Crucial Days Ahead for Global Stock Markets

The noise of the talking heads has become deafening.  Most investors have lost heart as a result.  That makes it more difficult to keep to a distinct and clearly marked investment path.

However, is this miserable mood really justified? - No, no I am not talking about fundamentals, the potential fallout from Europe imploding, US not agreeing to reduce a deficit, instead rather harp on overdone ideologies. And I am sure you can come up with another 50 examples of why calamity in stock markets is just around the corner.  I am talking about technical analysis of the advanced kind, the ones with reliable forecast ability.

It's all in the eyes of the beholder: if you are uncertain and more inclined to expect the worst, no amount of fair indications will turn you head.  What is needed is the convinction that a problem, ANY problem, will come with adequate solutions, ultimately, if we only keep our wits together.  Sadly, the majority of our news caster have been 'murdoched'! (don't know whether that is in the English dictionary yet: it's short for "i don't really know whether what I am telling has any relevance, but I've been told to do it anyway, - it's my job.')  And so the same story goes around the world...

Getting a Grip!

If I join the moaning whimpies I might find a very large consenting audience at the moment, but I am not looking for such. Allow me instead to offer some different market perspectives to the doomsday scnearios abound.

First up the USD:

Consistent with my previous forecasts, I continue to see the USD trading largely range bound, but still aiming at reaching 0,81 (the upper channel level) sooner or later.  The low point end of October also marks the lower channel level.  We may see lower volatility going forward, resulting in smaller swings, tilting slightly upward.  (Please see outline red and green arrows of anticipated future price moves.  The lighter coloured version denotes the less positive route for the USD - because it is tilting down -, but still a valid alternative). 

At the moment, (see orange circles) the USD has finished a zigzag move from the September top,, now 'oversold' in the RSI and CCI,  and facing the same resistance from the long standing Fibonacci level.  In a word, I think that this level is due to hold this time around and that the USD will start a series of smaller zigzag moves, retracing some 50% of the recent rally.  Only after January 2012 could we see a successful attempt at breaking through the upper channel level and reach the all important 0.81 level, - probably by February 2012?

Gold 

In such an environment, gold and commodity prices are unlikely to see any gains.  Indeed, gold and other precious metals are more likely facing a repeat of recent large sideway swings, tilting slowly downward.  That said, as the large framing red and blue arrows suggest, gold prices may be moving into a wedge form, which - when a break out happens - will send an explosive signal to all you gold bugs.

From Medium-Term View to Short-Term Perspectives

Neither the gold prices nor the movements of the USD in the medium term, however, are helpful in considering as to where the markets are right now.  As the title says: there are crucual days ahead! The short term momentum now needs firm footing in index levels to stop investors - sensing a repeat of 2008 stock market capitulation - abandoning their positions in great panic.

As for the level headed guys, they probably have already ticked off the fundamental noises and are, instead, looking for technical signals to support their decisions right now.  For what it's worth, here are some of the markers I have placed on majpr indices:

S&P 500

This view, aligning USD and S&P 500 rarely is rarely observed though its relevance is rather striking: For one, the two charts clearly are inversly correlated, turning at identical turning dates.  For non-US dollar investors, this has considerable impact on the volatility of the otherwise rather ferocious moves both up and down.  let's just view one particular time period, - from October 3rd, to November 3rd:

The S&P 500 climbed sharply by 17%. The USD fell by -6.3% against world currencies. Depending which currency you traditionally focus on, the actual return may therefore be nearer 10%.

A similar effect can be seen, when the index falls - and the USD rises.  (November 5-till now)

Why is this important?  In the average punter's view, his expectations are based on the index returns only, usually ignoring the impact of currencies. They could end up comparing apples with oranges.

Short Term Perspective

To ensure that the turning point we envisage for a Santa rally stays on track, the following support levels must not be breached: 

S&P500:                            1120 

FTSE 100/UK:                   5000

STI:                                     2650

Hang Seng:                      17400

ASX AORD:                         4050

Sensex (India):                15100

Bovespa (Brazil):            53770

In other words, these levels must hold now for the near future, or the Santa rally is not just delayed but is dangerously close to fall by the way side. It is thin ice, we are skating on.

Assuming they hold, we should see stocks in a renewed upward momentum, within a relatively stable currency environment, starting this coming Monday.

So, should there be a Santa Rally at all?

Firstly, my research suggest that the market participants are pricing in enormous negative outcomes of what of course are rather trying investment conditions. But they also realise that a lot of people are working hard to restructure and rebuild ailing economies in Europe and - the US. They also know that by the time new solutions are implemented and gain traction,stock markets will have anticipated the solid promises of future growth and have moved up strongly. Remember, a recession does not mean a bear market in stocks. The bears turn up long before that.

Just to give you a little flavour of situations ripe for a turnaround: Bonds yields have risen to highs not seen in decades, now even in German bunds. High Yield bonds are now almost on par with the risk levels normally associated with equity, suggesting that the risk premiums, demanded currently, are well over the odds. The only drawback is that we are expecting politicians to sort out the mess they did not even recognise till the stock market bottom of March 2009. Solutions must come from those who know what's really necessary now. - Those guys are out there, and so are the solutions. I have heard and seen evidence of quite a few very sensible idees. The change in leadership in Italy and Greece also is along the right track, - to me at least.

But I am digressing, - at the wrong time, as this time right now demands a positive approach. - I think the prerequisites for the savy investor, initiating a nice year end rally, are already in place. They have been testing markets for some weeks, found that support levels have been holding up nicely. Leading markets are recording higher lows, but also good volume when the markets turn up.

"BUT IT COULD BE A BULL TRAP!" many retort. Yep, it could, couldn't it! That's why I bothered to tell you about my safety levels. The rest is up to you... We certainly are ready to rumble.