What a difference a day makes. Australian stocks have bolted out of the blocks today after the US markets managed to hold above the key 1040 level in the S+P as discussed yesterday.
I would expect to see the markets rally for the immediate future now that this level has held, but the 1040 level is the one to watch in the S+P going forward. If the market can’t sustain a rally and tips over to close under this level then I would be lowering my risk exposure to the market.
The intermediate trend remains down with the 10 day moving average below the 35 day moving average. But there is no reason why we won’t see a rally that goes far enough to entice the bulls back into the market.
My expectation is that we’ll see a move back to the 35-day moving average around 1110 in the S+P and from there possibly to the .618 Fibonacci of the sell off from the highs. That gives a “Sell zone” range in the S+P of 1110-1150. I will be looking to take profit on recently acquired positions and also have my eye on a few stocks that I would like to go short.
In relation to the Aussie market the 4700 level in the ASX 200 is the important resistance going forward.
4700 is the midpoint of the range the market has been in for the past 7 months and I would expect to see us struggle at that level. If the market managed to break through 4700 convincingly then you would have to say that the uptrend of the past year and a half had reasserted itself and we may be off to the races again.
I don’t think that outcome is very likely because there are still some very bearish signs in the credit markets that won’t be disappearing anytime soon. Italian government bond insurance has hit a record; Belgium’s debt is currently 99 per cent of its GDP and is being seen as the Greece of the North. Throw in Spain with 10 year yields above where they were when the bailout for Greece was announced and Portugal and things aren’t looking so rosy after all.
Another interesting point is that European banks have funded Asia to the tune of more than half a trillion dollars. All of a sudden there is a link between Asian growth and the health of the European banking system.
The unknown in all of this of course is the US Government and the US Feds actions.
If they go down the path of throwing more stimulus money at the market or printing madly to avoid deflation we could see the markets held afloat by the flood of easy money. This is a real possibility when looking at their past performance during the crash.
I think we would need to see some real volatility in the markets that forces their hand before we see any moves to support the markets in this way.
Therefore my expectation is that we will see economic figures over the next few months showing the economy slowing down again and further problems in the credit markets leading to large falls in the equity markets before Ben and his cohorts step in to print money like there’s no tomorrow.
When looking at the market from a bird’s eye view it is hard not to see that there are some tough times ahead. The gold price is breaking out to new all time highs, the bond markets are rallying to multi year lows in yield and the spreads on high yield debt are increasing.
This is the sort of scenario we were faced with before the markets started crashing last time.
I would say to any trader at the moment that there may be some money to be made in the current rally – but you should have your eyes clearly on the exits and take profit and look to be ‘free carried’ in your positions as soon as you can.
If you are interested in learning more about the way we trade stocks here in St Kilda keep your eyes peeled for an email this afternoon that will explain in detail the way I approach the markets.
Rather than being stressed out by the huge volatility in the markets, this is a great chance for disciplined traders to make money!
Check your inbox later today…
Editor, Slipstream Trader
for The Daily Reckoning Australia