Risk back on as ISM and Chinese PMI surprise

A flurry of economic data sent markets higher today as growth concerns were trumped by upside surprises that sent risk surging off of significant support levels. Aussie GDP started the rally last night, as Q2 YoY came in at 3.3% vs 2.8% expected vs 2.6% prior, with the consumer driving the growth. Chinese PMI came in at 51.7 vs 51.2 prior, just around expectations, piggybacking on the Aussie data. However, GS econ was not impressed:

“Despite the fact that it is claimed to be seasonally adjusted, historical headline PMI data showed clear seasonality. Its August readings tend to be higher than its July readings. After adjusting for this seasonality, the PMI was largely flat in August (down by less than 0.1 percentage point).”

The IP number due on September 13 should provide more clarity about Chinese manufacturing growth. PMIs in Europe and the rest of Asia were weak, with UK’s at 54.3 vs 57.0 expected vs 56.9 prior. But the real story, of course, was the US PMI from ISM, which came in at 56.3 vs 52.8 expected vs 55.5 prior, sending risk surging all day from there.

In my most recent pieces, I asserted that S&P 1040 marked an “interim cycle low” and that “risk would be bid in the near-term”. Sure enough, 1040 marked the low and the market surged almost 3% today to close right at its 55d. The four-month-long symmetric triangle is still in play and is approaching its apex by the day. The size of the pattern implies a 200-point move in the S&P upon breakout/breakdown, and with the apex around 1075, this gives bull/bear targets of 1275 & 875. I am bearish and have been looking for a selloff to summer 2009 lows as it is, and the confluence of those lows with the 875 target level is significant. In the near term, however, I think the market will continue to rally on the back of today’s bullish data. Friday’s NFP number could be a gamechanger, however, especially considering today’s ADP number was very bearish. I am looking for the S&P to challenge its 1100 S/R level, which is also at about its 200d, but if there’s some selling around there, that could mark the top. The charts will tell as we approach the apex.

Although the Australian GDP figure was strong, the big consumption behind it means the household savings rate is now down to 1.5%. This could be an unsustainable development, as the entire Australian growth story seems to be leveraged into FIRE, with offshore funding replacing depleted domestic credit, a property market Grantham & Taylor call bubblicious, and the rest of the economy little more than a derivative of excess Chinese credit. Nevertheless, AUDUSD rallied strongly today, as the rising channel I’ve been pointing out remains intact and defining the trend well. AUDUSD may test August highs next, around 0.9200, which is where I expect it to find some selling. I’m bearish on AUD and will probably be looking to add to my short soon around 0.9200 and/or a breach of its channel support line. I initially shorted the cross at 0.9175, expecting to hold it through countertrend bounces into the fall decline I’m expecting, and the bounce it is currently experiencing is something I expected and wanted to hold short into and through. I have raised my stop in AUDUSD back up to 0.9225, by the way, as I’ve hedged my core short holdings, which means the thesis for my AUDUSD short is invalidated only on a breach through August highs.

Besides the long equity positions I’ve been throwing on as a way to hedge my core short positions, I used the AUDJPY cross yesterday to express some additional short-term risk appetite. It paid off, as it took off today for almost 200 pips. I am holding this as an expression of my near-term outlook, which is at odds with my intermediate-term outlook expressed by my bearish positions. AUDJPY now sits right under its 55d, like its risk proxy counterpart S&P 500, and has a triangle pattern in the works. I expect it to rally onwards to about 78.00 if risk continues being bid, and if that is taken out (I don’t expect it to), June and August highs around 79.50 should provide some significant selling pressure. I think both of these levels could provide terrific short entries if my bearish outlooks play out. For now, however, I am long and holding, until near-term bullishness subsides.

A similar triangle is developing in AUDCHF, and if the Franc suffers some near-term selling as Eurozone periphery spreads tighten on the back of renewed risk appetite, I might go short some CHFJPY (which is looking heavy on its chart as it approaches resistance) so my AUD long is funded in CHF and I can play the triangle in the AUDCHF chart. It remains to be seen how JPY & CHF will act in the near term.

Another CHF cross I’m watching is GBPCHF, which broke down below its very long-term 1.58 S/R level yesterday, a trade I had been watching for a long time but admittedly missed. If strength is capped at that 1.58 level, I may short this cross in the near future.

And speaking of GBP, I went short GBPAUD this morning as another way of getting some exposure to risk. In this instance, I used GBPAUD as a proxy to short vol, to which the cross has some significant correlation, as well as go long the China/Australia growth thesis against UK underperformance, characterized well today by the positive China PMI & Australia GDP data and the bearish UK PMI. After breaking down through its support trendline today, it sold off more than 200 pips to bring it to its lower levels since June. In the chart, there is a resistance trendline drawn as well. I would like to note that these two trendlines do not form a triangle together, in my opinion, as they represent two different ceilings/floors for two different timeframes. The support trendline associated with the resistance trednline drawn in already has not yet been defined by a second cycle low after May’s, and if a triangle is to develop, it has not yet in my opinion.

Wheat prices are on the rise, as the correction from recent highs on the back of the Russian drought is basing into a descending triangle. I am still long ahead of an imminent breakout, but will be cutting losses below the 675 support level.

The Dollar Index sold off from its 55d today as risk rallied, as the 38.2% Fibo level I’ve been mentioning (retracement of both November-June rally and June-August selloff) offered strong resistance. Next up could be a test of its 200d, also near its 50% Fibo level around 81.60, where it could find support and rally off of.

To continue my theme of getting long risk in the near-term, I bought some shares in Jos. A. Bank (JOSB) today as the stock broke out of its triangle on heavy volume on the back of a great earnings release today sohwing a 32% increase in profits. Though I was a little late to the trade, I think JOSB could rally up to test April highs aroun $44 in the near future, as price and volume expand from its very bullish technical breakout.

One of my longs, CMG, broke out on strong volume today, surging by about 5.7%. This is a very bullish development on a great looking chart and I expect more strength from here. The triangle from which it broke out implies a move to about $180.

Cloud computing names also showed some strength today, as CRM had a 6% breakout on strong volume. VMW surged 4% on good volume, as well, and it appears coiling for an imminent breakout of its own. Both are bullish charts, and both are long positions I am holding, CRM from last week, VMW from today.

USDCAD sold off today amid the risk appetite but the cross is currently developing a very large triangle pattern extending all the way back to last fall. This is an important cross to watch, particularly for commodities, and an eventual breakout could send it flying all the way back to last summer’s highs around 1.17, a good 1200 pips from current levels. For now, however, it is merely on my watch list.

The last chart for today is a chart of the Russell 2000/S&P 500 ratio, as measured by their ETFs, IWM & SPY, respectively. The Russell is comprised of small- and mid-caps and is a much higher-beta index than the S&P 500. Because of this, the IWM/SPY ratio can be a good indicator of the prevalence of liquidity in the current market environment. It rallied today as risk was bid, but sits squarely in a descending channel originating from April. I will be watching for how this ratio reacts around its channel’s resistance trendline, as a breakout may force me to reassess my bearishness and consider continue follow-through to the upside. However, I expect IWM/SPY to remain trapped in its downtrending channel for now, albeit having countertrend bounces along the way, indicating declining liquidity and consequently risk appetite.

Short EUR/USD | 1.3120 | stop 1.2915 | +320 pips
Short AUD/USD | 0.9175 | stop 0.9225 | +100 pips
Short GBP/USD | 1.5985 | stop 1.5810 | +545 pips
Short /NG | 4.485 | stop 4.510 | +16.12%
Short /ES | 1113.00 | stop 1120.00 | +3.14%
Long /SI | 18.41 | stop 17.75 | +5.32%
Long BIDU | 77.50 | stop 75.60 | +5.60%
Long CMG | 145.95 | stop 140.00 | +9.22%
Long IT | 28.56 | stop 27.55 | +2.56%
Long CCU | 56.30 | stop 55.15 | +4.14%
Long PAY | 23.99 | stop 23.35 | +5.92%
Long SLW | 21.84 | stop 21.35 | +3.07%
Long SOL | 8.09 | stop 7.05 | +11.74%
Long N | 18.00 | stop 17.20 | +8.78%
Long HS | 19.45 | stop 17.75 | +10.95%
Long /ZW | 701.00 | stop 674.50 | +1.00%

Long JOSB | 40.55 | stop 39.30
Short GBPAUD | 1.7270 | stop 1.7420
Long AUDJPY | 75.15 | stop 73.70

Short PCX | 10.85 | cover 10.65 | +1.84%

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DISCLAIMER: Nothing contained anywhere in this commentary, including analysis and trade ideas, constitutes or should be construed as investing or financial advice, suggestion, or recommendation. Please consult a financial professional and do due diligence before engaging in any purchase or sale of securities.

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