GBPUSD - Price action hints at a correction towards 1.5200

Looking at the above chart we see a rising channel formed which was followed by a false break higher. This has led to near-term weakness. I favour a continuation of this weakness but favour it to stall near 1.5803. This may then provide a selling opportunity on a bounce back towards 1.6500/1.6600. Stops should be placed over the annual high at 1.6745. Medium term I favour a correction towards 1.5200. Click on chart for a larger image.

Nifty 50 p/e ratio - Brief update

Above is a chart of the NSEI Nifty 50 on a weekly basis including the p/e reading in the lower half so that readers can follow the link between the two. As per my prior posts I see a retrace towards 3600 before the possibility of thinking about getting long again. This also ties in nicely with my post below about a hint at the change in perception of global growth. I will try to update my developed vs emerging ratio too.

EURAUD and GBPAUD hint at direction of global economy.

This post is essentially just an observation of reversal patterns in both GBPAUD and EURAUD which can be seen in the two charts above, together with targets. Click on charts for a larger image. Both have broken over necklines although GBPAUD has yet to close above it. My own bias is for a continuation of the recovery in both pairs and as per my earlier post the volatility breakout in GBPAUD may be taking place.

So assuming that there is some more upside say for the next few weeks at least, what does this tell us about the near term perception of the strength of the global recovery? If both GBPAUD and EURAUD are biased higher then we are arguing that EUR and GBP will outperform AUD. This is clearly not a play on global growth. Thus my observation is simply that certain markets are beginning to price in a hint of a reversal in optimism about global growth in the near-term.

Inflation vs deflation - which is more likely?

Once again I am taken back to my youth and my fathers wise words that extremism breeds extremism. This leads me to follow on from my recent piece about deflation, bond yields and equity markets. During my morning snooze I found myself contemplating my existence and pondered how true it is that extremism breeds extremism and we all know how markets like to push for extremes.....

As often happens I wake up and I have a trade idea in my mind and in this case it was selling GBPUSD and it occurred a few days ago (no jokes). I may return to that in a later post. Digging deep into my subconscience I believe the idea was linked to an FT article that I had been reading on the train home some weeks ago about how large the state is now as a national employer. Thats right, unbridled capitalism got us into this mess but now we are left with a huge proportion of the workforce dependent on the state..... The UK is a socialist state.

Now, we also know that over the last few decades the shift in power from workers to corporations has accelerated towards the corporation. This has led to concepts such as outsourcing and as a result stagnant to lower wages with only the chosen few milking the system at the expense of the rest. As with all things, I believe we are simply in a perpetual cycle and now is the time for a swing back to power to workers and away from the corporation. In economics we would say from capital back to labour.

So what we know is that the state is being choked by it's own debt with more to come, it is also the largest employer in the country and it is likely that we get a swing in power back to workers (I don't wish to use the word labour as it may be confused with the political morons that are in power). So under these circumstances, which is more likely to manifest itself, inflation or defaltion? Ask yourself who gains the most if deflation sets in. Number one on the list of those who gain would be the state. As yields fall on government debt and in time that debt is rolled over at lower coupons, the amount of tax income that is used to service the debt holders is reduced and so more can be ploughed back into the economy. Secondly the most astute consumers who have not taken on any debt will also gain as should be the case, those that were not greedy and did not take part in the madness should be rewarded. Does the state favour an inflationary scenario or a deflationary one?

So for all the talk of inflation versus deflation, just ask yourself who gains in each scenario and who is the country's biggest employer. The power shift back to workers is coming and with it so will deflation. In time, as we know only too well, extremism leads to extremism and so a swing from deflation to perhaps hyperinflation may come some day, but give it a rest for now, we are nowhere near having to worry about inflation.

Nifty Fifty - Possible head and shoulders top

This set up is actually better seen by looking at the Sensex as the neckline was tested as resistance today just perfectly, but I do not have access to the data today! In any case there appears to be the potential for a head and shoulders top with a target back at the 3600 region close to where I initially targeted. It should be initiated on a push below the neckline or 4143.25 to be sure. This is the scenario that I favour, so good luck to all those who have a go!

OMX - First signs that the bears are taking control

Following on from my earlier post on the OMX, today's price action definitely shows the bears are beginning to take control of this market. As can be seen in the chart above (click on chart for a larger image) the OMX has had a false break higher to 810.03 followed by weakness which has broken minor trend-line support and also closed below 755.53. This now warns that bears are in control and as detailed in my earlier piece I still favour a fresh low in this market.

BUND - Possible reversal pattern

As is detailed in the chart above we have seen a bullish false break lower in the Bund on a daily chart and a reversal pattern has formed. A break over 120.00 will trigger further gains towards 122.00 and possibly higher. I have also shown the Dax in the lower portion of the screen to highlight the general inverse relationship. So, with that in mind, could the movement in fixed income be signalling the end of the bull run in stocks? For further thoughts on the links between bonds and stocks take a look here. Also, as an after thought, the Dax has broken out of a well defined bullish channel to the downside......

EUR Index - Possible technical signs of weakness

For a change I thought I would take a look at the EUR index as I always focus on the USD Index. The EUR index is interesting as it is has been trading in a symmetrical triangle. There was a bullish false break lower which occured in mid April, however strength has since failed by old trend-line resistance and has fallen back below the old support. If this break is maintained and given that the EUR is the biggest component of the USD Index this perhaps gives extra weight to the possibility of USD strength in the pipeline. A decisive break under 114.983 will signal medium term weakness in the EUR. As always, click on the chart above for more details.

Most of us are aware of the failure of many European banks to give any insight at all into the state of their balance sheets. Industrial production continues to be poor in Germany and most ECB bankers seem to be on a different planet from the rest of us. If there is no demand from elsewhere it does not matter if you have a low level of consumer debt (ie Germany), as somebody still needs to buy your products. Also, given the stubbornly low levels of inflation in the eurozone, it seems to be setting itself up nicely for a Japanese style lost decade. If you're suffering from deflation what you need is a weak curency not a strong one, therefore I am biased down for this index.

GBPCHF - Extension higher favoured.

GBPCHF has broken above the pivotal level of 1.7490 as mentioned in my prior post. Given the shallow retrace to 1.7120 and swift rejection lower seen last Thursday I see a long position as a good diversification of being short EURGBP. This ties in with a medium term view that EURCHF is headed higher, although I would not rule out a swift return to 1.4800 in EURCHF before substantial strength higher. Fundamentally I see the reality of the world economy as being much the same as it was back in 2007 when the mayhem began. US consumers, the linchpin of the global economy, are still heavily leveraged. Given that the US consumer is not coming back anytime soon this implies that US GDP will do the same and with it earnings expectations for the S&P500 are probably a tad too optimistic . In this scenario the tug of war between two currencies like the Swiss Franc and Sterling just turns into a technical arguement as to which one is the most overextended on the downside given their dependence on finance. My opinion is clearly in favour of Sterling although this may begin to change if and when I see EURGBP at levels below .8223 and GBPCHF over 1.9000. In the meantime I favour extensions in both currency pairs, although cable may be capped around 1.6685. In terms of targets for GBPCHF please refer to my prior post. A push back below 1.7120 however warns of an end to strength and it would be wise to take a step back and re-assess.

Nifty 50 - Brief update and trade recommendation

The Nifty almost touched the bottom of the range of values at which I recommended to go short namely 4700 - 5000. As can be seen in the chart above it now trades just above trend line support. It is possible that we get a bounce from here that may give another shorting opportunity within the afore mentioned range. Given the price action in the S&P 500 I still favour weakness and combining that with my bias from the emerging/developed analysis below I favour an eventual break beneath this trend line. My ideal scenario is a return to the range that was trading before the post election madness, between 3300 and 3700. I would suggest selling pullbacks up to 4450 with a stop over 4550. Alternatively wait to see if it gets back into the range that was mentioned earlier; the option for the truly safe trader. As always good luck.