The coming correction in Bonds

US government bonds have torpedoed ahead, a trend which I believe will reverse soon. Either that, or a total collapse of the dollar. I don't think both will happen, it is the matter of which will happen.

After a successful trade in shorting the USD for December, I believe that short bonds is one of the few clear trades for the next few months. The stock market has disappointed with somewhat anaemic performance, and I believe the balance of probabilities between bullish and bearish outcome is currently even.

Short term neutral on the Equity Market; USD to continue weakening

The market rebounded strongly on Friday, suggesting that the Thursday/Friday drop could have been the pull-back we were expecting. However, its extent was too deep to remain a comfortable bullish stance. We are therefore turning neutral and awaiting clearer patterns in Equities.

Commodities are to continue to strongthen; USD to weaken.

More complex patterns

Even though the market fell as expected, the extent of the drop was unexpected. This prompted a trimming of longs, but I continue to recommed small longs, so long as today's lows hold. Medium-term, equity markets are bottoming for a strong and long (in time) bear market rally.

Commodity and FX markets are much clearer at the moment, and Copper in particular (second chart, below) is looking very bullish. Stops should be put at the lows. The USD should continue to weaken.

Early stages of a bull run in Equities

So far, equity markets are trading along expected lines, with DJI futures hitting the 8500 level and SP500 futures declining past the 875 level. I am still looking at this market from a bullish point of view, however I am somewhat worried that the market is taking so long (in time) to correct. On the other (bullish) hand, the VIX is flat on the day... In short, I would recommend small longs with tight stops.

The USD declined nicely, along expected lines. I expect this move to continue, however I think that EUR will begin to underperform GBP, NZD and other, somewhat riskier currencies.

Early stages of a bull run in Equities

Under the bullish count, wave 3 of a larger wave 3 (the strongest part of a move) is likely to start soon. It may start from current levels, or ,with equal probability, from 3% lower - around 875 in S&P500 futures, as low as 8500 in DJI futures, around 4700-4650 in DAX futures. I would use such levels as excellent entry points into longs.

There is a somewhat remote (at this stage) possibility of a move to new lows. Looking at large cap stocks individually, as well as some of the more volatile sectors (homebuilders, financials, basic materials) I cannot yet see that as more than about 20% likely. Crucial levels for a bull move are the low of last Friday at 817, however I would get quite concerned if we see anything close to 855.

The USD is continuing top building process, I expect levels in the high 1.30s on EUR/USD soon. Copper and Crude oil are also bottoming.

Early stages of a bull run in Equities

I believe that we are in the early stages of a bull-run in Equities, and that weakness should be used as a buying opportunity. I wouldn't be surprised if SP500 futures declined into the 880-870 region, and would be adding to my longs there. DAX could decline into 4600-4550.

Correction in Equities likely over, strong rally ahead

The one week correction to the ~20% rally from November lows likely finished on Friday, post the awful employment number. If this is the case, markets should rally about 20% more, with minimal give-backs and pauses. Any weakness should be used to add to more longs. Friday lows are now critical for this view.

Some markets failed to put in "complete" corrections, where the final leg takes out the price level (in our case, the low) of the first leg (notably - SP500, NASDAQ & DAX). The ones that didn't are likely to be the stronger ones. The ones that did, such as the DJ EURO STOXX 50, FTSE, CAC40, DJI are likely to be weaker.

Finally, please note that it is very, very likely that the USD will weaken (perhaps substantially) in the coming sessions (against everything - EUR, GBP, CHF, Copper, Crude, etc.) - so it might be wise to go long of the DAX, IBEX.