The Week Ahead

More questions than answers, I'm afraid.  The economic data being reported this week is pretty light, which puts QE2 squarely in the spotlight.  Last Friday's POMO was the first $7 Billion injection since the Fed announcement on November 3rd, and much to the dismay of Big Ben Bernanke and the POMO bulls, it was pretty much a flop - at least in terms of being able to drive the market higher.  In this post we'll take a look at:

1.  The S&P 500

2.  A few currencies

3.  A quick look at Cisco, post earnings

Then wrap things up with what we could see in light of ~$25 Billion in POMO, the continuing situation in Europe, and of course...the much anticipated IPO of General Motors later in the week.

Starting with the S&P, although the Fed's constant manipulation have all but killed technical and fundamental analysis as we know it, there are still a few interesting things that can be gleened from the daily chart below.  As always, all charts on these pages are clickable for an expanded view.

So the main things I want to highlight here are:

1.  We are clearly still in an up-trend.  Note the very defined trading channel we have been in since August, with support and resistance points as noted.  What I find interesting is that even post the big Fed announcement on 11/3, we have still remained in this channel, bouncing off the top trend line the two days subsequent to the announcement, and now sitting squarely on the bottom trend line on Friday's close.  Until we see a serious breach of this bottom trend line, the trend is your friend, and we should bounce back up from here.

2.  I've include the Aroon trend indicator.  I won't go into the technical details of this indicator (Google it if you're interested), but the thing to note here is that so long as the green line remains above the red, we are in an up trend.

Back in the day, the common Wall St. rule of thumb was "don't fight the tape".  The days of ticker tape DOW following are long gone, but the concept remains the same....don't fight the trend, and no matter how wrong it may feel, we are in a very well-defined up trend.  That doesn't mean you should pile into longs just yet - it simply means don't go short, or do so at your own risk.  There's also nothing wrong with being in cash. 

As for currencies, I'll start with the EUR/USD pair, as that seems the most relevant at the moment.

What is notable here is once again the action we have seen since the QE2 announcement.  I've annotated on the chart the day that this occured (11/3), and as can be seen, the Euro rallied for just one more day, then rolled over and has dropped ever since.  The interesting thing about this is that in a stand alone environment, one would expect the Euro to be rallying.  Why?  Well, with Ben and the Fed promising to print $600 Billion plus in new dollars, the dollar should devalue against other major currencies.  However, let's not forget that the Euro is anything but a healthy currency.  In fact, if it weren't for the German economy, and to a lesser extent, the French, the Euro would likely already be a dead currency.  As David Rosenberg mentioned last week in one of his letters to clients (and I'm paraphrasing here) - since last year, the Euro has basically been trading like it was the German Deutschmark, but don't forget, the Euro is comprised of a bunch of trash currencies from the likes of Italy, Portugal, Greece, Spain and Ireland, and even though Germany is holding things together, the Euro is not the DM.  In fact, the stance that Germany has been taking recently regarding the pending meltdown in Ireland is one of the main reasons why the Euro has taken such a hit.  Angela Merkel and her Finance Minister have basically said that there will be no Greece style bailout for Ireland - implying that bond holders (mainly the big banks) will actually have to take a haircut on their positions.  That is something I would like to see.  So far, the Fed backed IMF bailouts have protected the banks in Europe, just as TARP did here in the US for our too-big-to-fail banks.  It's high time that they actually feel the pain of their poor decision making.  It's all very political though, so I'm not getting my hopes up too high.  Should be an interesting week though....

Full disclosure:  I was short the Euro from 1.41 and covered at 1.38.  I then re-entered a new short position a few days later at 1.3775 that I am still holding today.  My original stop was at 1.3825, but on the overnight trade down below 1.37, I've moved it to1.37.  Currently trading at 1.3633 as I type, but went as low as 1.3603 early this morning.

The only other currency pair that I want to make mention of today is the AUD/JPY pair (Aussie dollar/Japanese Yen).  I don't think I've mentioned it on this blog before, but for those of you who make the rounds of the financial websites, you'll know that this pair trades in almost complete lock-step with the S&P Futures (ES).  In fact, it does so to such a degree that the Zerohedge guys note it on their website whenever these two instruments de-couple intra-day, as arbing the spread has become an almost guaranteed money-maker. 

What you see here is a 5 minute chart of this pair, which shows a rising channel since 1:00 AM EST this morning.  S&P futures are also up slightly as I type, so keep an eye on this pair today for an indication of how the market will likely playout.

Finally, a quick look at Cisco.  The daily chart below is pretty telling...and the story isn't good.  Cisco reported a huge miss during their earnings call on Weds afternoon, and have lowered future guidance by $1 Billion.  Ouch!

The pundits on CNBC have been saying this is a buying opportunity.  I'm not so sure yet, and for two reasons.  The first - a $1 Billion adjustment is pretty huge and I don't think it should be under-estimated.  So far, the market seems to be in agreement with this.  Secondly - look at the volume of this selling.  The day immediately subsequent to the earnings call, over 500 million shares traded on Cisco, and on Friday, another 234 million shares - the two biggest volume days in 2010 (there was one day in August with 227 million shares traded), while the 50 day moving average for shares traded in a single day is only 67 million.  This is significant.  To put it in better perspective, you need to go back almost 10 years before we find another day that traded 500 million shares or more.   Selling on large volume is normally not a positive sign for a stock. 

Is there a silver lining for Cisco?  We'll soon see.  The blue line shows the 2010 lows, and should act as a magnet for near term price action, while also providing support.  My play here - wait for it to hit this line, then enter a buy stop order at $20, which will fill if the stock does indeed bounce.  If it doesn't bounce, but continues to go down, your order won't fill and you haven't lost anything.  If it does bounce and your order fills, place your sell stop $.15 - $.20 below the blue line, or the new 2010 low, whichever is lower. 

So there you have it.  Like I briefly posted on Friday, this week's action will likely be a showdown between the effects of ongoing QE2 versuses a potential sovereign default/bailout scenario in Europe.  All of the big POMOs this week are supposed to be setting the stage for a wonderful IPO environment for GM...something that the pundits on CNBC have been trumpeting as a must-buy for your portfolio.  Yeah, right!  As long as the Fed is there to back-stop GM, the stock may go up, but on it's own, I wouldn't touch it with a 10 ft. pole.   What will be very interesting to see is how the European situation impacts the markets, and if negative enough, will it result in a postponement of the IPO?  Hmmmm......as I mentioned at the top of this post, more questions than answers. 

Good luck trading.