Trading Day: slipping away…

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The S&P/ASX 200 Index closed down 38 points or 0.9% lower to 4247 points today. In after hours trading, the index is down a few points, with Euro and US markets pointing to lower opens.

Asian markets had a similar day, with Japan’s Nikkei 225 also down 0.9% to 8463 points, the Hang Seng losing almost 3% to 18798 and the Shanghai Composite currently down 2.17% to 2474 points.

In other risk assets, the AUD was sold off against the USD losing more than 1% (see my chart analysis at bottom of this post) falling to 1.0066, whilst WTI crude also lost 1% and is currently $98.41 USD a barrel.

Gold echoed the tempo of the falls and slipped 1% during the Asian session and is currently at $1764 USD an ounce or $1751 AUD an ounce.

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Movers and Shakers
A red day on the board of the ASX, with all sectors losing, financials the biggest loser, down 1% whilst telecoms stocks went almost unscathed.

The banks were actually mixed, with ANZ down 1.1%, Commonwealth (CBA) losing another 1%, National Australia Bank (NAB) bucked the trend – maybe because they’re not passing on the interest rate cut to business borrowers – and was up 0.4% whilst Westpac (WBC) lost over 2%

Macquarie (MQG) also lost 2%, whilst healthcare stalwart Cochlear (COH) was sold off by nearly 2% to $54.34 a share. Its “twin” CSL continued to make gains, up 0.83% (presumably on AUD weakness, but why not COH as well?) whilst Telstra (TLS) was steady.

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BHP Billiton (BHP) fell 0.6% against a steady Rio Tinto (RIO) whilst gold miner Newcrest Mining (NCM) slipped over 1% as gold reversed course.

Fortescue (FMG) was very quiet again – only down 1.4% alongside a heavily sold off Woodside Petroleum (WPL) which lost 3%. Defensive stock Woolworths (WOW) lost over 0.5%

The Charts
There are 4 charts I want to focus on today – the ASX200 as usual, the AUD/USD, the US S&P500 index and the US Dollar index (DXY).

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First, remember that risk markets – i.e shares and most non-USD currencies – move inversely to the USD and USD-denominated bonds. Risk on/risk off, Karate Kid style.

I’ll start with the US Dollar Index (DXY) chart which is very bullish:

After the initial breakout in late August, the DXY dropped as risk markets rallied around the world. A second breakout, back above support and the long term moving average is pushing the DXY back to resistance at 78.80. A sustained move above that level will likely see the Federal Reserve enact QE3 to weaken the USD.

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We can see this USD strength reflected in AUD weakness, which has just breached support today to fall precariously close to parity with a target of 95 cents below:

From the equity side, the S&P500 stands at a triangular crossroads, having completed a reflated rally (note how the rally has decelerated).

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There is a considerable danger that the S&P500 will not be able to climb out of its current pattern (and above its long term moving average, which every trader watches) and will fail support at 1220 points.

This brings us to the ASX200, which is closely correlated to its American cousin, but stands in relatively worse shape.

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The market has repeatedly failed to clear the 4350 point resistance level, indicating selling pressure and a reluctance of bulls to bid the market up, even though valuations are “cheap”.

I have continually cautioned that this is a typical bear market rally that has a low probability of morphing into a cyclical bull market. Risk markets are not believing that a European solution has worked and are not prepared to buy up assets in participation of a “miracle” through financial engineering via the ECB.

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Tread carefully and assign your asset allocation based on the risks.

www.twitter.com/ThePrinceMB