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Good morning,

Check out this story, courtecy HSBC:

Beware the witching hour – Friday 15:59:30 BST to be exact

The Perfect storm

We have a very unusual situation in the FX markets occurring this Friday – the perfect storm. Every day at 4pm London time there is a fix that is widely used for transactions by international portfolio managers.

There is a complicated formula to establish the exact price and range but the timing is simple -it takes place in the one minute surrounding 4pm. That is it starts at 3.59 and 30 seconds ending at 4.00pm and 30 seconds.

This Friday is the quarter end

Now there are several factors creating this perfect storm. Starting with the obvious one this Friday is not only the end week (as usual) but is the end of the month and the first quarter. The last time this occurred was in March 2002. This means many financial institutions will need to do their quarter end re-balancing.

So from this perspective it is more important than usual.

End of the Japanese Fiscal year

It is also the Japanese financial year-end and historically we have seen some strange price action ahead of and after this event. However, it is widely believed this was mostly driven by Japanese banks who needed to repatriate of funds to bolster BIS ratios, and this may not have occurred this year owing to the healthier state of the banks. On top of this we have the all important Japanese Tankan survey released after midnight Sunday night.

Clocks change in London but not in New York - creating the perfect storm

This is a very significant event. Usually we get US data at 3pm London time and by the time the data has washed through the markets we have the 4pm fix. However, summer time began in Europe last weekend but the US clocks will not change until this coming weekend. This means the 4pm fix in London is taking place simultaneously with two other events. The first is the option expiry that takes place at 10am New York time. This will now not be 3pm London time, but 4pm London time, putting the option expiry and the 4pm London fix at the same time.

In addition to the week-end, month end, quarter end and fiscal year end we have the options expiry and London fix at the same time. What makes this particularly messy is that the Chicago PMI is released at 10am New York time. This is now at 4pm London time. Our analysis shows the Chicago PMI is the second most important market moving economic release after the US non-farm payrolls. This could make for an exciting end to the London trading week.

click to enlarge

There will be no update tomorrow as I am attending a wedding. I will try to post the Map for the Dow, if I can crack it before my flight.

I held a seminar last night on technical analysis, and I was talking about the merits of simple support and resistance analysis. I brought up a chart of the Dow index for the last 10 days, using a 5-min chart and the group identified the crucial areas of support and resistance. Going short at 11240 on the Dow really was a no-brainer signal with a stop-and-reverse a couple of points above.

The SP500 futures double-topped at 1315, and any move below 1309, either during GLOBEX trading hours or in the regular trading session will cause a short-signal. I am reluctant to think we will see a big drop below 1309, if support is taken out, purely because we are so close to quarter-end. I think institutions will attempt to hold the market here. If the Dow trades above 11240, it should lead to higher prices.

The Map points to a trending day, and the cycles suggest it means higher prices. The cycles in the DAX confirms this. However, if we were to trade below 1309 in the SP500, which would be equivalent to 11200 in the Dow, we could see a slow grinding day with lower prices. In this case the Map has most likely inversed and we will trade lower most of the day.

I got stopped out of my gold position. I have been in this short position now for the better part of 6 weeks. If you are bullish gold, you can trade on the long side with stops at $565. I think the anticipation of the Japanese institutions taking funds back home for their year-end and its effect on the US dollar has had some speculate that gold is poised for a higher move. Either way (don’t want to get bugged down with the fundamental reasons!) gold is looking to push above $576.

Good luck today

Tom