Technical Update - Tuesday, March 4

KRUGER INSIGHTS TUESDAY, MARCH 04, 2014

By: Joel Kruger

Small Change - There is no denying that the geopolitical uncertainty over the past several days has played a hand in market volatility. However, geopolitics aside, the picture does not change, and in my view, risk assets should still be exposed over the medium-term. So even if this Russia-Ukraine conflict is diffused, I would still be looking for US equity markets to top out, USD/JPY to gravitate back towards 100.00, EUR/CHF to challenge 1.2000 and commodity bloc/emerging market currencies to show vulnerability. The big picture right now is the recovery in the global economy and the even quicker recovery of the more developed nations. The developed nations were the first to enter the global crisis and will be the first to recover. Money flowed away from these developed nations for a good portion of the global downturn, in search of more attractive yield in the form of commodity bloc, emerging market economies, and equities, and this money should flow back out of these markets and return to the developed nations as these respective economies show signs of sustained recovery. This is the story right now and this is what should be influencing price action. Anything else is really only a distraction. So while we have seen a fresh round of bids into risk assets in early Tuesday trade on account of some encouraging news on the geopolitical front, if you are thinking this will have any meaningful impact on the fate of the market looking out beyond a few hours, I think you will be disappointed. 

Silver Linings - Moving on, I will say that this unwavering bid tone in US equity markets has been nothing short of astounding. The ability for this market to consistently be so well bid on any form of a dip and continue to push to fresh record highs, seemingly without thought, is quite unsettling in my view. I have very little doubt that we will soon see a legitimate meaningful top carved out that will last for more than just a few days, and it really is only a matter of time before this house of cards comes tumbling down. It doesn't need to be a catastrophic decline by any means, but we do need to see a legitimate and healthy corrective pullback. For those of you frustrated with the lack of downside follow through here, I would say that despite the ongoing surge to record highs, there have been some formidable opportunities to take shots at fading these moves along the way. I have taken many shots over the past 9 weeks and have had a lot of success with this strategy. In fact, half of my gains this year can be attributed to my shorts in the S&P and fading intraday rallies. Admittedly, these gains have not been as satisfying given my expectation that this market should really roll over and my desire to be involved when it does. I try not to get caught up in this and am very grateful for the rewards thus far this year, but when you have such a strong macro view, it is difficult to manage the crave to really catch the big wave when you know it is coming. Still, this is not an ego game and we need to trade with caution and always be looking to protect and preserve our capital. That is what is most important. As always, let's see how it all plays out. I will say that as pretty as things are early Tuesday, they could be just as ugly into the close. Be careful.

Technical Update - Monday, March 3

KRUGER INSIGHTS MONDAY, MARCH 03, 2014

By: Joel Kruger

Keep On Shooting - So I rarely establish fresh positions on Fridays, and certainly can't remember the last time I got into two positions on a Friday. But that is exactly what happened this past Friday, with the market doing some funny things and offering two set-ups that I simply couldn't ignore. First it was the sharp decline in USD/CHF to 0.8800, that had me taking a stab at the long side. With the market tracking by fresh multi-week lows and violently oversold intraday, I liked the idea of buying around the figure, particularly due to the added layer of comfort in the form of the possibility of some kind of an SNB defense. However, this trade ended up closing the day marginally out of the money, showing no good follow through. This prompted me to take a small loss at the Monday open (the market didn't bounce like I thought it would and even though it could very well bounce from here, the trade changed and was not the same trade that I got into in the first place..and so better safe than sorry). The second position taken on Friday was one not too unfamiliar to you all. I have been playing with the short side of the S&P 500 all year, and continue to take my shots with every chance I get. I believe there is a major correction around the corner, and would very much like to be involved when we finally see this pullback play out. I have had good success with the short trade this year, with two or three nice trades, one loss, and the rest breaking even. On Friday, I was taken out at cost from a short I had on at 1857 earlier in the week, but with the market rallying to yet another fresh record high into the US morning, but not exploding higher, I simply couldn't resist the chance to sell again at a slightly better level. And so, I sold 1859.1 and had to endure a rocky session of trade, before the market sold off into the close. The escalation in geopolitical tensions has undoubtedly served as the catalyst for some more profit taking into Monday, and with the equity market already in desperate need of a healthy decline, irrespective of the geopolitical landscape, this event should only help to cement what should already be coming. Russia-Ukraine/Russia-US tensions aside, I could easily argue that the shift in Fed monetary policy and flow of funds away from risk correlated assets in anticipation of this shift, should be be enough to justify a reversal in stocks. But just because it should doesn't mean it will. 

Threat To Intervention - On the currency front, I have spent a lot of time talking about EUR/CHF in recent weeks (even months), warning of the possibility for a retest of the impossible 1.2000 barrier. The SNB has been quite vocal about defending the level, but how easy will it be to defend the level when macro flows are fighting against the central bank? Remember, the SNB has had the benefit of a global central banking system that has been promoting and incentivizing a shift away from safe haven assets over the past several years. The has been a tremendous support to the Swiss central bank's plight, and has made it that much easier to defend the level. But what happens when these central banks can offer no more accommodation and risk assets start to come under pressure? What happens when geopolitical tensions escalate and stock markets fall off sharply? I would argue that no matter how much the SNB has to throw at the defense, it won't be nearly enough in the face of these potential pressures. And so, keep an eye on EUR/CHF, as this could be a very interesting story ahead. It is finally getting more attention into this week, and could get a lot more over the coming days. The effectiveness of intervention has long been a topic of debate, and while the intervention seen in the world over the past several years has arguably proven productive to this point, will it continue to be productive? Unsurprisingly, we have also seen a fresh wave of Yen demand on similar flows, with USD/JPY back under pressure and contemplating a break of the yearly low at 100.75. I have been looking for a drop back under 100.00 and towards 98.75, and would love to have the opportunity to be a buyer of this major pair (seller of Yen) down at 98.75. While the Yen still benefits from flight to safety flows, the currency itself offers no underlying fundamental lure as a safe haven asset. This has long been a misconception with the Yen, and should we see this move down to 98.75 play out, I will happily look to buy. Finally, the Euro has broken to major resistance in the 1.3800 area, after exceeding the figure on Friday. This figure represents some critical falling trend-line resistance off of the record high from 2008. And so, it will be most interesting to see which way EUR/USD finally decides to break over the coming days. There are compelling arguments to be made for both directions and I really have no strong opinion at the moment.