Monday, July 23, 2012

Time for one step back?

Last Monday, I wrote that markets were choppy, volatile and lacking in direction (see Waiting for direction) and I was waiting for a technical breakout, either to the upside or downside. Despite the upward bias shown by the stock market last week, I remain convinced that equities remain in a trading range. In that case, the coming week might be a opportunity for stocks to take one step back.

These days, the way to think about global markets is to think about how the Big Three are behaving, namely the US, Europe and China. In the US, a glance of the chart of the SPX tells the story. The market remains in an ascending triangle pattern, but was rejected at resistance on Friday. This suggests to me to expect some weakness, with downside support appearing at about the 1350 level.

Across the Atlantic, the Euro STOXX 50 is showing a similar pattern of a rising wedge and ascending triangle. We have been seeing relatively good, or at least benign, headlines out of Europe. My instincts tell me that Friday's carnage may be the start of a negative news cycle.

Then there is China. When I think about China, I could point to the bullish pattern formed by commodity indices, but they have been distorted by the weather driven rally in the grains. Instead, consider the price of Dr. Copper, which is displaying a pattern that is eerily similar to the previous two charts.

I am also watching the AUDCAD currency pair. While the Australian and Canadian economies are similar in character in their resource exposure, Australia is more sensitive to Chinese demand while Canada is more sensitive to American demand. The AUDCAD staged a minor breakout last week. Will the breakout hold?

In short, the risk-on trade appeared to have hit some kind of collective resistance level and may be in the process of pulling back. How it performs in the coming week will give further clues of whether the bulls can make a stand or if we are back to the same-old-same-old of choppy and direction-less markets.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

1 comment:

Mo said...

Good call. One step back, indeed!