BarroMetrics Views: China Revisited

Eyes are again turning to Europe as the deteriorating employment situation in Spain grabs our attention.  I’d suggest however, there is a potentially more dangerous situation looming China.

Let’s see what the charts are pointing to:

•  Figure 1 is a weekly Shanghai Index marking the all time high at 6125 and the reaction low at 1678. It also shows the correction from July 2010 to November 2010.  Taking a closer look at the July-November rally. we turn to Figure 2.
• Figure 2 shows a zoomed in view of that correction.
• In June 2012 we saw a break below the 2318 (July2010 support)  that was followed by an attempted rally. That rally failed to accept above 2423 and is now returning to test the Maximum Extension at 2155.
• If we see acceptance below 2155, we’ll see a retest of the larger Primary Buy Zone at 1892 and 1664.

If the momentum of the current down move continues when testing 2155, we’ll probably see acceptance below it. This raises the question of what it means for US and rest of the world.

I’d suggest that acceptance below 2155 will put the world on notice that Chinese growth in China will be below 7%. If this plays out, the effect on the S&P will be far greater than any European crisis.

FIGURE 1 Weekly Shanghai Composite

FIGURE 2 Weekly Shanghai Composite

FIGURE 3 Weekly Shanghai Composite

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BarroMetrics Views: S&P March 2012-03-27 (2)

Continuing from yesterday’s blog:

The price action on March 27 did not clarify the situation for me. In my mind, the question is:

• Have seen the completion of the correction of the 1371 (basis cash) breakout so that the move on March 26 is classified as a new impulse move? Or
• The up move on March 26 was part of an incomplete correction that will take the S&P back to the 1371zone?

Figure 1 shows the Normalised Volume for yesterday. It would appear from this chart that the buyers are in control. Despite the average volume, we saw a below average range day. But this market is far from easy. Shifting down to the lower timeframe (including Globex), paints a different picture.

Figure 2 is a 30-min chart; the area is the rectangle is the day-session. We see:

1. The buyers were  unable to hold the zone 1419.75 to 1414.0 (basis June).
2. In the day session, they were unable mount any creditable threat to this resistance zone. Indeed, until 2:00 PM (CT, the E-mini had a range of only 2.74 points.
3. In the last hour, the sellers took control and sold off the ESM2 to 1405.00. Figure 3 (30-min Normalised Volume) shows that the highest volume of the day took place in this down move.

So, as Pete Steidlmayer would say. ‘the edge is now with the sellers and they need to do something with their turn at bat’.

If the sellers can create acceptance below the Mar 26 low (1392 basis June), we’ll probably see a test of the zone around 1371 (basis cash, about 1365 basis June). If the buyers reassert control and we see acceptance above 1420, I’d conclude that we should see a continuation of the up move that started on March 26.

FIGURE 1 Normalised Volume S&P

(Chart through the courtesy of Market Volume)

FIGURE 2 30-min ES Continuation

FIGURE 3 30-minute Normalised Volume

(Chart through the courtesy of Market Volume)

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BarroMetrics Views: S&P March 2012-03-27

First off an apology and explanation for the silence.

A personal issue arose in early March which means I am flying the Singapore-HK-Singapore route every 18 days or so with the 5-days in HK taking up most of my time. This in turns means that the days in Singapore are choca-bloc. Something has to give, and usually, it is this blog.  I’ll be doing my best to resume posting around 3-days a week until end July when the issue will hopefully be resolved.

Turning to the S&P:

Bernanke’s comments implying that QE3 was still on the cards seemed to spark a strong reaction with the S&P. We saw an above average day’s range and, as Figure 1 shows, the buying was marked by strong buying control. Moreover, the winners beat the losers by a margin of 49 to 4 (i.e. an A/D ratio of 12.24).  So, we’d have some reason to believe that the correction is over.

But there are a couple of clouds on the horizon:

1. The declining stocks average volume was 69.9M whereas the advancing stocks had an average of 47M. This is bearish divergence.
2. Figure 2 shows that the breakout volume was way below normal - also a bearish divergence.

So how do we trade this?  To answer that question, I’ll turn to a conversation I was having with a friend, and great trader, Tom Wong. I told him that the QE’s had caused periods of advancing stock prices on decreasing range and volume. Tom suggested I have a look at Hedley’s Acceleration Bands.

Figure 3 shows the cash S&P with the Acceleration bands and a 10 EMA (close).

In this case, Tom suggests that since we see a ‘creeping trend’, the strategy is to be ‘long or out’ until we see a close below the 20 SMA (brown line) from which the bands are launched. Two consecutive closes (Tom insists that at lease one of those is a conviction bar) suggests a strong momentum upside breakout. A retest would take the form of the S&P coming back into the bands but closing above the 10-day EMA.

So, for the moment, I’ll be standing aside. I want to see what Wednesday and Thursday brings.

FIGURE 1 Market Delta

FIGURE 2 Normalised Volume Daily

FIGURE 3 S&P with Acceleration Bands

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BarroMetrics Views: The Greek-Restructure III

The politicians are proclaiming the crisis is over - the Greek default will not extend to another country. Putting aside the fact that the ‘polis’ have been consistently wrong to date, the facts don’t support the claims.

Let’s take the two most likely to succeed Greece:

1) Spain

As we know from this blog (see http://tradingsuccess.com/blog/unexpected-events-2254.html), contrary to its signed ‘fiscal compact’, Spain raised its budget deficit from 5.8% of GDP from the agreed 4.4%. In 2011, the target was 6.0% and came in at 8.5%. If history repeats, we can expect to see a deficit higher than 5.8%.

The problem is this: with the austerity measures in place and no growth in sight (GDP is forecast to be -1.0% to -1.7%), it would be impossible for Spain to meet the 4.4% target; indeed it would be difficult to meet the 5.8% target.

So the EU is now between a rock and a hard place. If offers concessions to Spain, how will it refuse them to Portugal, Ireland etc. On the other hand, the 44.4% is patently unrealistic.

The only good thing on the Spanish horizon is the fact that its 10-year bonds are below 7% (around 4.9%). This is not the case for……

2) Portugal

We see a worse position in Portugal.

To prevent debts spiralling out of control, we’d need to see a budget surplus of over 11% of GDP (Kiel Institute For the World Economy). The problem is no country can achieve for long, a budget surplus above 5%.  That being the case, we can see that Portugal and Greece are following similar paths….

….It’s said that no country can afford to pay for long rates on bonds above 7%. The Portuguese 10-years are at 13.94% (high 17.39 in Jan 2012, reaction low in Feb 2012 11.93). In Jan 2011, the rates stood around 7.4%. With those sort of rates and its current projected GDP, no wonder Portugal is likely to be next in line.

The European crisis is alive and well. The only question is when it will next strike the markets.

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BarroMetrics Views: The Greek-Restructure II

The newsflash just out is there was a participation rate of 85% (Greek Law) and around 69% (Foreign Law).  Greece has invoked the CACs and raised the participation rate to 95. Greece has extended the invitation to Foreign Law investors to March 23.

All this was as expected.

The problem now is not with the Greece situation but with what will happen to Italian, Portugal and Spanish Bond rates. My take is we’ll see bond investors abandon those bonds. This will result on pressure on rates in each of the three countries with the consequent pressure on the S&P.  And speaking of the S&P…

Today we have Non-Farm Payrolls. The expectations are:

• Headline Number: Consensus 204,000, range 180,000  to 275,000
• Participation Rate: Consensus 8.3 % range 8.1 % to 8.5 %

If ShadowStats is correct (& I believe it is), the US Department has been playing ducks and drakes with the monthly numbers. If its practice continues (and I believe it will until after the elections), we should see numbers at the higher end of the consensus range, say 250k to 275k. That should send the S&P up, at least for today.

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BarroMetrics Views: The Greek Re-Structure

A received a number of queries and decided the best place to answer them is here.

The questions can be categorised into two main groups:

1. What are the terms of the restructure and bailout?
2. What are the consequences of investors’ not accepting the restructure?

Terms

There are two groups of investors:

• Those whose bonds are governed by Greek Law
• Those governed by International Law (mainly ‘foreign hedge funds’)

The terms of the restructure were that the present bond holders would take a 54.5% haircut for new bonds and cash payment that would be issued under English Law and losses, if any, shared by the Eurozone governments.

The Greek Government needs a 95% participation rate to get Greece to 120.5% of debt levels by 2020. This is the objective set by the EU and IMF for the second bailout.

To ensure participation, Greece passed a retrospective law (CACs - collective action clauses) which would allow the Greek Government to force a deal if:

1. 50% of local bondholders  agreed to participate and
2. And 66.67% (of the 50%) agreed to the deal.

As of last night (HK time), Greece has the 50%. It is probable it will get the 66.67% and invoke the CACs.(But note: invoking the CACs may trigger the credit swaps insurance).

Foreign Bond Holders

Greece has told the this group that it will stop payment if they don’t agree. Now, here is the fly in the ointment:

1. This group totals 14%. So, to get the 95%, they must come on board.
2. If they refuse, this will probably trigger the credit swaps default insurance. In this case, the foreign bond holders will take much less a haircut.

Effect if Default Triggered

I would be surprises if we see a repeat of Tuesday’s sell  off - at least immediately. However the default will trigger the next crisis in Italy and Spain and at that would send the S&P tumbling.

So, how likely is it the Foreign Bond Holders would refuse. In my view, as certain as I can be when in comes to trading. They have little to lose (provided the ISDA agrees a default has been triggered) and much to gain.

In any event, today’s result scheduled for 9:00 PM (ECT) [4:00 am HK time; 3:00 PM EST] will only tell us if the Greek Government has had to invoke the CACs to get closer to the 95%. The foreign bond holders still have some time to decide beyond tonight. Let’s see what happens….

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BarroMetrics Views:Unexpected Events

Today’s FT has a number of interesting events, events that I’d classify as ‘unexpected’. (An unexpected event is one which changes the underlying sentiment and structure of a market in a way that does not immediately signal the change).

The most important was hidden in the back pages. It said that Mariano Rajoy, the  Spanish Prime Minister, on Friday, Mar 2, raised Spain’s deficit target for 2012 notwithstanding that Spain was on of the signatories to a treaty - a treaty that gave effect to German ‘inspired rules for deficit control’. In addition, Spain did this without telling the summit leaders.

Now add this is bit of news to the fact that we have seen a series of poor economic reports from Europe’s most troubled countries, and you have the the making so the unraveling of the treaty later this year.

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BarroMetrics Views: Services

I haven’t done this for a while; so, it’s a great time to review the services I use.

Rob Hanna’s “Quantifiable Edges”

Rob is a swing trader who uses quant studies for his method. His style and mine could not be farther apart. But, I find his studies useful and robust. Great value for money.

Jason Goepfert’s “Sentimentrader“

I use this mainly for Jason’s “Smart and Dumb” Money sentiment indicator. But there is a lot more on his site including quant studies, trading models and seasonality studies. Again good value for money.

Steve Breise’s Insider Capital 

Steve does a good job on interpreting the COT data. Sometimes, this approach provides an advance warning of a possible change in trend.

InsideTA

Finally I’d like to take the opportunity to give Steve Vinson of Insider TA a huge rap.

Many years ago I bought InsideTA for its excellent ‘volume candlesticks ‘ module. Volume candlesticks have volume as the horizontal axis rather than time. This allows the trader to obtain a different perspective to the normal chart where volume is a separate chart at the bottom of the screen.

So, why am thanking Steve?

I bought a new PC and wanted to move my Insider Trader software to it. I found that I had misplaced the original box with manual and disk. Steve was kind enough to provide a replacement disk for the cost of the postage . That was unexpected! Thanks Steve for your generous assistance.

By the way, the software package has a demo that has many of the  features in the program. It is, however, restricted to the demo files.

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