Hang Seng

Employ Caution in Emerging Markets As Sharp Pullbacks Are the Norm

In light of the recent over-performance of the MSCI Emerging Markets index, a gauge for Emerging Market equities, it seems necessary to analyze what led to this over performance, the current risks to continued growth of the EM space, and what this activity could mean for the industrial markets.  Throughout the market recovery from March to January, investors underwent a “flight to risk.”  Investors sought out assets with the highest yields and sold-off low-yielding treasuries that they had accumulated during the span of the recession.  Yields on 10-Yr US Treasuries went from as low as 2.53 percent in March to as high as 3.84 percent in January.  With that much outflow of capital from T-bills, and the riskiest assets residing in the EM space, emerging market equities were primed for a sharp break.

As the market rally quiets, the correlation between risk and emerging market equities has began to unwind and fundamentals have come into play.  Nowhere is that more true than in China, which is at the forefront of all emerging market talk.  China’s benchmark equity index, the Hang Seng, had a 120-day correlation of 0.97 with the S&P 500 at the height of the recovery, a sign of risk appetite’s overall influence.  That correlation has now dropped to 0.05, which means the two are barely related at all.

China, which at the height of the recovery looked to be in shape to challenge the world’s economic superpowers, now seems like it may be in the midst of “the greatest bubble in history” to quote James Rickards, former general counsel of hedge fund LTCM.  In part, that is due to the 4 trillion yuan ($586 billion) stimulus plan that China adopted during the crisis.  The plan allowed the country’s economy to grow 10.7 percent in Q4 2009, a rate that many experts believe to be unsustainable.  Even China’s central bank recently said that it sees new asset bubbles emerging in certain parts of the world that were brought on by “ultra-loose” monetary policies.  Unless the PBoC heeds its own advice and takes significant steps to reel in inflation caused by the stimulus, steps that would include raising rates or allowing a free floating exchange rate, China’s growing asset bubble is likely to burst and those skeptical of risk should be ready for the inevitable reversal.

In order to position for a turnaround in the emerging market space, it would be beneficial to know where investors are storing their money after selling emerging market assets.  If world equities are any indication, the answer would seem to be developed nations.  The chart below shows the relationship between the US’s World Market Share compared to that of the four leading emerging market countries, known collectively as the “BRIC” nations.  Most recently, that relationship has turned negative, especially among Brazil and China.  In other words, investors selling EM equities are using the proceeds to buy US equities leading to an increase in the US’s World Market Share and a decrease in the respective EM nation.  In the case of China, if an asset bubble were to lead to an economic downturn and the aforementioned relationship were to hold, there would be a mass “flight to safety” in the form of selling of Chinese assets across the equity, bond, and real-estate space and buying of safe U.S. assets like treasuries and Consumer Staples.  Besides the “flight to safety,” the general lack of liquidity for emerging market securities will put added pressure on prices, providing more than enough incentive for emerging market investors to tread carefully in the coming months and to take precautions in case the worst were to happen.

Written by Gary Chalik, CFDTrading Research
Please send any comments about this report to GChalik@fxcm.com

Hang Seng

U.S. Equities Trim Weekly Loss On Fourth Quarter GDP Revision

U.S. Session Key Developments

•    U.S. Fourth Quarter GDP Revised Higher to 5.9 Percent, Personal Consumption Lower
•    Existing-Home Sales Drop in January, Chicago Business Gauge Better-Than-Expected
•    Commodities Trade Higher as Greenback Falls Against Major Cross Currencies

U.S. stocks posted a slight gain in the final day of trading this week, as estimates for fourth quarter economic growth were shown to be higher than previously thought.  Despite today’s gain, however, the S&P 500 closed the week down 0.4 percent to 1,104.  The market-moving GDP revision was announced one hour before the opening bell and showed that the U.S. economy expanded 5.9 percent in the fourth quarter of 2009, better than the 5.7 percent initial estimate.  The GDP data was revised higher thanks to stronger business investment in the quarter and a greater contribution from inventories.  The personal consumption aspect, however, was revised lower to 1.7 percent from a 2.0 percent initial reading.  Overall, stocks traded mostly sideways during the session as other economic data released today was mixed.  The Chicago Purchasing Managers Index unexpectedly rose from 61.5 to 62.6 in February, but the University of Michigan Confidence indicator fell in the month and existing home sales disappointed for January.  Home sales were expected to rise 0.9 percent in January but instead were shown to have fallen 7.2 percent, after declining 16.2 percent in the month prior.

Globally, stocks had a strong day as the major European indices and China’s Hang Seng Index each traded at least 1 percent higher.  Investor risk appetite made a strong return as commodities joined stocks in trading higher across the board.  Crude oil prices gained for the third time this week, adding nearly 2 percent to $79 a barrel, while gold futures posted a second consecutive gain and closed the week near the $1120 level.  As for currencies, the U.S. Dollar was generally weak, falling against most of its major counterparts, including the euro.  The U.S. Dollar Index fell for a third consecutive day, but held above the 80 level for a seventh consecutive session.

DJIA 30                     10,325.26                      +4.23                       +0.04%
The Dow Jones Industrial Average closed slightly above even on a low-volume trading day.  Volume on U.S. exchanges today was slightly under 8 billion shares, 11 percent less than the 2010 average due to a snow storm in New York City and the surrounding area.  JPMorgan Chase led the index with a 3.2 percent gain after analysts at Barclays recommended buying the bank’s shares.  The bullish commentary led to a near full percent gain among financial shares.  Other stocks that outperformed the index included General Electric and drug maker Merck, which each added 0.8 percent on the day.  The worst performer on the index was Kraft Foods, which fell over 1.3 percent on the day.

S&P 500                     1,104.49                         +1.55                         +0.14%
The broad-based S&P 500 posted a small gain in the final day of trading this week on strength in financials and basic materials shares.  Financials rose nearly 0.7 percent on bullish commentary from Barclays analysts as well as commentary from Fed Chairman Ben Bernanke in the past two days that suggested rates would remain low for the foreseeable future.  The basic materials sector added 0.3 percent today, as commodities generally traded higher during the session.  Mining company Freeport McMoRan gained over 1 percent, while Barrick Gold Corp. added 0.2 percent on higher precious metals prices.  On the downside, AIG fell 10 percent for the biggest loss  on the index after posting a fourth-quarter net loss of $8.8 billion.

NASDAQ                     2,238.26                         +4.04                         +0.18%
The tech-heavy Nasdaq was the best performer among major U.S. indices as technology stocks posted a slight gain.  Among the heaviest-weighted fifteen tech stocks on the index, smart phone competitors Research in Motion and Apple posted the largest gains.  Shares of each company rose at least 1.2 percent as shares of Palm, another smart phone competitor, sank on news that company sales may be very weak this year.  Qualcomm was the worst performer among the large Nasdaq tech stocks, dropping 1.3 percent on the session.

Written by James Russell, CFDTrading Research
Please send any comments about this report to JRussell@fxcm.com

Hang Seng

The S&P/ASX Has Broken Through Channel Support

The Japanese benchmark is working its way deeper into a congestion pattern. A series of lower swing highs for the Nikkei 225 over the past two months has developed a convincing wedge formation with the more-established rising trend from April. Realistically, this congestion pattern has more than 500 points of room to maneuver so a trend-defining breakout is not necessarily imminent. However, there is the potential for a short-term break with the pivot and Fib confluence set at the psychologically-significant 10,000 level. A bullish break here is the more likely outcome; but should this level hold, we could quickly progress a deeper retracement of the dominant bear trend.

The Nikkei 225 rally from the October 2008 low is in 5 waves and therefore probably wave within a larger A-B-C corrective (probably a zigzag) advance.  Weakness from the January high likely extends to 9076 (wave iv low).  8494 is additional support.

The S&P/ASX 200 is on a tear. The three-session rally that began with last Friday is the most aggressive bull wave we have seen since the inception of the solid mid-July to October advance. At the same time, the rally may simply be a correction of the late November plunge that still has traders wondering whether Australian equities are developing a medium-term top. In the meantime, we have notable resistance with the pivot (going back to September) and short-term 61.8 percent Fib of the recent bear correction at 4,750. If this level holds, it could develop a head-and-shoulders formation.

The S&P/ASX has broken down below channel support.  A drop below 4503 would expose 4261 and then 4079.  Favor the downside against the January high.

The Hang Seng Index is just off the 15-month highs set back on October 23rd. The trend is still clearly in favor of a test and perhaps breech of this moderate technical level (the 61.8 percent retracement of the December 2007 high to October 2008 low comes in around 22,595). The long-term bias is still well defined by a series of higher swing lows. The only stopping force for Hong Kong equities at this point is momentum. The average true range (ATR) shows the market is the most volatile it has been since mid-August; before the period of congestion and the notable pull back.

The Hang Seng was the leader on the way up and is leading on the way down as well.  The index never reached its November high and is approaching the August low at 19426.  There is potential channel support at 18305 this week (increases 148 points/week) and a drop below would expose 17186, then 15781.

Written by: John Kicklighter and Jamie Saettele, Strategists for CFDTrading.com
Questions? Comments? You can email them to John at jkicklighter@cfdtrading.com.

Hang Seng

Japanese Stocks Hit Resistance, Australian ASX Benchmark Well Beyond Its Ceiling

Nikkei 225

The Nikkei’s reversal over these past two weeks has been fully charged by momentum. In fact, the Japanese benchmark index has seen its most aggressive advance in over two decades. Now, however, we have come upon the first significant level of resistance to be concerned with. After the gap higher, Monday’s advance was stalled at the same level as the swing high from early July. This is a psychological barrier though and is a direct conflict with the market’s underlying trend. Should the strong bias maintain its course, a forced break could essentially be catalyzed to significant follow through. However, with a long-term 50% Fib 130 points above said level, at least a temporary break seems overdue. How long can this record breaking rally last without some relief?

S&P/ASX 200

Though the Japanese market is the focus among the bullish crowd with its strongest rally in decades, the Australian ASX could arguably be considered a more bullish-centric. Advancing 9 of the past ten active sessions, the advance is steady – if yet still slowing. Resistance at this point is more a condition of momentum rather than solid levels. The chop that preceded the October/November financial seizure offers a wide net to hold technical traders back; but a long-term 38.2% Fib at 4,185 may offer something more tangible to work with.

Hang Seng

The Hang Seng’s most recent, bullish leg has not been as clear as some of its Asian region counterparts; but the general direction and momentum are hard to argue with. Once again riddled with gaps, we have seen this surge push through its range of highs through 18,850/19,000. Looking for potential resistance on this run, there is an immediate level to be concerned with in the 61.8% Fib pulled from the May to October 2008 bear wave at 20,385. Perhaps more prominent is the support this region (20,500/350 offered going back to 2007. However, it should be noted that technical levels on the Hang Seng are rarely held to be exact turning points. Therefore, we will watch momentum rather than hard levels to gauge the potential for corrections.

Written by: John Kicklighter and Jamie Saettele, Strategists for CFDTrading.com
Questions? Comments? You can email them to John at jkicklighter@cfdtrading.com.

Hang Seng

Asian Shares See Questionable Resistance, But Momentum May Fortify The Ceiling

Nikkei 225

Short-Term Technical Outlook

The initial bullish break above 9,500 was momentous for the Nikkei 225. However, since that initial spark in volatility; we have seen the drive stumble. There are few levels of resistance above. One of the few technicals allowing for a ceiling on price action is the 38.2% Fib retracement pulled from the equity benchmarks decline from its summer 2007 highs at 9,910. This level has buffeted the market little in the recent past; so those that don’t see the retracement can easily overrun it. At the same time, the market’s real stumbling block at this point is momentum. A retracement to its former resistance – and now the current level of the rising trendline from March’s low – at 9,500 is likely.

Long-term Technical Outlook

The 5 wave decline from the 2007 high in the Nikkei 225 is wave A in a second corrective sequence that began at the 1989 top.  Wave B (underway now) is expected to reach the area of the former 4th wave, which is far away since wave 5 of the decline was extended.  That area is 11691-14601.  The 50%-61.8% area is 12646-13980.  The Nikkei should spend the next several months working towards mentioned resistance.  Staying above 8998 keeps the near term trend pointed up.

S&P/ASX 200

Short-Term Technical Outlook

The S&P/ASX 200 has finally cleared the former swing high, 200-day SMA and minor Fib retracement confluence at 3,965 after a fourth consecutive surge from the benchmark. Wednesday’s close points to initial follow through, but the precedence set by European and US market’s suggest this won’t follow through for a fifth green bar. Looking above, there is little in the way of resistance; so momentum is the key component at this point.

Long-term Technical Outlook

The S&P/ASX completed 5 waves down from its 2007 high in March.  The index should work its way towards Fibonacci resistance over the next several months, which does not begin until 4517.  Staying above 3715 keeps the near term trend pointed higher.

Hang Seng

Short-Term Technical Outlook

Are we set up for a counter-trend pull back in the Hang Seng Index? Recent price action would suggest so. So far this week, the index has stalled around 18,850/19,000 after last week’s sharp rally. It is never wise to trade against a trend as consistent and aggressive as the one that has been in place since March; but there are periods when this drive dips for a breather. For headway, we have the top of a rising trend channel and a long-term 38.2% Fibonacci retracement (of the entire financial crisis decline) in this same region. This may be good for a temporary retracement with initial targets at the former resistance level at 17,650 and then the trend channel floor (which is variable).

Long-term Technical Outlook

The Hang Seng decline from its 2007 high is also in 5 waves (wave 5 is truncated).  The countertrend rally is closing in the 38.2% retracement of the larger decline.  The structure of the rally is unclear but staying above 16334 keeps the series of higher lows intact and favors bulls.  RSI (not shown) has rolled over from above 70 but is not divergent at the recent high (the indicator confirms momentum at the high).  As such, a meaningful reversal does not seem probable at the current juncture.

Written by: John Kicklighter and Jamie Saettele, Strategists for CFDTrading.com
Questions? Comments? You can email them to John at jkicklighter@cfdtrading.com.

Hang Seng

Asian Equities Mixed, Australian Business Investments Plunge Lower in First Quarter

Asia Session Key Developments

· Japanese retail trade improves in April

· Australian business investments falter in first quarter

Asian Equities Mixed, Australian Business Investments Plunge Lower in First Quarter

Price action in the Asian equities market was mixed on Thursday, with the Nikkei tipping higher following the drop in the Japanese yen. The USD/JPY surged higher to trade above 96.00 on speculation Japanese investors were increasing their purchases of foreign assets, while a report by the government showed domestic demands rose more than expected in May. Meanwhile, business spending in Australia plunged 8.9% in the first quarter after rising 7.3% in the three-months through December, and fears of a deepening downturn weighed on the markets as RBA Deputy Governor Battellino continued to hold a dour outlook for global growth.

NKY 225 9438.77

The Japanese benchmark equity index added 12.62 points (0.13%) to close at 9451.39 in Tokyo, led by a 1.19% gain in technology. The advance was following by basic materials, which gains 1.00% during the session, while telecommunications led the decline in the market as the sector slumped 1.58%. Sanyo Electronic Co, the world’s largest maker of rechargeable batteries, jumped 5.2% after the government announced it will try to raise its dependence on rechargeable cells, while Toyota Motor Corp, the world’s largest automaker, advanced 2.7% following the drop in the Japanese yen. At the same time, Japan Tobacco Inc tumbled 6.9% on policymakers look to increase taxes on cigarettes, while Sumitomo Metal Mining Co, the largest gold producer in the region, advanced 6.1% on speculation investors will increase holdings of the precious metal in order to hedge against inflation.

HSI 17885.27

The Hong Kong equities market was closed for the Tuen Ng Festival (Dragon Boat Festival)

ASX 200 3755.70

The ASX fell 45.40 points (1.19%) to end the trading session at 3,755.70, with 9 of the 10 components falling lower. Health care dropped 2.97% to lead the decline, and was followed by a 2.42% drop in industrials, while oil & gas gained 0.04% after Carnarvon Petroleum Ltd discovered a new oil reserve in Thailand. Meanwhile, share of BHP Billiton and Rio Tinto dropped 1.8% and 0.6%, respectively, following the drop in commodity prices, while Australian and New Zealand Banking Group lost 1.2% after the firm sold shares at discount.

Notable Asian Session Event Risk / Economic Releases

Hang Seng

Despite Retracements Nikkei And Hang Seng Trends Still Bullish

Nikkei 225

Short-Term Technical Outlook

The Nikkei retracement has extended beyond last Thursday’s lows. We are now testing the confluence of technicals that was major resistance for the market through the end of April and into the begging of May. The seven month, falling trend (former resistance) is now a floor along with the long-term 38.2% Fib retracement and 50-day SMA around 9025/00. This level is integral to holding up the bullish bias the market has held since March. Should this fresh support give way, it would be a quick drop to retest 8,500.

Long-term Technical Outlook

The correction from 7028 has reached the upper end of the former 4th wave triangle. An Elliott guideline is that corrections tend to end near the extreme of the fourth wave of one less degree. There is also divergence with daily RSI at this high. However, the advance has not even retraced 38.2% of the decline from 2007 yet. As such, additional upside seems likely. Structure of the advance does not appear complete either. In fact, the rally could accelerate in wave iii of c. It is worth noting that waves a and c (labels not shown) would be equal near the 50% retracement of the decline (the area is circled).

S&P/ASX 200

Short-Term Technical Outlook

Unlike the Japanese and Hong Kong markets, the Australian equity benchmark index has a relatively unstable platform for support. An ill-defined, rising trend following the lows starting in mid-March is the primary technical pattern for bulls to follow. On the other hand, we have the double top at 3,815 which can once again prove troublesome for advances. Momentum would be readily available should the aforementioned resistance give way. Alternatively, the choppy and closely set lows of the past two months could easily trip up a bearish break down.

Long-term Technical Outlook

The S&P/ASX is in a similar position. The rally from the low has reached and exceeded the 4th wave extreme but the advance is shy of Fibonacci resistance. Only a drop below 3661 would suggest that a top is in place.

Hang Seng

Short-Term Technical Outlook

While the Hang Seng opened the week sharply lower, the market would make up for the gap through the active trading session; but recovering its lost ground and then some. The initial decline was notable because it would test the 16,300 lows from the past few weeks. A reversal subsequently held the market back from retracing the gaps from last month that drove us through 16,000. The long-term 50% Fib retracement of the July-October down draft near 17,050 is offering a temporary point of resistance; but a true bullish bias can easily overrun this level.

Long-term Technical Outlook

The Hang Seng rally is closing in on the 50% retracement of the decline from the 2007 high. While there is the possibility of short term fluctuations, additional upside is likely in order to satisfy equality with waves a and c (labels not shown). These waves would be equal at 20362, which is very close to the 61.8% of the decline.

Written by: John Kicklighter and Jamie Saettele, Strategists for CFDTrading.com
Questions? Comments? You can email them to John at jkicklighter@cfdtrading.com.

Hang Seng

Nikkei Marks Longest Advance in Four Months Led by Financials, Toyota Cuts Dividends

Asia Session Key Developments

·Global commodity prices slip lower – crude oil pulls back below $58/bbl
·Goldman Sachs raises HSBC to ‘buy’

Nikkei Marks Longest Advance in Four Months Led by Financials, Toyota Cuts Dividends

The Nikkei 225 advanced for the fifth day to mark its longest winning streak in four months, led by financials however, the ASX and the Hang Seng Index slipped lower from the previous week as investors soaked in profits following the drop in global commodity prices. Despite the downtick in the equities market, the Asian indices have gained nearly 50% from the March lows, and stock prices may continue to push higher over the week as market participants continue to raise their appetite for higher risk/reward investments.

NKY 225                                           9451.98
The Japanese benchmark index advanced 19.15 points (0.20%) to close at 9451.98 in Tokyo, led by 3.33% gain in financials. Mizuho Financial Group, which obtains more than half of its profits from commodities, jumped 14.68% as oil prices surged to a six-month high last week, while  Inpex Corp, the largest oil and gas explorer in Japan, picked up 3.7%. On the other hand, Toyota dragged on the markets as shares fell 4.8% as the world’s largest automaker cut its dividend for the first time, and said that its net loss for 2010 will widen to $5.58B. Furthermore, Bridgestone Corp, the world’s top tire-maker, plunged 6.99% as investors speculate that the firm will post a bigger-than-expected loss for the first half of 2009 as demands falter, which weigh on Sumitomo Rubber Industries Ltd, who’s shares slipped 4.1% after the firm raised its forecast for first-half losses.

HSI                                                         17087.95
The Hang Seng index plunged 301.92 points (1.74%) to end at 17,087.95 after rising as much as 1.7% during the session. Utility stocks led the decline as the sector slipped 2.67%, while consumer goods fell 1.94% from the previous week however, shares of HSBC, the biggest bank in Europe, surged 3.9% in Hong Kong after Goldman Sachs raised the stock to ‘buy’ from ‘neutral.’ Moreover, Cathay Pacific Airways jumped 7.78% on speculation that the firm plans to sell some or all of its stake in Hong Kong Aircraft Engineering (Haeco) in an effort to weather the downturn in the global economy.

ASX 200                                            3926.00
The ASX 200 slipped 15.07 points (0.40%) to close at 3,926.00 in Sydney, led by a 2.67% drop in utilities. Rio Tinto Group, The world’s third-largest mining firm, shed 3.2% after metal prices slipped lower in London, while shares of Australian Agricultural Co slumped 9.2% after the firm dropped plans to sell its ranches worth nearly $192M. Meanwhile, Woodwide Petroleum Ltd, Australia’s second biggest oil and gas producer, jumped 3.96% as oil prices held near a six-month high.

Hang Seng

Asian Stocks Threaten To Revive Long-Term Bull Trend

Nikkei 225

Short-Term Technical Outlook

Last Thursday, it seemed as if Japanese equities were charging up the next, long-term bear wave. However, Friday’s bullish gap and aggressive rally threw the breaks on any immediate downdraft. At the week’s close, the market was still below the range high at 8,825 that was so prevalent over the previous week – so there was still a chance that bears could revive their drive. However, after seeing Monday’s bullish follow through; it is clear that the probabilities have changed. Now stationed just below the 9,000 resistance defined by a long-term 38.2% Fib and notable falling trend top, the market does not have to overextend itself to force a breakout to revive the long-term bullish trend (in contrast to the spent rally through March and into April). The market will retain its bearish lean until there is a confirmed close above 9,000.

Long-term Technical Outlook

The correction from 7028 has reached the upper end of the former 4th wave triangle.  An Elliott guideline is that corrections tend to end near the extreme of the fourth wave of one less degree.  With the index trading at the upper range of the recent range, I favor the bearish side near term, even if just for a few weeks.

S&P/ASX 200

Short-Term Technical Outlook

The Australian stock market has made a clear and forceful break for direction with Monday’s rally. Though we technically saw a breach of 3,815 three weeks ago, the rally was immediately snuffed out as the market lacked conviction in what could have amounted to the next step in confirming a bullish market cycle. Monday’s candle comes with all the correct features. The rally opened at the session low and closed at its high; the close has brought us to a new high; and there are few significant technical levels in the immediate vicinity to curb the drive. Follow through should be easy to generate after having run so many stops and triggering bullish entry orders. Therefore, if we do indeed see a pull back; we would be very skeptical of the strength behind this trend.

Long-term Technical Outlook

The S&P/ASX is in a similar position.  The rally from the low has reached the 4th wave extreme.  As such, it is possible that the entire advance from the low is complete.  It is also possible that the rally from 3073 is just the initial leg of a larger correction.  Either way, a setback is likely over the next several weeks in either the resumption of the long term bear or wave B of a correction.

Hang Seng

Short-Term Technical Outlook

We have seen monumental reversals across Asian equities; but none of the developments exuded the wild abandon that the Hang Seng Index has shown through its three day turn. It began on Friday with a bullish gap that curbed momentum behind a bearish channel break. However, the market could have retained its bias from that point. With the follow up gap over the weekend and aggressive rally through Monday’s session though; there is far more certainty that we are seeing a trend revival after a brief pause. We have already overtaken last month’s swing high and the 200-day SMA at 16,000 with yesterday’s move. The next objective for bulls will be the long-term 38.2% Fib at 17,000. Beyond this, resistance will spread out.

Long-term Technical Outlook

The Hang Seng is in the exact same position as the S&P/ASX.  The rally from the low has reached the 4th wave extreme.  As such, it is possible that the entire advance from the low is complete.  It is also possible that the rally from 11344 is just the initial leg of a larger correction.  Either way, a setback is likely over the next several weeks in either the resumption of the long term bear or wave B of a correction.

Written by: John Kicklighter and Jamie Saettele, Strategists for CFDTrading.com
Questions? Comments? You can email them to John at jkicklighter@cfdtrading.com.