Friday

Friday Analysis: Deleveraging on Dax

Post a Comment May 22, 2009 – 7:37 am |   | Permalink |  Print This Post |

Last nights sharp move down was expected - the Candle chart for the Dax demonstrated this the clearest, with a long tail up (high of 5045) - this is usually a sign of a top3. Together with our earlier analysis of a turning point around 19-20th May, it both aligned nicely in favour of a significant fall. We have been calling for a pullback for a while, with initial aim for the Dow to hit 7400 and to top at least at 8150. This was back when the Dow was still struggling at 7800 levels. Dow has gone up to a closing high of around 8504 (way above our estimate) after weeks of consecutive rally. We started shorting the Dax at 4850, anchored more at 4885 and another at 5000, for a total of $15/point (still net down at current levels). We have decided to close $5/point (our 5000 short) now at 4888, realising $560 profits. Rationale being: deleverage in case our analysis is wrong, 4900 is where the 30 day moving averages are, and the bulls may try to defend this level - our $500 profit giving us a free 50 point-buffer to hold our existing $10/point longs. We will reshort if it goes back to 5000 (unlikely).

Our short term indicators suggest markets may bounce Friday. The higher it goes, the better (so that we can reshort). If markets dive further pre-open we may take a small long or close more shorts (same thing).

On a bigger picture, we think the Dow has made its top for now, and will start a decline to sub-8000 (nice round number to breach) before heading higher. We look to close some more of our profitable longs. Gas has expectedly pulled back after strong rally, we think this is a long term play and that prices may bottom feed for about 6 months before heading higher.We will gladly buy more Gas - Crude Oil is currently trading at $61 (July contract) whilst Natural Gas is currently trading at 3.58 (June contract - we cannot find a July contract) - giving us a ratio of 16.9. This is almost at unprecedented levels! We will look into a discrepancy play between gas and crude oil - but we need to work out the ratios (and it makes it difficult when both have different expiries). We still remember the lesson we learnt going long on Natural Gas contracts - it made a sharp decline and subsequently rallied right after it expired - again demonstrating manipulation at its best.

We have missed out on the Gold rally - it is possible that it has broken through the resistance - and the anticipated decline in markets (ie Dow heading to sub-8000) will fuel Gold’s rally even further.

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