Kruger Insights Tuesday – December 17, 2013 by FirstMacro

BinaryOptionsNow | Published on December 17, 2013 at 3:59 pm

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Now Or Never – I’m not too sure how much volatility we will get in the markets on Tuesday, with participants squarely focused on the outcome of Wednesday’s Fed policy decision. Irrespective of the outcome, I believe this will be a huge decision that will have a major impact on markets going forward. Recent economic data has certainly been supportive of a shift in policy, and would seem to justify some form of a taper at a minimum. More importantly, strategically, I think a taper or some very strong language tomorrow warning of an imminent taper, would be in the Fed’s best interest. I am in the camp that believes risk assets have been supported over the past several years by Fed policy. My worry now is that risk assets have finally taken full advantage of a Fed policy that can’t extend any further. If the Fed continues to show an unwillingness to reverse policy even the slightest, we could see a scenario where risk assets start to come off heavily (investors book profit as they no longer see additional incentive from the Fed), with the Fed having nothing it can throw at the situation to buoy the risk liquidation. This in turn would create a credibility crisis and another economic crisis. If however the Fed starts to move on a path towards tightening, at least markets will be able to reconcile any pullback in risk assets, understanding that it is because of the Fed moves. This seems to be the better route at this point, as it will produce a less panicked reaction.

kruger insights december 17, 2013

Forget About Monday – Technically, I believe risk assets should come under intensified pressure in the weeks and months ahead, with the charts all warning of topping in these markets. US equities are at the center of it all right now, and a serious pullback is long overdue here with studies so overextended. We saw a very nice bearish reversal week in the previous week, and the price action would suggest that US equities should close this week a good deal lower than where we closed last Friday. Yet the signal has not been sympathetic to bears in the early week, with Monday’s sharp rally leaving many bears feeling defeated. Still, I would not throw too much weight behind Monday’s rally, with the market only consolidating the previous weekly declines thus far and prepping for what I believe will be the next major downside extension in the S&P below 1760 and towards 1720 further down. Clearly tomorrow’s event risk is the leading candidate for such a catalyst, and it would stand to reason that if we were in fact to see this bearish follow through in risk assets, it would imply the Fed decision will come out on the more hawkish side.

Be Careful With Euro And Yen – For currencies, stay away from EUR/USD right now. I like the idea of selling, but also would not rule out the possibility of one more surge to fresh yearly highs beyond 1.3835 and towards major multi-month falling trend-line resistance off of the record highs from 2008, which comes in around 1.3900. I also would be careful with USD/JPY. While the outlook is aggressively bullish over the medium and longer-term, I still feel there is risk for a significant short-term pullback that could take us back into the 99.00’s. Otherwise, I would expect to see the US Dollar very well bid against all other currencies, particularly against the commodity bloc and emerging market currencies. Moving on, don’t forget about EUR/CHF and the implications here if the market comes under additional pressure and starts to threaten 1.2000. Finally, I am out of the money on a long AUD/NZD trade (long 1.0897), but absolutely love this trade. I got into the position knowing that I would be holding medium-term, and I would only be concerned if we established back under 1.0700 on a weekly close basis. This is a market that has been obliterated this year and is begging for a major reversal higher. I think this reversal is imminent, and also believe that if we do see a shift in risk sentiment, this will weigh more heavily on the higher yielding New Zealand Dollar.

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