3rd October - How not to trade these markets
08 October 2013
TECHNICALS:
FTSE DAILY CHART
The market is stuck in a trading range. A breakdown beneath 6337 would signal a short-term Double Top. A break up through 6610 the completion of a Continuation Triangle ( or Double Bottom)
US T Note DAILY CHART
The market has bounced but the market is struggling to penetrate the resistance from the Gap in June - where it failed in both July and August this year.
Gold DAILY CHART
The market was on the point of completing a continuation bear Head and Shoulders when the Shut-Down entered the debate.
The close completion of that H&S pattern remains a powerful bear possibility…wait for a confirmed close beneath the Neckline.
In which case the minimum bear move would be down to about 1150…
FUNDAMENTALS:
Markets are in retreat. And the main reason is the deadlock between the US administration and Congress over the US budget and debt ceiling.
The Administration relies on Congress to grant it the funds it needs to run the country and that has meant for many, many years the government borrowing to plug the difference between taxes raised and spending commitments.
As time passes, the US debt builds up and the debt ceiling set by Congress has to be raised to allow the government to function. Currently the ceiling has been reached, but the House Republicans are not willing to raise the debt ceiling without some concessions from the President; neither side seems willing to give way and that has led to a partial shut down of the US Federal government for the first time in 17 years.
What worries the markets is the uncertainty about whether the two sides find enough common ground to allow Congress to raise the debt ceiling? Thereby getting the government working again before the government completely runs out of funds and has to default on debt maturities and coupon payments.
Clearly it isn’t in either sides interest to allow a default. The US would loose her credit rating and find it more expensive to borrow in the financial markets.
We judge it is unlikely the US will default and expect the two sides to find a route out of this stand off. But equity markets remain in retreat as do Bonds and the Dollar is selling off against the Euro, which represents an economic area with more problems than answers, but offers a degree of fiscal certainty currently lacking in the US.
So, how best to trade these markets?
Since we judge the current stand-off is likely to prove relatively short-lived, we see no reason at this stage to change our assessment of under lying market trends which are:
We are currently bearish of Gold. Over recent months Gold has struggled to mount a convincing rally despite the on going civil war in Syria and recent drama over the use of Chemical weapons there.
Additionally the upheaval in Egypt continues and still gold cannot rally. However if the unthinkable happens and the US did default then Gold would likely be back in demand so we judge it would be unwise to sell now.
But as soon as Congress and Obama reach agreement on raising the debt ceiling we expect Gold to resume its decline. One major support for gold over many years has been the friction between the West and Iran over her suspected development of nuclear weapons, but a new government has shown a new approach and appears willing to negotiate a resolution to the crisis and quite rightly the west is giving diplomacy a chance.
In summary we judge the previous trends in most markets will reassert once the US gets its house in order, but until then we judge it prudent to stay on the side-lines.
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10th Oct - Heating Oil Pullback Reaches 61.8% Level 
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03rd Oct - Soybeans Slip to Key Long Term Supports