I’ve got to hand it to PaddyPower; most Spread Betting firms launch with a free gift and a guide on do’s and don’ts. But PaddyPower provide a 2-month real life illustration of how exciting it is to trade the markets, and they’ve done it at the most ‘interesting’ time in the markets for the last few years. Now that is damned impressive.

So, after all the excitement is it safe to dip a big hairy toe back in the water. Or should we run like hell to the safety of the beach hut?

As the end of the third quarter approaches fund managers will spend hours in meetings, pontificating on the markets and trying to work out how to make money over the next three months.

Here’s my shorthand version, more digestible with a pie and a pint, so let’s pull up a Guinness and work out where we are.

Interest Rates
The US Federal Reserve played ball and cut rates by the generous amount of 0.5%, reinforcing the message with a similar cut in the discount rate. Let’s assume that in time honoured fashion the US will continue to play the game and take whatever action is necessary, so long as it involves cutting interest rates.

The ECB started off as good guys but there’s still a question mark over whether they might raise rates further; a point made in bold red numbers showing EUR/ USD 1.41!

Last week Mervyn was swervin more than Britney Spears trying to drive herself home. Eventually, the Bank of England loosened its grip on the purse strings in exchange for Gordon Brown’s iron fist loosening its grip on Merv’s testicles. The bank provided much needed help in the 3-month area of the money market and this had the desired effect of reducing rates from 6.9% to 6.36%. But there’s little expectation of a cut in base rates this side of Christmas.

The Bank of Japan…. oh who gives a rat’s arse whether it’s naff all or naff all plus a little bit! A small change to the official interest rate at 0.50% still leaves it close to zero.

Currencies
The Euro has become the new ‘chosen one’ benefiting from the recent speculation over interest rates, hitting a new high of $1.4160 against the Dollar and rising to over 0.70 against Sterling. Whilst this is useful in keeping a lid on inflation, it will make life tougher for European companies to sell goods abroad. The recent strong run leaves the Euro looking overbought and vulnerable to profit taking.

Economics
Well, I’ll hold my hand up. The recent inflation numbers surprised me; they don’t reflect the earful I get every time my missus returns from shopping, but the recent falls could provide a convenient excuse if Gordon is still holding all the balls and wants the British electorate to vote happy. The housing market looks to be slowing down and credit conditions are undoubtedly tightening at a time when retailers are already prophesising doom and gloom at Christmas. There are plenty of Cassandras out there warning of the Mother of all Recessions, but I reckon it’s far too soon to tell. True, it might pan out that way, but that’s some way off; we’re traders and we’ll get very sore sitting on the fence till then.

Technicals
Putting on my technical analysis pointy hat and cloak helps me to see things in a pretty positive light. I reckon from looking at the chart that the FTSE could give up 100-200 points and still be bullish. An important factor has been the sea change in investors’ confidence. Back in August the mere mention of some previously unheard of hedge fund manager doing a runner from his local Chinese restaurant would have sent markets plummeting. But a genuine crisis at one of the UK’s main banks didn’t even threaten the 6000 level on FTSE and markets remained well above the 5800 lows of August. The queues at Northern Rock branches we’ve witnessed since Kylie said, “would someone please hold my ladder steady while I clean the upstairs windows.” But just over a week later and the FTSE has broken, and held, above its 200-day moving average and the 6400 level.

FTSE 100 ROLLING DAILY GRAPH

The 21-day moving average is pointing up, which is also a good sign.
Just for the hell of it I called on Fibonacci (I thought he played for Chelsea). The FTSE had rallied above the 61.8% Fibonacci retracement level from July’s high to August’s low, which is usually bullish. Yesterday’s sell off tested that level as support and bounced convincingly, which is also bullish.

The daily chart for FTSE shows a steady uptrend channel where the price has now retreated 50 points from the top trend line. Yesterday saw a break below the 6400 level and a test of the 200-day Moving Average; the support held and FTSE is currently at 6460.

Banks
Four major US investment banks reported third quarter earnings last week, but despite only Goldman Sachs producing good results, the other numbers weren’t bad enough to spoil the post-Fed party. Deutsche and Commerzbank have been trying desperately to leak bad figures into a relaxed market; they don’t report Q3 numbers until the end of October.

Recent events have rendered guessing the extent of sub-prime losses not accounted for as pretty meaningless; not only do we not have a Scooby Doo where these loans are and what they’re currently worth, but Northern Rock demonstrated a pretty effective way of going t*ts up without much exposure to the sub-prime market.

The banking sector remains nervous with Alliance & Leicester looking about as healthy as Pete Doherty after a quiet night with his herbal ciggies. After its recent fall from £10.50 to £5.80, the share price remains just above £7 following the governments announcement of a general guarantee to savers.

Oil And Gas
These two have been the ‘must trade’ spread bets of late with oil hitting record highs and gold soaring to a 28-year high. Both look to have the legs for a long-term run, but I wonder if there will be a bit of profit taking first to close the third quarter. If so this might be reflected in FTSE stocks like BP, Shell, BHP Billiton and Anglo-American.

By the way, in case you missed it I wrote a kind of dummies guide to trading oil a fortnight ago.

The Options Market
Prices in the option market suggest that professional traders are more willing to back a fall in the market than a rise.

For those of you that get what options are all about I’ve been comparing the prices of different Call and Put options. Despite the recent rally in equities the cost of a Call option (the right to buy the market) is far cheaper than a Put option (the right to sell the market) of similar distance from the current level. At the moment the FTSE is around 6450; the right to buy the market 300 points higher for October settlement costs 12p, the right to sell the market 300 points lower costs 34p

And To Conclude…
So, is my toe going in the water? As an investor my toe went in back in late August, but that’s completely different. As a trader I think FTSE is technically looking OK, but having put on 300 points in the past week I wouldn’t jump in just yet and wouldn’t be surprised to see another shock of some kind test the market’s resolve.

But hey! What are we? We’re traders - we can buy it, but if we don’t like the market we can make money selling it instead.