IG Markets: Afternoon thoughts 27/09/2011

Good afternoon,

Across Asia, regional markets are all sharply higher following the strong rebound rally seen in overnight trade amidst renewed hopes the latest plan European officials are working on will help ease the debt crisis. The Kospi is the best performer, up 4.1% while the Shanghai Composite, Nikkei 225 and Hang Seng are all up between 0.5% and 2.5%.

Locally, the ASX 200 is seeing strong, broad-based gains as yesterday’s big intraday falls, especially among the materials space are reversed. The S&P/ASX 200 is 3% higher at 3979, just off session highs of 3990. Not surprisingly, it’s the heavily weighted materials, energy and financial sectors that are adding the bulk of the points. They are all up more than 3.4%. Elsewhere, consumer discretionary and industrial names are adding significant points while the defensive sectors bring up the rear.

What we’re seeing here is a classic bear market bounce. The market had got overly bearish and was very oversold on a short term basis. Rumours over the latest and greatest plan for the Eurozone saw traders start covering their short positions. This short squeeze quickly gathered momentum, resulting in a big and powerful relief rally as bargain hunters were drawn into beaten up risk assets.

Whether or not the latest European plan provides any sort of relief or even gets actioned is anyone’s guess; given the political mess they have managed to get themselves into, nothing surprises me anymore. We’ll wait for concrete evidence of a plan rather than believing any of the thousands of rumours and headlines.

The moves seen in gold over the last 48 trading hours have been nothing short of spectacular. It’s been a classic ‘shaking out of the weak longs’. The last bullish phase for gold (US$1500 – US$1900) was driven predominately by hot, speculative money following headlines on the front pages of newspapers all over the world.

It was a distribution phase, where the professional money was offloading their trading positions to the ill-informed retail money. When gold made a failed break to new highs on September 6, alarms bells started to sound. No one thought the pullback would be so deep but it just shows you what’s possible, especially when you throw a few margin increases in from the CME which forces a huge amount of forced selling through the system.

Now, the big spike lower yesterday looks to have cleared the decks for another move higher, although by how much remains to be seen. Gold formed a bullish pin bar reversal pattern off a very strong support zone around US$1530 – US$1550; the long term uptrend also coincided with these levels. The sharp spike lower shows a big rejection of these lower prices as the forced selling dried up and bargain hunters stepped in.

ENDS

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