Weekend wrap up, May 3rd

Tomorrow is a UK Bank holiday, so both London and the LSE will be shut down. However, let's look at a few long term charts and try to wrap up what happened this past week (or couple of weeks) and what we could expect over the next.

Last week, we broke above an upward triangle that had began developing since the beginning of April. The lower boundary of the ascending channel was the triangle's hypotenuse, and the 4100 to 4160s provided the upper resistance.


We also closed the week above the 61.8% retrace from the January 6th high to the 2009 lows: Friday's after-hours close was in the 4250s. The area to watch is between 4280 and the 4330s: this is where the double top was built before the leg down that began in February.

Looking at the longer term picture, last week we began trading steadily above the 200 day weighted moving average: this had not occured since April of last year. Indicators are moving in overbought territory, but we have no indication of divergence for the time being on daily charts or on the longer intraday charts. We are also trailing the upper Bollinger band on the daily.


Last week we reached the 8th week of this bear market rally. The strong rally that we witnessed in the spring of 2008, after the acquisition of Bear Stearns by JPMorgan Chase, also lasted 8 weeks.


Many are calling for an end to this bear market rally. Daily charts are overbought, some weekly indicators are getting there, the rally has lasted a wholesome 8 weeks, and we reached a key retrace area. However, I'll be trading what the charts tell me: and, as we closed on Friday, I could not yet see any bearish argument in the charts (not the fundamentals...the charts).

I'll continue to be cautious, as I have been over the past two weeks. My sketch for the week right now is to look for strength above 4100, preferably between 4120 and 4180, to take longs. However, I'll be on the look out for any sign of pronounced weakness.

With regards to some fundamental facts, this week we saw some interesting developments:

• Fiat has successfully closed its deal with Chrysler, brokered by the US government, and it is currently in negotiation with German authorities to take over Opel, the European branch of GM. With Chrysler, Fiat obtains a full scale distribution platform in the US for its smaller Fiat models and its Alfa Romeo brand: a merger with Opel would provide substantial synergies and cost savings on the European market. Most importantly, we are now beginning to see mergers occuring in troubled, cyclical sectors, not just in defensive ones as it happened for pharmaceuticals earlier in the year.
• On the credit markets, last week saw banks coming back strongly on the issuance front with many unsecured issues and taking the lead over corporates in terms of volume. While the ABS market is still broken, unsecured markets have began to thaw more thoroughly. However, investor interest has also propped up auctions for secured debt: Whistlejacket, once a major SIV and investor in asset-backed securities, concluded its $6 billion liquidation with better than expected results.
• Meanwhile, rumours regarding the stress tests results for the major US banks continue to circle. The results are due for publication on Thursday. While this piece of news could certainly be the trigger to undermine this rally, I don't see the downside momentum we witnessed in October coming back, as some traders are calling for. Unless a major financial institution - and market counterparty - defaults overnight (which is highly unlikely, as governments are acting as backstops) we will not see that kind of volatility coming back. Some banks will likely need to prop up their Tier 1 base with common equity, but the bulk of accounting losses have already been published: what we'll witness is the slow crawl of defaults and impairments that will transform the accounting losses into cash losses, many of which mark-to-market has already recognised.
• An interesting snippet that caught my eye last week was the move by Citadel to expand into investment banking. One of the largest and most successful hedge fund groups made a move into the industry that was caught in the storm of the credit crisis. As investment banks have failed or been bought out, the entry into this industry of a very well informed, smart investor is a sign that, while this market has not bottomed out, we are probably moving towards the final chapters of this bear market.