Author: ColinTwiggs

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Nasdaq hints at recovery

Dow Jones Industrial Average is testing resistance at 11700. Breakout would warn of a primary advance, but the market is prone to false signals because of excessive volatility and it would be prudent to wait for confirmation. Respect of 11700, or a false break above 11700, would re-visit support at 10600.

Dow Jones Industrial Average

* Target calculation: 11000 – ( 12000 – 11000 ) = 10000

The S&P 500 is similarly testing resistance at 1230 on the weekly chart. Breakout would signal an advance to 1350, while respect would indicate another test of 1100. Breakout above the declining trendline on 13-week Twiggs Money Flow suggests nothing more than a secondary reaction (bear market rally). See the monthly chart.

S&P 500 Index

* Target calculation: 1100 – ( 1250 – 1100 ) = 950

The Nasdaq 100 index, however, broke through 2350 and is headed for its July high. Bullish divergence on 13-week Twiggs Money Flow indicates reversal to an up-trend. Breakout above 2440 would confirm, offering a target of 2800*.

Nasdaq 100 Index

* Target calculation: 2400 + ( 2400 – 2000 ) = 2800

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Causes of the Crisis: Basel II

Why do they [European financial institutions] hold so much Greek government debt? Because under Basel II, implemented (outside the United States) in 2007, Greek government bonds, rated A-, had the same 20 percent risk weight as AA/AAA asset-backed securities in the United States. That is, until S&P downgraded Greek debt from A- to BBB+. That raised the risk weight to 50 percent, suddenly requiring 60 percent more capital from banks holding Greek bonds.

This appears to be the reason that the possibility of Greek default has led to fears of another banking crisis.

via Causes of the Crisis: February 2010.

The 20 percent risk weight required banks to only hold $2 of bank capital against a $100 security — at the 8 percent Basel rate for adequately capitalized banks — allowing 50 to 1 leverage compared to 12.5 to 1 on normal bank loans.

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Germany, France Hail Debt Progress – WSJ.com

According to a European Union official familiar with the situation, Germany and France are weighing two models but leaning towards using the fund to insure bonds from euro-zone countries.

….Germany and France are (also) fine-tuning a proposal for European banks to bring their core Tier 1 capital ratios, a key measure of financial strength, to 9%, within six to nine months, said the EU official, who spoke on condition of anonymity.

Europe’s two largest economies agree that the region’s banks should seek to raise funds in the open market and will suggest giving the banks up to nine months to fulfil the new capital requirements, the official said.

via Germany, France Hail Debt Progress – WSJ.com.

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Big Banks Are About to Get Blasted by the Volcker Rule :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website

Since a significant chunk of the big banks’ profits – especially that of Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) – come from various forms of proprietary trading, the Volcker Rule stands to cost the industry billions in revenue.

To prevent cheating, complex compliance rules will require that banks prove that all their trading activities are for clients’ benefit, and not proprietary. Compliance alone is expected to tack on another $2 billion in costs.

via Big Banks Are About to Get Blasted by the Volcker Rule :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website.

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Roubini: Moving From the Post-Bubble, Post-Bust Economy to Growth | Credit Writedowns

It is not only the U.S. economy that is in peril right now. …Europe is struggling to prevent the sovereign debt problems of its peripheral Euro-zone economies from spiraling into a full-fledged banking crisis… Meanwhile, China and other large emerging economies… are beginning to experience slowdowns…Nor is renewed recession the only threat we now face. Even if a return to negative growth rates is somehow avoided, there will remain a real and present danger that Europe and the United States alike fall into an indefinitely lengthy period of negligible growth, high unemployment and deflation, much as Japan has experienced over the past 20 years following its own stock-and-real estate bubble and burst of the early 1990s.

via Roubini: Moving From the Post-Bubble, Post-Bust Economy to Growth | Credit Writedowns.

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Even a Slovak ‘Yes’ will make no difference – Telegraph Blogs

Mr Sulik (Slovakia’s speaker of parliament) is right. The EU-IMF rescue loans have not helped Greece pull out of its downward spiral. They have pushed the country further into bankruptcy. Greek public debt will rise from around 120pc of GDP to 160pc under the rescue programme, and the IMF is pencilling in figures above 180pc.

The rescue loans have rotated into the hands of creditor banks, life insurers, pension funds, and even a few hedge funds. ECB bond purchases have allowed to investors to dump their holdings at reduced loss, shifting the risk to EMU taxpayers. It is a racket for financial elites. A pickpocketing of taxpayers, including poor Slovak taxpayers.

“I’d rather be a pariah in Brussels than have to feel ashamed before my children,” he said.

via Even a Slovak ‘Yes’ will make no difference – Telegraph Blogs.

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Euro rallies on hope of bank rescue

The euro is headed for a test of $1.40 against the greenback, on the hope that European banks will be re-capitalized after taking a haircut on the PIIGS bonds. There still appears to be some confusion — I suspect deliberate — as to who will pay, with German Finance Minister Wolfgang Schaeuble suggesting that banks first attempt to raise money from investors. Given the current state of financial markets, private investment will be scarce and European taxpayers are likely to end up with sizable stakes in a number of banks. Expect resistance at $1.40 to be followed by another test of support at $1.30*.

EURUSD

* Target calculation: 1.40 – ( 1.50 – 1.40 ) = 1.30

The pound is similarly headed for resistance at $1.60. Respect would signal another test of $1.53.

GBPUSD

* Target calculation: 1.53 – ( 1.60 – 1.53 ) = 1.46

Canada’s Loonie and the Aussie dollar both benefited from a surge in commodity prices. Expect the CADUSD to find resistance at parity, followed by another test of support at $0.94.

CADUSD

* Target calculation: 1.00 – ( 1.06 – 1.00 ) = 0.94

The Aussie will find resistance between $1.02 and the descending trendline. Respect is likely and would indicate another test of $0.94.

AUDUSD

* Target calculation: 1.02 – ( 1.10 – 1.02 ) = 0.94

The Aussie has formed a broad double bottom against its Kiwi counterpart. AUDNZD breakout above $1.28 would signal a primary advance to $1.32*.

AUDNZD

* Target calculation: 1.28 + ( 1.28 – 1.24 ) = 1.32

Support is holding firm on the dollar-yen cross — with assistance no doubt from the BOJ. Expect a narrow range between 76 and 78.

USDJPY

The South African rand is testing support at R7.70 against the greenback, after penetrating its rising trendline. Probably because of all the visitors returning early from the Rugby World Cup. 🙂 Apparently they have invited the referee to run a series of clinics in South Africa on his novel interpretation of the forward-pass rule. I suggest that he decline — it could get violent. Failure of support would offer a target of R7.00*

USDZAR

* Target calculation: 7.70 – ( 8.40 – 7.70 ) = 7.00

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Crude and commodities rally

Brent Crude rallied off support at $99/$100 per barrel, headed for a test of the upper trend channel. 63-Day Twiggs Momentum above its descending trendline warns that the down-trend is weakening. Breakout above the upper channel would test the 2011 high of $125/barrel.

Brent Crude

CRB Commodities Index similarly rallied off support at 300. 63-Day Twiggs Momentum is still declining and failure to reach the upper trend channel (on the price chart) would warn of an accelerating down-trend.

CRB Commodities Index

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Dollar retreats, gold rises

The US Dollar Index is retracing to test support at 76.00. Respect of support would confirm the primary up-trend and offer a target of 84.00* for the next advance. A 63-day Twiggs Momentum trough above zero would strengthen the signal.

US Dollar Index

* Target calculation: 80 + ( 80 – 76 ) = 84

Spot gold is testing the declining trendline and resistance at $1700/ounce. Respect would warn of a decline to test $1500*. The primary trend remains upward and will resume if the Fed introduces further quantitative easing in the months ahead.

Spot Gold

* Target calculation: 1700 – ( 1900 – 1700 ) = 1500

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