The Global Market Trader Weekly Update – 25th September 2011

Hi friends,

The FOMC proved to be the trigger for a massive sell off in global equity, metals, and commodities. Practically everything pegged against the dollar. But the “Operation Twist” was known to the market wasn’t it? Then what was it that caused the massive sell off? Were Mr Bernanke’s statements about the global economy under significant downside risk, unemployment remaining elevated not known to the investing/trader community?  The answer lies in the fall in gold. Logically when the FED chairman made a statement on significant economic downside risk to the US economy and the instability in the Euro Zone, gold should have rallied as it has been doing all along. It did not. Why? In my last update I had mentioned that India, China and Europe were long on gold and US banks were probably short. The huge leveraged positions on gold were going to be a cause of concern to these banks considering the huge physical demand for gold. A continuous run on gold would have led to massive losses to the US banks. The only way out was to create some sort of a short term uncertainty which would force leveraged long positions to unwind in panic. So Mr Bernanke announces “Operation Twist” buying long term treasury and selling short term treasury which makes the dollar strong due to a reduction in the short term interest yield differences between countries. So the euro falls massively. To support the Euro European banks probably sell gold in the physical market. The immediate massive sell off is reflected by huge unwinding in the derivatives market which is what US banks want. So you get the picture. Now you will hear bearish views on gold on all channels making/forcing panic amongst investors to sell.

Here’s the reality.  If you understand Operation Twist closely the idea is clearly to drive more money into the equity markets. When long term yields reduce there is absolutely no alternative but to move to instruments offering higher yields. And equity does exactly that.

And the strengthening of the dollar in the short term seems to be a ploy to attract more money to the US. And one is likely to see more printing of money in future after things calm done leading to a massive rally in equities and commodities again. And for the reasons mentioned above the current fall in the US markets do not seem to be giving an indication that they will collapse like they did in 2008. The market is in a phase where it is yet to get the retail investor to invest in a big way and when retail participation is low markets are not likely to collapse. So in my opinion after the current fall equity markets are set to rise massively. The retail investor will be made to believe that everything is fine and only then one is likely to see the start of a major collapse. There is a still a lot of time for that to happen.

So short term bearish equities (1-6 months), after that period bullish equity which could take markets to new 52 week highs and then a major collapse.

Gold is exactly the inverse. We are likely to get to the target of $2000 by the end of the year. Then there is likely to be a retracement as money moves into equities and again a massive upmove in gold when equities finally collapse.

What Are The Markets Saying?

US Markets

Dow Jones Industrial Average

The medium trend was always down. So going long was risk but it was worth taking as markets were depicting a pullback to 11600-800. That did not happen and the market skid to 10600 odd levels. The market has held support around those levels and a mild pullback to 11050-11100 cannot be ruled out before a downmove to 9877. So the downside risk in the immediate time is higher than the upside. Avoid overnight long positions. Look to short on rise.

S&P500

The market held the support of 1100 but this is likely to break and 1050 is the target in the near term.

Metals

Gold

The metal is likely to find support around $1550-1600. If it does it is a strong indication for traders to go long. If it does not traders should get out. Investors can buy around those levels and on every decline and stay invested till $2000.

Currencies

EURO/USD

In the previous update I had clearly mentioned that 1.34 on the downside or 1.40 on the upside were likely to be tested depending on the outcome of the FOMC meeting. The downside target was tested. Further weakness is seen in the pair with a possibility of 1.3300 coming week. We could see some bounceback from those levels.

GBP/USD

The pair looks weak and could target 1.5200 before we see some pullback.

Indian Markets

Nifty

The market looked good to target 5300 but post FOMC this level looks highly unlikely now. Stiff resistance exists at 5150. The market could pullback to 5010 as the next week is expiry week and one could see wild swings in the market. The medium trend is down though with a target of 4680 and 4500.

Happy trading

Savio!!!

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Tags: Currencies, dow, forex, Gold, Metals, nifty, SP500, volatility