Good Evening

October 2008: “These capitalists generally act harmoniously, and in concert, to fleece the people, and now that they have got into a quarrel with themselves, we are called upon to appropriate the people’s money to settle the quarrel.” Abraham Lincoln – 11th January 1837 eloquently sums up the passing of the Paulson plan last week to bail out the banking system. Similar action is now taking place in Europe as more banks continue to fail or threaten to fail.

Last week all equity markets fell to multi year lows. Some made these on Tuesday, others on Friday. In Europe, the Netherlands AEX, London FTSE and Swiss SMI indices all fell to their lowest levels in over three years on Tuesday while the German DAX fell to its lowest level in over 2 years on Friday October 3rd.

In the Pacific Rim Australia All Ordinaries made a double bottom – level not seen since December 2005. Hong Kong lowest since July 2006 and the Nikkei fell below 11,000 for the first time since 2004. Nifty of India too fell on 30 September to 3715, its lowest price since April 2007. The US markets fared even worse – the Dow has actually fallen 4000 points since last year.

These falls were also mirrored across markets including commodities (lack of demand now coming through).Silver, oil, palladium (used in the car industry) were badly hit. It seems that traders and investors are cashing in everything and pouring money into safe havens such as Treasuries.This would also partly explain the recent surge of the dollar. However, this current financial turmoil has still some considerable way to go and will probably gather pace and whip up even more fear as it goes along leading to,not a recession but, a full blown depression.

Difficult as it may seem it is vital to try and remain detached from the fear and hysteria and try to understand, not only how the financial world arrived at this point, but also the likely outcome of this meltdown. Sadly the omens for a speedy resolution to the crisis are not particularly good as we are already one year into this downturn. However, two interesting indicators to use to gauge emotion and sentiment of a market are the VIX and Coppock.

The VIX – the fear indicator reached unprecedented levels last week although it began to send out warning signals as far back as May/June 2007 -http://www.making-bread.co.uk/trading-article5.htm and an important part of the trading toolkit. Meanwhile the Coppock indicator is useful as means of establishing when it is safe to re-enter the fray – http://www.making-bread.co.uk/trading-article1.htm.

This week’s economic data will simply continue to confirm that recession is not merely a threat but a reality.The BOE and Bank of Japan have to decide on interest rates. BOJ is expected to keep rates at 0.5% while the BOE is coming under increasing pressure to cut sooner rather than later. Under normal circumstances interest rates would influence the currency market. With an interest rate differential of almost 5% one would think traders would be buying the British Pound against the Japanese Yen. In fact the exact opposite has happened with the charts indicating possible further falls for the Pound.As this pair correlates strongly with the Euro Yen, both have similar chart patterns.Both pairs can also be highly volatile but very profitable if traded correctly.

Finally, one of the most interesting aspects of last week was the price of gold which, given its status as the ultimate safe haven, did not rise as expected.Indeed the gold chart shows that the price may even fall in the short term.Interestingly the CBOE recently launched the Gold Vix to measure market expectation of the volatility of gold prices http://www.ft.com/cms/s/0/7afb1bfe-5ff9-11dd-805e-000077b07658.htmlTrading Concept:
Volatility is not to be feared but understood and, where possible harnessed. Good luck and good trading.
Anna