Wednesday, November 17, 2010

Daily Uptrends Broken

The uptrend has been broken. You can see that the uptrend failed when the support levels around 1,200 were broken on the S&P 500 (ES Z0-D). The 34-day moving average held price today, but below that, meaningful support does not show up until 1,150 and 1,134. 1,134 would be similar to the August selloff.

None of these areas have to hold and price can reverse back up from anywhere, but this market has been very technical in how it has traded, so I will be watching for reversals from anticipated levels.

Here is the hourly S&P 500 (ES Z0-60 min) chart. On it, you can see that there is a ton of resistance above the current price. There was timing on the hourly chart for a reversal up yesterday, but the bounce has been very weak. Weak bounces into resistance, in a downtrend are normally not a bullish setup…

The Dow (YM Z0-D) has broken its uptrend and I have listed potential support levels.

The NASDAQ 100 (NQ Z0-D) has broken its uptrend and has already fallen to support.

I hope you were patient if you wanted to buy Gold (GC Z0-D). You can see that its uptrend is also broken and meaningful support comes in around 1,313 – 1,305.

The 120 minute chart on Gold (GC Z0-120min) is the same story as the S&P 500. There is substantial resistance above price here, and the trend is down for now.

The Euro (6E Z0-D) looks similar to Gold. The Euro has pretty meaningful support in here and had better hold, or it is going to make a serious retracement of the recent rally.

The 30-year US Treasury (ZB Z0-D0) has been massacred over the past couple weeks. It finally found support at the 168% extension zone and bounced hard up into resistance. The Treasury normally benefits as a safe haven trade during times of fear, so there may be money flowing out of Municipals and into Treasuries. Or it may simply be bouncing during a downtrend. We’ll see how it reacts at resistance.

All in all, risky markets broke their uptrends and are now correcting. Some are at or near daily support, and most are at hourly resistance. There is a lot of concern about Municipal Bonds being allowed to default be a Republican Congress (California, Harrisburg, Hamtramck) and the potential defaults by Ireland, Greece and Portugal. All the while, the Commodities exchanges are increasing margin requirements on risky assets. This should continue to be an interesting week. Watch the hourly charts for turns in the daily patterns.

Monday, November 15, 2010

Municipal Bonds Continue to Get Hammered

Municipal Bonds have been annihilated the past 7 trading days. The pain was particularly bad today. I have stated on several occasions that the Republican takeover of Congress will not lead to the “blessed gridlock” of the Clinton years. The new Republican Congress will have no inclination to continue Obama’s mission of bailing out the Unions with taxpayer money.

The key beneficiaries of this money were the states, who were given several $100 billion so that they would not have to make layoffs - the vast majority of these potential layoffs being union jobs. If this money dries up, the states will be forced to make difficult fiscal decisions, like layoffs and cutting payments to municipalities. The markets are now starting to price in potential defaults in municipal bonds.

It turns out that the politicians in California lied about how bad its finances were, just a few weeks before the election. Now the real numbers are coming out and California is about $25 billion deeper in debt than was admitted in September (can we please throw these politicians in jail already!). This risk is being priced into California municipal bonds.

I know that it is written into the California Constitution that the state may not default on Muni bonds, but that does not preclude small municipalities from defaulting. There is a real risk that Harrisburg, PA will default in the very near future and that is also being priced in to municipal bonds.

Take a look at how some leveraged Municipal Closed End Funds have been trading recently (PIMCO and Nuveen top the list of pain) –