FOREX-Dollar flat vs euro as "fiscal cliff" overshadows Fed policy

* Fed ties policy to specific economic target

* Fed extends debt-buying in line with expectations

* Speaker of the U.S. House Boehner again rejects Obama's demand

* Yen down across the board on prospects of more easing

By Julie Haviv

NEW YORK, Dec 13 (Reuters) - The dollar held steady against the euro after falling for three straight days on Thursday as a looming U.S. fiscal crisis curbed weakness in the currency after the Federal Reserve announced further monetary stimulus.

The Fed, after its policy meeting ended on Wednesday, matched market expectations by saying it would keep buying $45 billion of government bonds each month after its "Operation Twist" program expires. That is in addition to its purchases of $40 billion a month in agency mortgage-backed securities.

It said interest rates would remain near zero until unemployment falls to at least 6.5 percent. The Fed also explicitly linked its policy path to unemployment and inflation.

Without higher rates or the Fed scaling back the amount of available dollars in the economy, the dollar's upside is limited. It could gain, however, if the White House and Congress cannot reach a deficit reduction deal by the end of the year.

Failure to reach an agreement will automatically trigger massive spending cuts and tax increases in 2013. This so-called "fiscal cliff" should buoy the dollar due to its safe-haven status.

Congressional Republicans dug in on their opposition to raising taxes on the wealthy, even as polls showed them at a growing disadvantage in the U.S. "fiscal cliff" showdown with President Barack Obama.

"We view the Fed decision as notably bearish the dollar, particularly against currencies whose central banks are not engaging in offsetting type monetary policies; however the uncertainty surrounding the looming fiscal cliff dampens the impact near-term but not the medium-term," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.

The euro was last flat at $1.3074, having hit a session low of $1.3039 and a session high of $1.3100.

With the Fed actively targeting economic data, the dollar could see a boost if data shows any sign of improvement, analysts said. But they also cautioned that the euro could remain supported in the near term with positive developments in theeuro zone and successful bond auctions in Italy.

The European Union reached a landmark deal on Thursday to make the European Central Bank the bloc's top banking supervisor, a move that was seen as a step closer to resolving the debt crisis.

YEN FALTERS

Against the yen, the dollar was at 83.56 yen, up 0.4 percent on the day, having hit a near nine-month high of 83.67.

The dollar was expected to rise further against the Japanese currency on expectations the Bank ofJapan will ease monetary policy further.

The BOJ meeting will take place after Sunday's election which looks set to see the opposition Liberal Democratic Party clinch a resounding victory. LDP leader Shinzo Abe has been pushing the BOJ for more powerful monetary stimulus.

Part of the reason for the rise in dollar/yen was higher U.S. Treasury bond yields, which makes the dollar relatively more attractive against its low-yielding Japanese peer.

Earlier on Thursday the Swiss franc rose against the euro after the Swiss National Bank left its cap at 1.20 francs per euro but reiterated it was prepared to buy foreign currency in unlimited amounts to maintain it.

The euro was last down 0.2 percent at 1.2083 francs.

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Yen Falls as Price Data Fans BOJ Easing Speculation

The yen slid to a seven-month low versus the euro after data showed Japan’s consumer prices stagnated last month, fanning speculation the central bank will increase stimulus to spur inflation.

Shinzo Abe, leader of Japan’s opposition Liberal Democratic Party, today called for all needed measures to boost inflation to 2 percent. The dollar was near a one-month low against the euro as Democrats and Republicans wrangled over the spending cuts and tax increases of the so-called fiscal cliff looming for the U.S. in January.

“Abe’s remarks are pulling down the yen,” said Kazuo Shirai, a trader at Union Bank NA in Los Angeles. “It’s a positive that both Republicans and Democrats are negotiating over the fiscal cliff.”

The yen dropped to 107.30 per euro, the weakest since April 27, and traded at 107.13 as of 2:24 p.m. in Tokyo, 0.5 percent lower than the New York close yesterday. It fell 0.4 percent to 82.44 per dollar. The greenback lost 0.1 percent to $1.2996 per euro after touching $1.3014 yesterday, the weakest since Oct. 31.

The MSCI Asia Pacific Index of shares rose 0.4 percent, sapping demand for lower-yielding, haven currencies.

Japan’s consumer prices excluding fresh food were unchanged in October from a year earlier after a 0.1 percent decline in September, the statistics bureau said in Tokyo today. The BOJ has an annual inflation target of 1 percent.

Japan’s Elections

Abe has called for the Bank of Japan (8301) to pump unlimited cash into the financial system and said today that monetary easing may include purchases of foreign bonds. Economy Minister Seiji Maehara said earlier that concern over Japan’s economy is increasing and that he wants to cooperate with the BOJ to end deflation.

Abe’s LDP had an approval rating of 23 percent, compared with 13 percent for the ruling Democratic Party of Japan, the Nikkei newspaper reported yesterday, citing a Nov. 26-28 opinion poll. The nation will hold elections on Dec. 16 for the lower house of parliament.

“The yen has already entered a weakening trend,” said Akira Moroga, manager of foreign-exchange products at Aozora Bank Ltd. (8304) in Tokyo. “There are many players out there who want to buy the dollar-yen.”

The yen has fallen 3.2 percent versus the dollar in November, poised for the biggest monthly decline since February. The euro has risen 0.3 percent.

Fiscal Cliff

U.S. Treasury Secretary Timothy Geithner offered Republican House Speaker John Boehner a proposal to avert an end-of-the- year fiscal cliff that would trade $1.6 trillion in tax increases for $400 billion in unspecified entitlement-program cuts, a Republican aide said, who wasn’t authorized to speak publicly.

After meeting Geithner yesterday, Boehner said President Barack Obama must “get serious” about the fiscal cliff talks. Senate Majority Leader Harry Reid, a Nevada Democrat, said Democrats need a proposal from Republicans on what sort of spending cuts they want.

The Dollar Index (DXY) was little changed at 80.155 after losing 0.3 percent in the previous two days. The gauge has reached the support zone of 80 to 79.65, which includes the 50 percent and 61.8 percent retracements from the Nov. 16 high to the Sept. 14 low, according to Niall O’Connor, a New York-based technical analyst with JPMorgan Chase & Co.

“Breaks here are necessary to confirm a deeper pullback and retest of the range lows,” the analyst wrote in a research note yesterday.

German Vote

German lawmakers will vote today to ratify the amended aid plan to Greece after euro-area finance ministers agreed to ease terms of emergency bailout loan for the debt-saddled nation.

“Germany should give parliamentary approvals to the new Greek debt deal later today which may also help sentiment towards the euro,” Ray Attrill, Sydney-based global co-head of currency strategy at National Australia Bank, wrote in a research note.

The one-year, 25-delta risk-reversal rate for the euro rose to minus 1.2975 percent today, the highest since October 2010, signaling reduced demand for the right to sell the common currency against the dollar. It was at minus 3.3425 percent at the beginning of this year.

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Forex Analysis: EUR/GBP Classic Technical Report 11.30.2012

Prices are testing resistance at 0.8103, the 14.6%Fibonacci retracement, a barrier reinforced by the underside of a previously broken rising trend line set from late July (0.8120). A break above the latter level exposes the October 22 high at 0.8164. Near-term support is at 0.8066, the 23.6% retracement. A drop below that aims for the 38.2% retracement at 0.8006.

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FOREX-Euro up slightly; gains tenuous as U.S. fiscal deal hangs

* Boehner says no progress on budget talks in last 2 weeks
    * Italian yields fall, euro zone sentiment improves
    * Dollar's gains vs yen may slow
    * U.S. data boosted risk appetite


    By Gertrude Chavez-Dreyfuss
    NEW YORK, Nov 29 (Reuters) - The euro slipped from one-month
highs against the dollar to trade just slightly higher on
Thursday after comments by top Republican lawmaker John Boehner
dented a spate of optimism over an agreement to avert higher
taxes and spending cuts in the world's largest economy.
    A day after expressing optimism over a U.S. "fiscal cliff
deal," Boehner, speaker of the U.S. House of Representatives, on
Thursday said there has been no "substantive" progress made in
the last two weeks. 
    Following a meeting with Treasury Secretary Timothy
Geithner, the White House's main liaison to Congress, Boehner
said Geithner had not provided a comprehensive plan for dealing
with the budget problem. 
    A deal on the U.S. budget that would avert $600 billion in
spending cuts and tax hikes due to start in early January would
improve the outlook on the economy, which would be a positive
for risk sentiment.
    "What is driving this market is still the uncertainty on the
U.S. fiscal cliff, although my position is that some kind of
resolution would be reached," said George Dowd, head of foreign
exchange at futures broker Newedge in Chicago.
     By midday New York trading, the euro was up slightly at
$1.2968, after earlier hitting a one-month high of
$1.3013 as traders also reported month-end demand for euros. The
euro hit New York session lows of around $1.2945 following
Boehner's comments.
    The euro earlier had sharply cut gains after Democratic
Congressman Chris Van Hollen told MSNBC that lawmakers were not
close to a U.S. budget deal, traders said. Van Hollen is the top
Democrat on the House Budget Committee.
    Europe's common currency had gained earlier amid positive
comments from Boehner himself on Wednesday. President Barack
Obama was also optimistic an agreement would be reached before
Christmas. 
    The euro was also boosted earlier by a drop in Italy's
10-year borrowing costs at a sale of debt on Thursday and
positive euro zone data showing sentiment on the region improved
in November.  
    Overall, though, investors were cautious about pushing the
euro higher. Some analysts warned the euro remained vulnerable
to economic data and concerns about elements of Greece's aid
deal. Greece's ability to fully implement a debt buy-back is a
looming issue.
    "I think by year-end, the euro can get down to the
$1.23-$1.24 area," Newedge's Dowd said. "That assumes that,
number one, a fiscal cliff would be averted and that would get
the dollar bid, and number two that the situation in Europe
would just muddle through."
    Against the yen, the euro was up 0.2 percent at 106.44 yen
. On Monday, the euro hit a seven-month high of 107.135
yen hit on Monday.
    U.S. data on Thursday, though slightly below expectations,
pointed to an upturn in the economy, further feeding risk
appetite and helping the euro hold gains against both the dollar
and yen.
    The government reported new claims for U.S. jobless benefits
fell for a second straight week, and in a separate report said
the economy grew by 2.7 percent in the third quarter, a faster
rate than initially estimated. 
    "The positive revision to economic growth in the third
quarter is consistent with job creation that was almost three
times faster than in the previous three months," said Joseph
Trevisani, chief market strategist at Worldwide Markets in
Woodcliff Lake, New Jersey.
    
    YEN LOSSES SLOW
    The dollar was little changed against the yen at 82.06 yen
, pulling away from a one-week low of 81.68 hit on
Wednesday.
    The U.S. currency has seen a corrective pull-back since
hitting a 7-1/2-month high of 82.84 yen last Thursday when the
yen was sold on speculation about possible aggressive monetary
easing in Japan following a likely change in government next
month.
    Main opposition leader Shinzo Abe, a front-runner to become
prime minister after the Dec. 16 election, has called for
radical change in monetary policy, including unlimited easing.
His stance sparked a 4 percent fall in the yen this month. 
    Some market players, however, were paring back expectations
of aggressive easing that would weigh on the yen and questioned
how much impact Abe would have on monetary policy.
    SEB analysts said in a note to clients that there was a risk
of disappointment after the Japanese election. Longer term, the
yen is vulnerable and could weaken substantially due to high
debt and large deficits, they said, although higher rates
outside Japan may be needed "to trigger a more sustained
weakness".

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EU executive wants 2-speed integration

BRUSSELS (AP) -- The European Union's executive said Wednesday it wants to allow the 17 member states that use the euro currency to move faster toward economic integration than the broader 27-nation EU.

EU Commission President Jose Manuel Barroso claimed that more integration and centralization of decision-making in Brussels, at the expense of national capitals' sovereign power, is necessary to overcome the economic crisis. He said eurozone countries should be allowed to pool their debt to protect financially weaker member states.

But Barroso's call, which sought to set the tone for the EU's traditional year-end summit of government leaders on Dec. 12-13, is likely to be resisted by some in the bloc.

Experts say a two-speed EU, in which a core group integrates at a faster pace, threatens to isolate member states that are not part of the euro. The issue of a two-speed EU has become a sensitive topic in recent years as eurozone countries strengthened their ties to fight their financial crisis.

Some eurozone countries, meanwhile, are wary of giving up too much power to Brussels. Germany, the eurozone's largest economy, rejects the pooling of debt.

Barroso argued that the 17 euro nations should be allowed to "integrate further and quicker" to give them the ability to better anticipate market concerns about the currency bloc's finances.

At the heart of the eurozone's debt crisis has been the fear that individual member states can go bankrupt. Investors have been spooked by EU leaders' inability to make quick decisions on pressing matters — like giving rescue loans to a cash-strapped country like Greece.

Critics also say the leaders' summits, which often last through the night, rarely achieve more than temporary fixes for the most pressing problems.

After three years, financial markets have finally calmed this year as investors have been convinced that EU leaders will do what it takes to keep the currency zone together. One of the biggest factors to steady markets has been the European Central Bank's commitment in September to help lower countries' borrowing rates. That eased the lingering concern that an individual country might be frozen out of bond markets.

But the current calm in financial markets could EU leaders to sleep, Barroso fears.

"Yes, I am concerned that now not all capitals have the sense of urgency that they had some months ago," he said.

Many countries have economic reforms to complete. EU nations, meanwhile, have to finish working on a banking union and creating closer fiscal ties, including checks on each others' budgets.

Barroso said he wants the EU countries to go for "a truly coordinated economy and monetary union in the euro area."

He said some measures could be taken in the short term but also mentioned several that would need changes in the EU treaty and could take years to come into effect.

In the long term, Barroso's blueprint called for an "autonomous euro area budget" to help stabilize the monetary policies across the eurozone. The Commission said it "could allow a common issuance of public debt," something German Chancellor Angela Merkel has steadfastly opposed.

German Foreign Minister Guido Westerwelle said proposals for pooling debt "go in the wrong direction."

"Pooled debt liability, under whatever label, is not acceptable for the German government," Westerwelle said in a statement, arguing that it would overburden some countries while undercutting others' readiness to conduct reforms.

Separately, the Commission also adopted what it calls it's the "annual growth survey," a guide for EU countries on the policies they need to pursue to get their economies growing — something they badly need in their effort to reduce debt.

The recommendations echoed those made a year earlier. They focused on getting national budgets into balance, restoring a normal flow of credit to businesses and households, tackling unemployment and promoting competitiveness.

"It is crucial to stick to our strategy of growth-friendly fiscal consolidation, economic reforms and targeted investments," Barroso said. "This is the only way to restore confidence and create lasting growth."

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Yen Rises on Greece, U.S. Uncertainty; Aussie Advances

The yen rose against the euro for a third day, as investors sought the currency as a haven amid concern Greece will struggle to win bailout funds and before the U.S. presidential election today.

The Japanese currency strengthened against all but one of its 16 major peers ahead of data that may add to signs the sovereign-debt crisis is hurting Europe’s economic growth. The Australian dollar climbed to the highest in five weeks after the Reserve Bank unexpectedly left interest rates unchanged.

“Greece would struggle to receive aid should the austerity measures fail to be approved by parliament,” said Masakazu Sato, a Tokyo-based foreign-exchange adviser at Gaitame Online Co. “The yen may be bought in a bid for safety as attention shifts back to Greece.”

The yen gained 0.3 percent to 102.42 per euro at 9:04 a.m. London time, after having risen 0.9 percent in the last two sessions. It strengthened 0.3 percent to 80.13 per dollar at 8:14 a.m. London time, after touching 79.96.

The euro was little changed at $1.2776, after reaching $1.2767 yesterday, the weakest since Sept. 11.

As Greece seeks a 31 billion-euro tranche of its bailout package this month, Prime Minister Antonis Samaras is facing down a revolt in his three-party coalition. The leader of the Democratic Left reiterated Nov. 4 his party’s opposition to changes in the labor law demanded by international creditors. While no date has been set for a vote on that bill, it may come as soon as tomorrow. The budget vote is slated for Nov. 11.

Economic Slump

Spain said yesterday it is working on a review of income and spending in its welfare system as it heads toward a deficit. The country is relying on European aid for its banks and potentially seeking more to shore up its public finances.

Klaus Regling, managing director of the European Stability Mechanism rescue fund, said yesterday the 17-nation euro area needs more time to overcome the Greece-triggered troubles because the region is experiencing its “most severe crisis in 80 years.”

The final reading on a composite index measuring euro-area services and manufacturing was at the lowest in more than three years and unchanged from preliminary data on Oct. 24, according to the median of analyst estimates compiled by Bloomberg News before the report today.

German Data

German factory orders declined 0.4 percent in September from the previous month, a economist separate survey shows.

The euro weakened for a fifth day against a basket of nine developed-nation currencies, according to Bloomberg Correlation- Weighted Indexes.

“The euro is being sold as the market focuses on the risks surrounding Greece and Spain,” said Junichi Ishikawa, an analyst at IG Markets Securities Ltd. in Tokyo. “German data have been weakening and there are concerns the country may fall into a recession. You can’t buy the euro in the current environment.”

Ishikawa said the shared currency this week may decline to $1.2739, near the 38.2 percent retracement of its rise from the July 24 low to the Sept. 17 high, citing Fibonacci analysis. The analysis method is based on the theory that prices rise or fall by certain percentages after reaching a new high or a low. The level was last reached on Sept. 7.

“The euro has broken the $1.28 level after falling below its 200-day moving average and technical indicators are suggesting further declines,” he said.

U.S. Election

The dollar weakened against the yen as the extra yield two- year U.S. Treasuries offered over the same maturity Japanese government bonds narrowed. The spread was 17 basis points yesterday, the least since Oct. 16.

Americans vote today, with the national poll conducted by the Pew Research Center Oct. 31-Nov. 3 showing President Barack Obama leading Republican challenger Mitt Romney 48 percent to 45 percent. The survey showed them tied at 47 percent a week ago. The final tracking poll by ABC News and the Washington Post had Obama taking a lead of 50 percent to 47 percent in a survey of 2,345 likely voters conducted Nov. 1-4. The margin of error was plus or minus 2.5 percentage points.

Fed Chairman Ben S. Bernanke and his colleagues on the Federal Open Market Committee last month affirmed the decision in September to buy $40 billion of mortgage-backed securities each month without specifying the total size or duration of the purchases. Romney has said he wouldn’t appoint Bernanke to a third term.

Weaker Dollar

“Obama is looking like he will be re-elected and with the market expecting the Fed to maintain its current easy monetary policy under him, the dollar may weaken,” said Gaitame Online’s Sato.

The so-called Aussie climbed after Reserve Bank of Australia Governor Glenn Stevens and his board left the overnight cash-rate target at 3.25 percent. Seven of 27 economists surveyed by Bloomberg predicted the decision, with the other 20 seeing a cut to 3 percent.

“The RBA was expected to potentially cut rates today and they didn’t,” said Greg Gibbs, a senior currency strategist at Royal Bank of Scotland Group Plc in Singapore. “As a result the Aussie dollar rallied.”

Australia’s currency touched $1.0438, the highest since Sept. 28, before trading at $1.0425, 0.6 percent above yesterday’s close. It advanced 0.4 percent to 83.57 yen.

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Treasuries Advance, Euro Slips as U.S. Stocks Fluctaute.

Treasuries rose and the euro traded at an almost two-month low as Americans prepared to vote for president and concern increased that Greece will struggle to win a bailout. German two-year note yields declined below zero.

Treasury 10-year notes advanced for a second day, with the yield dropping three basis points to 1.68 percent as of 10:49 a.m. in New York. The euro slid to $1.2782, the lowest since Sept. 11. The Standard & Poor’s 500 Index was little changed at 1,414.07 and the Stoxx Europe 600 Index (SXXP) retreated 0.6 percent. Germany’s two-year yield reached minus 0.014 percent, turning negative for the first time since Sept. 6. Oil rose 0.3 percent.

Enlarge image

Visitors sit and check stock price information displayed at computer terminals inside the Madrid Stock Exchange in Madrid. Photographer: Angel Navarrete/Bloomberg

Enlarge image

Gold futures increased 0.2 percent. Photographer: Guenter Schiffmann/Bloomberg

U.S. voters decide tomorrow between giving President Barack Obama another four years in office or changing course with Republican challenger Mitt Romney. Service industries in the U.S. kept growing last month, a report showed today. Greek Prime Minister Antonis Samaras will this week battle to win political support for measures needed to obtain aid.

“People are more like holding their breath and turning blue,” said Madelynn Matlock, who helps oversee about $14.7 billion at Huntington Asset Advisors in Cincinnati. She spoke in a phone interview. “There’s concern about Europe. The market is looking like there’s some worry in Greece. There’s also the election in the U.S. That keeps investors on the sidelines.”

U.S. Election

Two-year U.S. note yields decreased one basis point to 0.27 percent and rates on 30-year debt declined three points to 2.87 percent. U.S. voters face unprecedented debt levels and a round of tax increases and spending cuts, which threaten to slow the economy.

Among U.S. stocks, Apple Inc. rose 1 percent after selling 3 million units of its iPad mini and fourth-generation iPad during the debut weekend, saying demand for the smaller version of its tablet outstripped supply. KBW Inc. added 7.2 percent as Stifel Financial Corp. agreed to buy the boutique investment bank in a cash-and-stock transaction valued at $575 million. Time Warner Cable Inc. declined 6.2 percent following earnings that disappointed investors as the company lost more video subscribers than analysts projected.

Earnings Season

Four shares fell for every one that gained in the Stoxx 600. HSBC Holdings Plc slid 1.4 percent as Europe’s largest bank by market value made an $800 million provision for penalties from a U.S. money-laundering investigation. Ryanair Holdings Plc (RYA) advanced 5.5 percent as the region’s biggest discount airline increased fiscal second-quarter profit 23 percent and raised its forecast for full-year earnings.

The Institute for Supply Management’s index of U.S. non- manufacturing businesses, which covers about 90 percent of the economy, fell to 54.2 in October from the prior month’s 55.1. The median forecast of 76 economists surveyed by Bloomberg projected 54.5. Estimates ranged from 53 to 57. Readings above 50 signal expansion. The ISM services survey covers industries ranging from utilities and retailing to housing, health care and finance.

Swings in U.S. stocks have shrunk to the lowest level in six years, an indicator that has most often coincided with incumbent parties keeping the presidency in data going back to 1900. TheDow Jones Industrial Average has gained or lost 0.54 percent a day on average this year, the smallest fluctuations for an election year since George W. Bush defeated John Kerry in 2004, according to data compiled by Bloomberg.

Tight Race

Obama led Romney 48 percent to 45 percent in an Oct. 31- Nov. 3 national poll conducted by the Pew Research Center, a survey that was deadlocked at 47 percent each a week ago. Polls conducted by NBC News with the Wall Street Journal and ABC News with the Washington Post also showed movement for the president in recent days, albeit a 1 percentage point edge for Obama that is inside the margin of error for both surveys.

“President Obama winning a second term is viewed as equity negative, bond positive because it implies higher taxes and increased health-care spending,” Kit Juckes, head of foreign- exchange research at Societe Generale SA in London, said in a research note. “Romney winning cuts taxes and spending, and helps Wall St.”

Bunds Rise

German 10-year bunds rose for a fourth day, pushing the yield down three basis points to 1.42 percent, as investors sought Europe’s safest government securities.

As Greece seeks a 31 billion-euro ($40 billion) financing tranche this month, Samaras is facing down a revolt in his three-party coalition. The leader of the Democratic Left yesterday reiterated his party’s opposition to changes in the labor law demanded by international creditors. While no date has been set for a vote on that bill, it may come as soon as Nov. 7. The budget vote is slated for Nov. 11.

Spain’s bonds fell, pushing the 10-year yield up 11 basis points to 5.77 percent before the country sells debt maturing from 2015 to 2032 on Nov. 8.

Turkish two-year bond yields fell to a record 6.80 percent after Fitch Ratings raised the debt by one level to BBB-, the nation’s first investment-grade ranking since 1994, citing an easing in economic risk and lower government borrowing. The ISE National 100 Index rallied 1.8 percent to the highest level on record.

The euro weakened against all 16 of its major peers, sliding 0.5 percent to 102.76 yen. Japan’s currency strengthened 0.3 percent to 80.25 per dollar.

ECB Decision

Investors are also awaiting a Nov. 8 rate decision by the European Central Bank, as economists predict policy makers will keep the benchmark rate at a record low of 0.75 percent.

China’s purchasing managers’ index rose to 55.5 in October from 53.7 the previous month, the National Bureau of Statistics and China Federation of Logistics and Purchasing said on Nov. 3. A separate services index released today by HSBC and Markit Economics fell to 53.5 in October from 54.3 the previous month.

President Hu Jintao is set to hand over leadership of the Communist Party to Vice President Xi Jinping at a party congress that begins Nov. 8.

The S&P GSCI gauge of 24 commodities was up 0.2 percent. Oil rose 0.3 percent to $85.13 a barrel, after earlier reaching $84.34, the weakest since July 12.

Hedge funds cut bullish wagers on commodities by the most since June as prices retreated to a three-month low. Money managers reduced combined net-long positions across 18 U.S. futures and options in the week ended Oct. 30 by 11 percent to the lowest since July 10, Commodity Futures Trading Commission data show.

The MSCI Emerging Markets Index fell for the first time in five days, declining 0.4 percent. South Korea’s KOSPI and Hong Kong’s Hang Seng retreated. The Russian market is closed for a public holiday today.

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Using Options to Trade Double Tops

Potential double top formations can provide profit opportunities for option traders and MoneyShow’s Tom Aspray explains how two key technical tools can be used to take advantage of this Important pattern.

Double tops and double bottoms can often alert the investor to major turning points especially when they are observed in the weekly charts of a major market average or a key commodity like crude oil.

Last November I discussed double bottom formations on crude oil (see chart) and many stocks were also showing potential double bottom formations.

There are many articles on the classic characteristics of double top formations and the 1948 technical analysis classic Technical Analysis of Stock Trendsfrom Robert D. Edwardsand John Magee is still a wonderful source on the topic.

The traditional interpretation dictates that the formation must be completed before action is taken. In the crude oil example it took a close above $90.52, which was almost 20% above the double bottom lows, to confirm the bottom and project a move to $105.33.

To confirm a double top formation prices often need to decline significantly from their highs and stops above the previous peak can make the risk uncomfortably high. Often times what appears to be a double top or bottom on the daily chart turns out to just be part of a continuation pattern. Traders who wait for the formation to be confirmed often have trouble managing their risk and therefore do not take the trade.

In this article, I will show you how combining the chart formation with two technical tools can allow you to take advantage of these situations using options. With this approach you can find a low risk entry point if a true double top is being formed, but also can profit if it is just part of a continuation pattern.

Click to Enlarge

This weekly chart of Kimberly-Clark Corp. (KMB) shows what appears to be the formation of a double top. The initial high in August at $88.25 (point 1) was followed by a drop to $81.25 the following week. Prices stabilized for five weeks as support was found in the $82 area, line a.

KMB rallied back to $87.80 in October (point 2) before dropping sharply last week. Of course the key support at $81.29-$82 needs to be broken in order to complete the double top.

In order to determine the downside target you take the difference between the high and support ($88.25-$81.29 or $6.96) and subtract it from $81.29 to get a downside target of $74.33.

I have found two technical tools to be quite useful in identifying double tops. The first is what I call the RSI3, which I learned about from cycle expert Walt Bressert. It is calculated by taking a three period simple moving average of a five period RSI. As discussed in a past trading lesson, I use the RSI3 along with its 13 period WMA not only to identify divergences but also to identify changes in momentum.

For KMB, the weekly RSI3 peaked in May and formed a lower high, line b, as KMB was making its high in August (point 1). The RSI made even a lower high in October and was already declining at point 2. The RSI3 has subsequently dropped below its WMA.

I find the on-balance-volume or OBV to be quite good in identifying changes in the volume patterns that are essential in identifying double top or bottom formations.

Volume in KMB was heavy on the decline from the August high and while there were no weekly divergences, the OBV did break its uptrend, line c. This weakness was confirmed when the OBV failed to move back above its flattening WMA on the October rally. The increase in volume last week is consistent with a double top.

For option trading, I feel you have to look at the daily analysis to get your entry signals. The potential double top formation, points 1 and 2, is quite clear on the daily chart as is the key support at line a.

The RSI3 formed a short-term negative divergence (line b) as KMB closed at $87.68 on October 18. The candle chart shows that KMB closed lower the following day and the RSI3 turned lower as indicated by vertical line 3.

The daily OBV also formed lower highs in October but did not form a negative divergence as KMB did not move above the August high. The OBV did test its resistance at line c and by October 19 had also had turned lower.

In option trading, the strike price and liquidity are key considerations. On October 22, the November 85 put opened at $0.75 and closed at $0.95. The following day it traded in a range of $0.88 to $1.10.

I favor establishing multiple positions in one strike price so that you are able to scale out of your position. Given the October 19 shift in momentum, buying four Nov. 85 puts at $0.90 would have been a reasonable trade.

Of course risk control is a key concern with options as second guessing your stop or exit level is often disastrous. This position should have been closed out if KMB closed above $88.25, which was the August high.

The put option started to move on Oct. 24 closing at $1.55, followed by a close at $2.45 on October 25 and then $2.55 last Friday. I favor closing out half of a position if I am fortunate enough to get a 50-100% profit.

If two of the puts were sold on Thursday at $1.80, it would have covered the cost of the entire position. By comparison, the Nov. $82.50 put opened at $0.30 on October 22 and closed on October 26 at $0.95. Given the oversold reading of the RSI3, a break of the key chart support (line a) may be followed by a rebound.

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The daily chart of BioMarin Pharmaceutical Inc. (BMRN) shows that it made a high on July 12 at $44.18 as it had risen from a low of $23.75 in August 2011. BMRN reversed from the July highs and dropped to a low of $36.20 on August 29.

BMRN started to turn higher in September and made a high of $43.53 on October 16 before closing the day lower. The next day (line 3) BMRN was down again and the RSI3 dropped below its uptrend, line c, and its WMA. The RSI3 formed lower highs, line b, which was a negative divergence.

The volume on the rally in September and early October was significantly lower than the volume was leading into the July highs. The daily OBV formed a slight negative divergence in July and then broke support, line e, in July.

The OBV was much weaker than prices in October as it was well below its prior highs, line d, and just rallied back to resistance at line e. With the lower close on October 19, the OBV closed well below its WMA, and soon after, it violated the September lows.

The next trading day was October 22 and BMRN closed at $41.21. That day, the Nov. $42 put closed at $3.60, while the Nov. $38 put closed at $2.45. By the end of the week (October 26) BMRN closed at $38.85 after making a weekly low at $37.78.

The Nov. $42 put closed at $5.70 last Friday, while the $38 put settled at $4.20. Therefore, one did have an opportunity to close out half of either put position for a 50-100% profit. For example, if a 50% profit was taken on half the Nov. $42 put position, the cost of each remaining puts would have been $1.80. A break of the support at $36.50-$37.13, line a, will project a drop to the $28.80 area.

The weekly chart of apparel company Fifth & Pacific Companies Inc.(FNP) appears to show a double top or formation, points 1 and 2. FNP had a spike high at the end of March of $15.37 and then continued higher for a few weeks with the highest weekly close on April 28 at $13.75 (point 1)

For the next 11 weeks, FNP drifted lower finally bottoming in the middle of July at $9.02. Two weeks later, FNP reversed to the upside with a strong close but the volume was light. The week ending September 8, FNP closed at $13.68 (point 2) and was unchanged the following week. This was a sign the uptrend was losing momentum.

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The next week FNP did turn lower, which was confirmed by the declining RSI3, line 3. The weekly RSI3 had formed lower highs, line b, but since the weekly close was just a bit higher in March, it was not technically a negative divergence.

The weekly OBV had formed lower highs in April (line d) and then violated support, line c, in May. On the September rally the OBV just tested the downtrend, line b, and its flat WMA before turning lower. The volume was much higher during the spring highs than it was during the September rally. This is typical of a double top.

The key support for FNP is now in the $9 area (line a) and a break below this level would project a drop to the $4.25 area. Unfortunately the data on the October option series for FNP is no longer available, but I am confident there would have been a good opportunity in September. Since FNP is part of the seasonally strong apparel sector I would not press the short side of FNP at current levels.

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Under Armour Inc. (UA) is even a better known apparel company that rallied from an early July low of $44.07 to a closing high on September 14 of $60.03. The intra-day high was $60.96. The decline found support at the $53.28 level, line a, which was just above the late July low of $53.02.

On October 18 UA had a high of $60.20 but then closed at $59.27. The following day UA formed a doji and declined for three consecutive days after the high. Though the RSI3 showed divergence at the September highs there were no divergences when UA was peaking in October.

The RSI3 turned lower on October 19 and on October 23 the RSI3 dropped below its WMA (line 3), which confirmed that the momentum was now declining. The uptrend in the RSI3 has now been broken.

The OBV did form a slight negative divergence at the September highs (line c) and broke two-month support, line d, later in the month. As UA was making its secondary high the OBV just barely made it above its WMA and just retested the resistance (former support) at line d. Just two days after the highs, the OBV had dropped back below its WMA.

On October 24, UA opened at $57.92, traded as high as $58.31, but then closed at $56.62. The Nov $57.50 put opened and closed around $3.40. On Friday October 26, this put traded as high as $6 and closed at $5.50. The 50% profit level (excluding commissions) was therefore at $5.10, and if half of a four-lot position were sold at this level, it would have brought the cost on the remaining options to $1.70 each.

The stop on the position should have initially been a close above the high at $60.96, but this stop should have been lowered when the support at line a was broken. The downside target from the formation is now in the $45 area. This does seem like a legitimate break of support as volume was high. Any rebound should find resistance now in the $54.50-$57 area.

The best trades using this strategy will be when double tops are observed on a weekly chart though they do not occur that often. What appear to be double top formations are more frequently observed on daily charts but because they are often just part of a continuation pattern, discipline is the key.

I suggest that you use a close only stop based on the stock, not the option. If your entry level is quite close to the high, and prices do reverse, the loss should be no more than 10-25%. But as I cautioned earlier if the stop is hit, get out-don’t wait.

Secondly, if it is a continuation pattern and not a double top, the stock may just test the key support and then reverse to the upside. That is why I recommend you scale out of the position when it goes in your favor and not get greedy. By taking partial profits, it will protect your trading capital by significantly reducing the dollar risk on your position. If the double top is confirmed, the remaining position should do quite well.

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