Deflation/Risk Aversion Start to Tighten the Noose…

Deflation/Risk Aversion Start to Tighten the Noose…

The weakness seen in Ags, metals, energies, equities, commodity currencies, and strength in the dollar brought back vivid memories of the financial malaise seen throughout Q3-Q4 of 2008. The question as traders going forward is how to play the reinitiating of a pro risk-averse sentiment in the market. In our weekly preview of Netto’s Numbers, we outlined the metrics setting up the equity sell down and what key technical levels would give us a nice proxy of taking profits.

As noted last night, the March 900 puts served today’s price action extremely nicely as not only did we get a nice directional move in favor the puts, but implied volatility crept up across the volatility structure. This move was corroborated by the move in the USDJPY, which had decoupled from its close correlation until recently. The British pound was the one bastard child currency today as GBPUSD, EURGBP, GBPJPY all got crushed. I am looking for any morning strength tomorrow in these crosses to get sold into by the end of the US Equity close.

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Tomorrow’s updated pivot points are as follows…

EURUSD – 13436 – is the new line in the sand and the directional pivot for tomorrow’s action. Any strength not eclipsing this mark should be sold into and play for a move down to 13071 as the ECB heads into its January meeting.

EURJPY – This is one of the real high fliers in the risk aversion world and is worth watching tomorrow as a sign of where things are headed. With a downside target of 11583, any action below 12250 is an opportunity to sell and stack a short position. The daily 15 Moving Average sits at 12541

ZN H9 (10 Year Treasury Notes March – 126-10 is a key spot in the 10 year treasuries as we’ve seen the longer end of the curve under perform the short end. The price action above this level sets up a vacuum move higher to the 128 level…

USDJPY – Monday’s low of 8889 is a level I suspect will serve as a short term pivot high for the remainder of the week as we have lifted our delta hedges on this position from last week’s calendar spread that was initiated at the 94 level and now I am short completely against the Yen futures, or long the USDJPY from the standpoint of taking off the last position of this gamma trade. I think we can see this cross bounce modestly to the 9080 level in the next few days before making a savage run on the lows put in Dec. ’08.

ES H9 ( March S and P Minis) 885 is the natural point of control going forward for tomorrow. We still have yet to replicate the same vigor and enthusiasm when witnessing the price action of the ES over the final months of last year. However, there are flashes during the day of a vibrant market, yet most of the trading juice rests with the currency markets…

Good luck and see you