Key Technical Levels

  • May 21, 2004
  • Dave Floyd

Risk
Aversion

If there were two words that
sum up major markets presently, FX included, it is “risk aversion”.  The last
two weeks have produced sideways price action with no real tangible “stories” or
technical patterns for traders to sink their teeth into.  As traders we can only
be patient and ride out this quiet phase, forcing trades will only waste
precious capital.

So what are some of the risks
that the market appears to be concerned about?

  1. Strong US jobs and inflation
    data have eliminated any hope that the Fed will be on hold until 2005

  2. China’s tightening raises
    fears of a “hard landing”

  3. Rising oil prices

  4. Terrorism and geo-political
    risks

Before we get to that however,
it should be noted that the FX market, as of Thursday evening appears to have
finally broken the recent trading range.  The moves up in the EUR and GBP have
been solid, over 100 pips.  However, trying to anticipate these moves earlier in
the week was rather frustrating and costly.  The market now appears in a
position for us to establish longs on any pullbacks.

The prospect of higher rates
sooner, rather than later, is giving the markets reason to pause.  Despite the
bond market doing 100 bp’s of tightening already the jury remains out on just
how much this new monetary stance will effect GDP growth going forward. 
Estimates range from 0.6% all the way to 1% shaved off of GDP in the year
ahead.  It would appear the market is trying to get its hands around such an
outcome.

A “hard landing” in China may
be the most recent sound bite regarding market behavior lately but despite the
headlines, China’s growth will slow, but not likely plummet.  Naturally there
always remains that possibility of not being able to engineer a soft landing in
an emerging market.

Higher oil prices, if
sustained, will always have a negative impact on markets.  A sustained 10% rise
in oil prices will typically reduce 0.3% off G7 GDP growth within a year.  Given
that oil has risen more than 10% year to date, and possibly higher still, the
possibility of raising that level to 0.85% is not out of the question.

Terrorism.  Naturally we know
what this does to markets, uncertainty.  With no end in sight to random acts of
terrorism, the markets will remain on tenderhooks.

In fact, all of the above
scenarios are reasonable grounds for the market to pause and wait for a more
definitive outcome.  While I do not like to rely too much on fundamentals/macro
analysis, many market participants do and it serves as a useful way to frame
present conditions.  Technically speaking, the market is still wrestling with
key levels.  Let’s review them:

S&P 500:

1113

1103

1094

1084

1076

EUR/USD:

1.2054

1.1958

GBP/USD:

1.7865

1.7955

1.7566

Continue to trade lightly until
price action loosens up a bit.  Yes there are opportunities each day, however,
you must be selective.  From an HVT standpoint, it remains the “story” stocks. 
The market is so rotational each day that one needs to seek out where the action
is rather than waiting for the action to come to them.

As always, feel free to send me
your comments and questions.

Dave