How Am I Trading The S&P, FTSE And DAX?

Pah! What lousy timing for a catch-up on where the markets are heading. If I’d written this a week ago I could have worn my smug face and reported that, as predicted, the markets were comfortably back into bear-mode.

Unfortunately, I’m left defending/ questioning a view that’s technically going belly-up after a normal rebound gained momentum, ploughing through all lines of resistance. But first some numbers, although they as at last night’s close and therefore out of date:

The pecking order stayed the same as on the way up, with the S&P (^GSPC) the best performer and the FTSE (^FTSE) in bronze position.

Global Economy In 30-Seconds
Most data remains erratic on a monthly basis with confidence numbers, housing data and retail sales offering more false starts than a 100m sprint final. The past month has seen a sharp fall in retail sales although data yesterday hinted at a summer boost in the UK due to the sale of bikinis and barbeque food. House prices generally fell in the UK, but are expected to rise over the next few months unless sellers step up to match the buying interest.

Unemployment remains a major global problem; the most recent US payrolls data served to remind us that the situation is worsening and will deteriorate for months to come. This will continue to impact on the housing market, consumer spending and banks’ loan loss provisions.

There was speculation of a second US fiscal stimulus; the IMF helpfully pointed out that other major economies might need to consider further measures. That was except for the UK, which is already in so much debt it features on Zimbabwe TV as a warning to others.

There’s still little sign of government money feeding through the banks and being made available to borrowers. Credit remains tight and mortgage rates are way above official rates.

Let’s look At The Charts

Dax (^GDAXI)
The Dax has rallied over 300 points from Monday’s low, far more willing to buy into the ‘aren’t banks great’ argument than the FTSE. The index had no hang-ups about the old courtesy of not crossing the 200-day and 21-day moving averages at the first attempt and has bulldozed through the 4800 level this morning.

The daily RSI has now crept back above 50, but my trend indicator, the 21-day MAV remains in a downward slope. This leaves me expecting a return below that level soon, but I don’t know how far it will rise before that. There must be the risk that, with more earnings reports like Goldmans and Intel, the index could head for the upper Bollinger band at 4900 plus.

One further technical measure of interest (pointed out by my eagle-eyed mate, GG); check out the Fibonacci lines; the recent low was as near as damn it the 38.2% retracement line. It’s the same on the FTSE chart, but not the S&P.

FTSE

Here, the index has shown far more respect for its 21-day moving average, although last night’s trade saw the fortifications crumble under the weight of Intel’s rosy forecast. This morning’s move has propelled the RSI above 50 although the 21-day MAV is still pointing towards its toes, not its nose so I’m looking for a retracement sometime soon.

S&P 500

It’s a similar story in the US; last night’s close dragged the index back above its 21-day MAV, and with the RSI now above 50 there’s scope to test the upper Bollinger band at 930ish.

Seasons In The Sun
OK, we’ve looked at the charts, but a word of warning to newbies; the technicals don’t play by the rules during the summer holidays. Many of the big decision-makers and traders reunite with their families for summer at their villas somewhere in Europe, so there’s no-where near as much trading going on. However, less liquidity often means greater volatility as prices react more keenly to individual orders. This often leads to market moves that show no regard for the technical niceties.

Having said that, let’s have a quick glance at the long-term average trends for July, kindly provided by Dimiti Speck at seasonal-charts.com.

I’ve shown the Dax, but the pattern is similar, to a greater or lesser extent for the other two indices. Markets rally until about half-way through the month; this is followed by a sudden dip before markets push higher into August. For the FTSE both the sell-off and the subsequent bounce are more striking; the S&P is less bothered in either direction.

What’s Coming Up?
On the economic front today sees the release of US CPI, manufacturing numbers and the minutes from the last Fed’ meeting. There’s a US bias to the remaining data for this week with the weekly jobless and NAHB House prices, followed by housing starts on Friday.

In corporate land Thursday will see reports from Carrefour and Nokia in Europe and Biogen, IBM and JP Morgan in the US. Then get ready for some heavy-duty action on Friday with Bank of America, Citigroup, General Electric and Morgan Stanley. Remember that last time around the banks borrowed Gordon Brown’s smoke & mirrors routine to create the illusion of huge profits; will investors fall for the same trick again?

How Am I Trading It?
It doesn’t rhyme too well, but at the moment I’m short and wrong. I’m not massively short, but I did open bets on the Dax at both the 200-day and 21-day moving averages (yep, the ones that failed miserably as resistance). This morning I added to my position, selling the Dax at 4850.

I’m also running short bets on some UK banks, Tui Travel and British Airways and a small long on Dana Petroleum.

I’m pretty sure we’re headed lower at some point, but with the earnings season just warming up it could be a bumpy ride. The seasonal charts suggest we’re close to the mid-month sell-off; perhaps this comes after Friday’s option expiry. But if the seasonal charts prove to be correct with that move, then I’d better remember that they all show an end of month rally.

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