SOFIX - Trendline Breakout Confirmed

SOFIX has now a confirmed Trend line break and targets the psychological Resistance at the 400 level. A break above will make the market focus on higher Resistance levels: 428 / 469 and the 2009 top above 500.

Risk is on a dive back below the broken trendline the odds of which diminish greatly with the rise of inflation and the global recovery we are monitoring in major markets. The money will soon start to flow from the center to the periphery again and frontier markets like Bulgarian Stock Exchange will find its spot under the sun.

US Dollar Index Reversal tracking the Flattening 2Y-10Y UST Spread

The chart shows an extremely tight correlation of the US Dollar Index to the 2Y/10Y UST Notes Spread. The strength in the USD has been fueled by the Steepening in the spread following the Nov '10 announcement of the QE2 program.

This however seems to have run its course and the spread is turning flat along with the violent reversal in the USDX last week. This might be linked to an undergoing allocation into bonds or the effect of the ongoing bond purchases by the FED as the rate rise is postponed for the time being.

The reversal of the USDX ahead of the Resistance at the 200-DMA is a bearish sign and the ADX reading is signalling a pending Trend strengthening of the down move. RSI and Momentum indicators basically reflect the range trading conditions since Dec '10.

The EUR/USD staged a strong recovery off the 1.29 Support level as indicated in previous posts.

I had to rethink my thesis for USD strength in light of the latest developments and I assume the market will focus now on the unfolding Large Uptrend Channel as marked on the chart.

Trade wise I'd like to see a close above 1.35 for the 1.37 target to come in focus. I expect the price to lift into the 1.35-1.37 range for the next week. The bullish bias in the EUR/USD is present and only a close below 1.3240-50 would negate the present momentum and will force the market to re-think the current scenario.

UST 30-Year Bond - Pullback to 123

Lookinf for a bounce into the upper channel trendline resistance around 122-123 after the Flat Support at 119 held the current slide.

Global Macro Update

S&P 500 started to decline after reaching overextended level of complacency. While the pullback was much expected we must see 1235/40 broken to look for a bigger slide.

10-Year Notes have been in an oversold state for quite some time and need to hold above 119 for a move higher. There is a case for higher yields on the back of better employment data released this week however with the pending slide in Equities I'd look for a flight to quality pushing the Notes higher into the 121 level.

Increased Volatility in Precious Metals suggests a possible Distribution phase is in progress.

Price action around 1355 would determine the Short term sentiment in Gold.

Dr. Copper as traders call it is leading the Equities cycle and is still strong however just like S&P it is in pullback mode and we should monitor 420 and then 410 levels to offer support.

Last week's news of the large trader holding approximately 85% of LME's Copper is interesting and points to a possible squeeze just like the large exposure of the GLD ETF to physical Gold price might severely affect the price action once the public participation starts to fade and the holdings are started unwinding.

FX Review: Majors and the USD Bullish case

Major currencies are all giving their gains to the US Dollar with once exception: the Canadian Dollar. According to a Research report by the Bespoke Investment Group (http://www.bespokeinvest.com/thinkbig/2011/1/5/country-market-caps.html) "With a gain of 0.54 percentage points, Canada saw the biggest increase in percent of world market cap in 2010."

For the technical levels on the various currencies, please look at the brief technical annotations on the chart attached.

Against the dominant notion of the effects of FED's QE2 program the USD has been on a surge since the announcement of the plan in Nov '10. Technically the break of the 80 psychological level is a sign of strength seen also in the RSI and just recently the ADX Buy signal.

The grand battle should happen at the flat 200-DMA at 81.66 which if overtaken will result in a trend acceleration. Euro-zone Peripheral Debt problems coupled with the pending pullback in major Equity indices and Commodities would see a flight to safety into USTs and thus will boost the current trend in USD. This is a scenario in the making so I'm watching it vigilantly how it will play out.

This chart gives a vague idea of the correlation in the move of the UST 10-Year Yield and the current USD trend. Since mid Oct'10 the Yield starts to lead the direction of the USD which is presently lagging a big portion of the move and thus I assume an acceleration once the 200-DMA in the USD Index is taken out.

EUR/USD needs to hold above 1.3055

EUR/USD 4 hour chart:

The pair needs to hold above the 1.3055 crucial Support in order to fend off the bearish momentum which would overtake the market once below that level.

Market is currently sitting on a thin Support trendline around 1.31 and the Support cluster area 1.3082-85 and the 1.31 big Figure. The current drop in EUR/USD will be negated only after the pair regains decisively the 1.3270 level.

Below 1.3055 the Bearish scenario focuses on the 1.2966 Low and the consolidation range in the 1.2640-1.2920 area.

US Sector Performance vs S&P 500 - Small & Mid Caps Outperformance

Small Caps (RUT) and Mid Caps (MID) Outperform the S&P 500.

IWM and MDY ETFs track best these cash indices.

Financials rallied off the lows in Dec 2010. Energy sector performed very strong in Q4.

Consumer Services and Basic Materials were the strong performers in 2010.

Health Care has been the weakest performing sector in 2010. Consumer Goods reversed their strength in Q4.

There was volatility in Q3 in Technology sector, however performance is overall flat for the 2010. Home Construction was a consistent Under-performing sector which bottomed out in Dec 2010.

Utilities as a defensive sector finished 2010 near the lows of the 2010 range. Industrials were a consistently outperforming sector and given the economic recovery builds momentum in 2011 they will continue to do well.