talk about confusion there. There have been ascending wedges, trend lines off highs, lows, etc.

    In all honesty I have stopped looking at all these because they were simply both overwhelming and just plain confusing. But sometimes when you step back from starring at something and simply take a quick glance the truly obvious jumps out.

    Such an obvious observation (say that five times) is on the SPX daily chart. Not as much the pattern but just how well price has touched and either bounced or been rejected.

    Let me explain this pattern while doing a little “trade school” at the same time. First the pattern, highlighted by the orange circles is an ascending wedge. This pattern is created by two upward sloping lines, resistance  (designated by red) and support (designated by blue). What defines this pattern is the steeper slope or angle of the support line versus that of resistance. The opposite is true in a descending wedge both of which are sloping lower.

    The relative steepness of support over resistance is the simplest reason why these patterns typically break lower. But another conceptual way to view price action is that with each subsequent bounce off support the move higher is less as witnessed by the lower slope of the resistance line.

    In other words each bounce is losing steam. No different than bouncing a ball where the first bounce is the strongest and each subsequent bounce weaker.

    By no means is this pattern a definitive reversal point but considering the number of failed breakouts above resistance, declining market volume, declining market breadth and increasing market divergences it is looking more probable. Additionally a hanging man candle was printed on the SPY daily.


    With US markets closed on Monday currency pairs put in some interesting price action. Rather surprising the AUD/USD was unable to take out prior highs after a strong gap up at the open. A close below 1.0620 on Tuesday would be confirmation of a trend reversal.

    Additionally the EUR/AUD put in a rather bullish move but has yet to confirm a trend reversal. As a reminder the EUR/AUD reversed very quickly with no warning during the July 2011 equity selloff.

    AUD/USD – notice the reversal candles and neckline failures

    EUR/AUD – notice the similar pattern to July 2011

    Lastly here is a chart of the USD/JPY which put in a very powerful breakout of a five-year descending wedge pattern. Implications for this move are bullish for the USD and if powerful enough have negative implications for equity.

    5 Year Weekly – Notice how clean the pattern is

    6 Month Daily – Notice how powerful the break is

    Trade School – Market Breadth

    I want to follow up on a post last week discussing market breadth where I said it was an excellent intraday trading tool. Now I want to expand and show how it can also be used to identify possible trend reversals. The volatility of market breadth though makes it somewhat difficult to study but the chart below I believe captures the declining breadth while equity continues to advance.

    Notice the net advancing NYSE issues trending lower (yellow arrow) versus the SPX trending higher (green arrow). This is more prevalent over the past few weeks. The significance of this is further evidence that the market is tiring as less stocks are moving higher. Eventually the breadth becomes weak enough that the market simply cannot move higher any further.

    As an example on a day when the equity market is up 1% you would expect to see NYSE breadth at or above 2,000 whereas recently we have seen levels closer to 1,400 or lower.



    Market and Economic News

    Greek Debt May be 160% of GDP By 2020

    A recent troika (ECB, IMF, EU) debt sustainability report shows that Greece’s debt to GDP ratio could be as high as 160 percent in 2020 far above the goal of 120 percent and unchanged from current levels. In other words over the next eight years Greece’s ability to service their debt may simply not improve.

    From Reuters full story can be found here.

    “Greece will need additional relief if it is to cut its debts to 120 percent of GDP by 2020 and if it doesn’t follow through on structural reforms and other measures, its debt could hit 160 percent by 2020, a debt sustainability report by the IMF, European Central Bank and European Commission shows.”



    Nigel Farage “It’s Going To Be Portugal Next”

    Nigel Farage is possibly the only politician I personally every listen to (and I live in the US). Another soundbite from this leader of the UK Independence Party (UKIP) is out and once again he is not shy in calling out the actions of political leaders regarding Greece and as he says “it’s going to be Portugal next.” A great 2 minute interview.


    Gallup Finds US Unemployment Rising

    A recent Gallup survey shows unemployment rising from 8.6% to 9% in February which if true would be a sharp reversal of a recently improving “reported” trend. The sharp drop off recently in the participation rate would also support Gallup’s research.

    From Gallup.com, full story found here an excerpt is below

    “PRINCETON, NJ — The U.S. unemployment rate, as measured by Gallup without seasonal adjustment, is 9.0% in mid-February, up from 8.6% for January. The mid-month reading normally reflects what the U.S. government reports for the entire month, and is up from 8.3% in mid-January.”


    Economic Data Being Released

    Chicago Fed National activity index at 8:30AM.

    3 and 6 month treasury bill auctions at 11:30AM.

    2 year treasury note auction at 1PM.

    Intraday Discussion

    All are welcome to join the intraday discussion on this post. Feel free to discuss anything from intraday trading to macro economics and more. All I ask is for civility and to treat people with respect. In a few weeks I will be adding an enhanced comment system to improve the ability to communicate with others. For now we are staying “old school.”

    Enjoy your day!

    Images: Flickr (licence attribution)

    About the Author

    Macro Story is designed as a one stop source for all of your macro related news and data.  From credit markets to economic data to geopolitics, you will find it all in a simple and organized fashion.  Content is presented in a format that allows you to read as little or as much as prefered.  Whether your goal is to do advanced research, a simple market overview or to become educated on macro subjects, the site has been designed with you in mind.


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