No relief for Oil

The Technical Trader’s view:

WEEKLY CONTINUATION CHART Oil is testing the long-term supports from the succession of prior Highs. The band of support from $33.70- $41.15 has been tested. So far it has held, but if it broke then the market would have very little support left…

DAILY CHART: The short-term picture is not encouraging for the bulls. The market has failed at the horizontal resistance from the prior low. Watch carefully for a break down beneath the recent low of $42.51. That looks likely to happen. And a test of the $39.99 horizontal will result.

The Macro Trader’s view:

The oil producers’ cartel OPEC have this week delivered the biggest output cut in their history: 2M bpd, in an attempt to stem the recent correction which saw the market more than halve since the all time high made in the summer. But far from support the market as they intended, the oil price has begun to weaken further.

In the Macro Trader’s Guide we have covered this phenomenon several times over recent weeks. As OPEC began voicing concern about the weakness of the market, several hawks began calling for a large cut in output with the aim of sending oil prices higher, towards the US$70.00 a barrel level. When producers met a couple of weeks ago they were unable to agree the size of the cut. Consequently the market weakened further and hardened up opinion in the cartel to the point where even the more moderate Saudi Arabia joined the likes of Iran demanding a big cut.

We have consistently argued that their efforts would prove counterproductive. The global economy is facing probably its worse period of weakness since the 1930’s and all the major developed and emerging economies are affected.

In an environment such as this, where demand is already weak for everything including energy, cutting output in response to price falls is simply chasing demand lower.

As we argued recently, the market corrects higher briefly ahead of the cut, driven by fear of what might occur, but as soon as the decision is known, the market refocuses back to the fundamentals; economic weakness which currently resembles gazing into a bottomless pit. Even if OPEC had proved successful and driven the price higher, the global economy would have been further damaged, resulting in greater weakness, lower energy demand and ultimately lower prices.

As it is, traders have already anticipated this affect and sent oil prices lower. Currently the driving force behind the oil price isn’t whether or not there is sufficient supply, but whether there is sufficient demand:

- with the Fed cutting interest rates to virtually zero and announcing their intention to buy bonds/print money,

- the ECB mulling whether or not to establish a clearing house facility for inter-bank and other lending, and

- the Governor of the Bank of England warning in an open letter to the Chancellor that his next official correspondence could well be explaining why inflation has dropped too low.

The authorities in these economies are clearly anticipating an extended and deep contraction of economic activity and we judge the oil price can still go lower. With China and India also suffering in this slowdown, their demand for energy has reduced too and as large manufacturing economies that rely on exports mainly to the developed economies, their appetite for oil won’t recover anytime soon.

So why hasn’t OPEC succeeded in manipulating the oil price higher? Simply because the world’s leading economies are contracting fast and traders anticipate a significant further reduction in energy demand.

Mark Sturdy, John Lewis

Seven Days Ahead

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Resolving the deadlock in Gold

The Technical Trader’s view:

• MONTHLY CHART: The long-term chart is familiar by now: the market’s failure to sustain itself above the Old high of $873. The subsequent pull back … …and support found at the Prior High at $732
• WEEKLY CHART: The weekly chart lacks clarity: the repeated attempts to break down through the $732-739.9 band of support have come to nought. Look closer still….
• DAILY CHART: Feb 2009 After vacillating around $732 the market has just made a spirited rally back to the resistance from the old low at $829.40- 834.50. If that band breaks, while there is no clear pattern completed, the market will get a fresh bull impetus. A retest of the old high of $938.80 would result.

The Macro Trader’s view:

The gold price has traded in a well-defined range for almost two months, following a bearish trend which began in April this year after making an all-time high.

Gold’s weakness coincided with a turn in the Dollar’s fortunes. After an extended Bear Run, the Dollar began a recovery, driven by optimism generated by the rescue of Bear Sterns. While this has since proved a false dawn, the Dollar’s momentum has been maintained by growing concerns of recession abroad. Economies that had previously seemed impervious to the troubles dogging the US and subsequently the UK, suddenly looked vulnerable. First the Euro zone, then China and India looked ripe for recession, followed recently by Japan.

As recession spread, oil prices fell, leading to a correction in inflation that has much further to run. With most of its key supports withdrawn, gold sold off. But just as it seemed the lows of 2004 were beckoning, gold’s bear trend paused then developed into the current period of range trading.

A new rally looks very possible, and is helped by renewed Dollar weakness, which has emerged as a result of a US economic outlook that looks much worse than it did even only a few short months ago. US unemployment is rising at a pace not seen since 1974, the incoming US President has promised to spend up to US$1.0T to stop the rot and get the economy going, but the massive increase in US National debt is a major concern and has begun to undermine the Dollar to the benefit of Gold.

So for Gold to resume its decline, the US economy needs to show some signs of at least bottoming out, at the same time as the other major economies look set for a further period of recession. Currently that prospect looks remote as the recession in the US continues to deepen. Worried investors are flocking to 3 month T-bills forcing the yield negative for the first time in living memory. Traders have resumed selling the Dollar against the Euro and Yen. Once again, gold seems to be emerging as a safe haven. All the major developed and emerging economies are in, or heading into, recession and fiscal spending in many has been ramped up as politicians try to head off a deep and painful recession.

Worries about who will buy all this debt are beginning to cause investors concern, to the extent that a neutral safe haven is being sought and once again that seems to be gold. So the deadlock in gold looks like being broken to the upside

Mark Sturdy, John Lewis

Seven Days Ahead

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Aussie Dollar Trying To Find a Base

The FX Trader’s view - From a July peak, the sharp drop back in AUD/USD has found some interesting support on the long term chart. Now the s/term bulls must do more to establish a base that can support a decent recovery.

• MONTHLY CHART: Of the major 2001-2008 upmove the market has retraced very close to 76.4%. This is sometimes a very effective technical level. BUT, the bulls have still to display better enthusiasm – see Daily chart below…
• DAILY CHART: We are looking at sets of retracements here. A close above the key 0.7000 area (23.6%/38.2%) would complete a small base pattern, and trigger us bullish. Some may use a close above falling resistance, around 0.6660 currently, as an earlier, riskier trigger. At that stage a drop back below 0.6289 05-Dec low would negate any bull signal. Our initial/minimum target would be the 0.7500 area, the next 38.2% level. Any buyers would likely look to take partial profits towards this level. Stronger resistance, however, could lie between the 0.7800 17-Sep low and 0.7925 dual retracement level.
• [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

The Downtrend in Copper Has Slowed Down

The Commodity Trader’s view Copper is just one of the markets where the downtrend as discerned on the Daily chart has slowed down. S/term bull signals have been elusive – but it wouldn’t take much to set the bullish pulse racing...

• MONTHLY CHART – CONTINUATION: So far prices have collapsed to the area of the 76.4% retracement of the major 2001-2008 upmove. This is often a good technical area of support/resistance). We have also drawn in the simple 1.618 swing projection of the 238.50-427.00 rally, at 122.00.
• DAILY CHART – MAR-09: The nature of the downtrend changed (slowed), following the 163.60 27-Oct low. If the recent breach of small falling support was false, then recovery through s/term falling resistance and the 173.35 26-Nov high needs to happen soon. This would be an initial bull trigger, further confirmation to be had from a rise above the channel top projection, currently around 188.00. However, if bulls fail to deliver, and new Dec lows are seen, then we must continue to target our next Fibo projection around 104.80.
• [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

Singapore Dollar Looking Tired?

USD/SGD has recovered some 38.2% of the 2001-2008 losses and it could soon be time for bulls to take a backseat as the market corrects some of its gains.

• MONTHLY CHART: The recovery off the 1.3438 Jul low has been impressive so far – but the market seems to be sticking at the 38.2% level. (There is also a resistance band on the Weekly chart, not shown here)
• DAILY CHART: Current action remains in a s/term bull channel, overhead resistance implied firstly by a Fibo projection around 1.5520, ahead of the channel top above 1.5700 now. The impulsive upmove from the Jul low seems to comprise 5 waves, the last of which is unfolding now, after late Oct support was found above the 1.4475 11-Sep high (which remains a key support). Characteristic tiredness of this ‘last’ leg is indicated by the negative RSI divergence that is now apparent – a break below the first rising support line, around 1.5050, would be an initial bear sign. [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

Short Term Recovery in Cocoa Underway

The slump in Cocoa prices from a July high has come to a temporary halt near supports on the long term chart. Following an initial recovery we consider what further upside scope there is, before resistance gets tougher.

• WEEKLY CHART – CONTINUATION: Note how the fall from a 3385 peak halted near old highs from 2003/2005, and not much above the 76.4% level of the 2004-2008 rise just below 1800. These levels currently underpin the s/term recovery in progress.
• DAILY CHART – MAR-09: The recent break/close above the 2209 29-Oct high and 2256 Mar low was a s/term bull sign. Subsequent slip back does not concern, although ideally the s/term support from around the 2108 19-Nov high can hold, for better momentum, - otherwise the small rising channel base projection (1975 just now) needs to support a deeper dip. We initially target the 2454/99 area, 61.8% and 15-Sep low. Falling resistance is nearby too.
• Buyers will ideally have initial stops below the 1975 level, looking to raise to just below 2108 after a break above the small channel top (2235). At least partial profits would be taken near the 2454 61.8% level. [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

Oil: the bears remain in charge

The Technical Trader’s view:

MONTHLY CONTINUATION CHART: The long bull market has been smashed: the prior High at $78.40 has long gone, the 61.8% retracement broken, the diagonal trend line supports broken, the only support of substance lies at the horizontal from the succession of highs around $40. We think those levels will be tested by the market.

WEEKLY CHART: The market paused at the Pivotal low at $51.56…

DAILY CHART: And now (this is the Feb 09 contract) that level has been broken. Use the band at $49.40- $51.56 for Stops. The market looks set to go on down in the short and medium-term

The Macro Trader’s view: It almost seems unbelievable that only 4 months ago oil prices made an all time high of around $147.00 a barrel, when today it is trading at close to $100.00 lower in the March 09 contract at $49.12. What brought about this dramatic collapse and has the market further to fall? The oil price was driven up by several factors:

The invasion of Iraq was undoubtedly the catalyst for the rally,

Geopolitical tension in the Middle East between Israel and its neighbours,

Geopolitical tension between Iran and the major powers over the latter’s development of nuclear technology, suspected of being a cover for developing a nuclear weapon, and

The economic growth of China and India to an extent where they are almost economic super powers with an insatiable appetite for commodities and raw materials, but especially energy.

But things are changing: the Iraq situation has ceased being a support for oil as the US and allies seek an exit strategy, tensions involving Israel have cooled as peace is again being sought, and the Iran question has quietly slipped from view as President Bush entered the twilight of his Presidency, removing geopolitics as a major support. That leaves the energy demand from China and India and the perceived finite supply of oil driving prices to their all time high. However as soon as the financial crisis hit, caused, arguably, by the decision in the US to allow Lehman Brothers to fail, economic meltdown emerged as the single biggest threat to the global economy, not the price of oil. And although governments worldwide rushed to enact substantive rescue packages for their ailing financial systems that saw the value of Bank’s shares collapse around the world, the reality of economic weakness, derived originally from the credit crunch, had hit home and oil traders realised that falling demand in the major developed and emerging economies, would lead to a substantial drop in the demand for oil. Now, as a deep recession is almost a certainty, despite record low interest rates in the US, UK and elsewhere, the economic outlook remains grim.

In the US, interest rates look set to be reduced to zero, with UK rates falling further. In China growth forecasts for 2009 have been slashed to a little over 7%, and while that sounds strong, for a country recently used to growth running at 10 or 11% that will feel like recession. In short, the global economy continues to contract and despite aggressive action from policy makers through the use of lower interest rates, liquidity schemes and fiscal policy. The bottom isn’t yet in sight, so how much lower can oil prices go? Much lower than this despite the threat of further output cuts from OPEC.

Mark Sturdy, John Lewis

Seven Days Ahead

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Sterling Euro – stick with the trend

The Technical Trader’s view:

• MONTHLY CHART The big picture of Sterling Euro is powerfully bearish for Sterling. The Reversal pattern formed since 1996 suggests moves up as far as 0.89 minimum. We’re close but not there yet....
• WEEKLY CHART The market formed an unusual expanding consolidation for most of 2008. And then the market broke on up. The pull back should expect powerful support at the rising diagonal beneath the market at 0.9250 or thereabouts. Look closer still…
• DAILY CHART The pull-back should find support both at the diagonal and the band of horizontal support from the near highs at 0.8062-0.8185.
• DAILY CHART That pull back itself has the shape of a Triangle. Traders should focus attention on the higher of the two diagonals – currently at 0.8522. A break of that will triggers fresh sales of Sterling….

The Macro Trader’s view: The recent price action in Sterling/Euro has been mainly sideways. This followed a period when the Pound weakened significantly against the other major currencies, including the Euro. Indeed so rapid was Sterling’s decline, it didn’t seem unreasonable to expect Sterling/Euro to go to par. The engine for Sterling’s collapse was the weakness of the UK economy which looked set to experience the deepest recession of the major developed economies. While the US continued to experience economic difficulties, the prospect of, and eventual election in November of a new President brought a degree of optimism both in the US and abroad, as Barack Obama was hailed as JFK and FDR all rolled up into one. In the Euro zone, while a recession was expected, the outlook wasn’t judged as severe as in the UK, and this helped undermine the Pound. But over recent weeks the ground has shifted: - The UK government has delivered an emergency mini budget that has offered Sterling limited support, despite it being previously viewed as negative for the currency during early discussions,- In the US the economy continues to deteriorate and the Dollar rally looks in doubt, and - In the Euro zone the economy is in recession and the outlook has darkened. While the German and French governments have ruled out copying Brown’s fiscal boost, the EU has announced a package worth Eruo200B (but will the member states support it?) Returning to Sterling, traders are still assessing the worth of the UK’S fiscal measures, which have greatly increased National debt and will take several years to reduce and return the UK’s Government finance to a more stable and sustainable path. What Brown has done is to take a huge gamble: - If it works, the UK recession will be less severe than otherwise would have been the case, and the buildup of debt, while still questionable, will be just manageable, but - If it fails, due to the overall weakness of the global economy and the plan’s reliance on a VAT cut, (which may not take fully into account rising unemployment and an unwillingness to spend during times of economic uncertainty) then the debt burden will be even bigger, take longer to pay off and condemn the economy and Sterling to a prolonged period of underperformance. Once traders have made up their minds, we expect the Pound to come under renewed selling pressure as we judge the stimulus will prove an expensive mistake, leaving Sterling/Euro at par a possibility. Mark Sturdy, John Lewis Seven Days Ahead [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

How Strong is the Floor in EUR/USD?

The 2008 fall in EUR/USD has remained supported after finding a temporary floor in late October, but the bull signs are not conclusive yet.

• WEEKLY CHART: The break below Dec-04 1.3667 high and the bull channel base projection happened simultaneously, emphasising the loss in medium term momentum. Recently the losses have stabilised close to the congestion lows from 2005. Any recovery will be assumed to be relatively short-lived.
• DAILY CHART: This chart has found a temporary floor, unlike its USD/CHF counterpart which has recently continued extending its ceiling. The 2.618 swing off prior 1.3879-1.4865 rally (1.2285) has provided useful support (note this 2.618 level ‘crops’ up in today’s Soybean Update too). An initial bull sign has been given by the close above the small bear channel top projection – bulls now need a break/close through 1.3294 30-Oct high for further reassurance. That said, note potentially strong resistance at 1.3745/1.3879, 38,2 % recovery level (our minimum target) / 11-Sep low. This is the next major hurdle on the upside.

Re. USD/CHF Update 13/11/08 – this market has pushed up further than expected, but the main assumption, that a final (up) wave is in process, remains valid. [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

Soybeans Could Be Trying To Base...

From a peak in July, Soybeans have fallen significantly, retracing 50% in absolute terms. There are other technical factors that could quickly combine to offer the conclusion that a modest base had formed, heralding a temporary reversal.

• WEEKLY CHART – CONTINUATION: After losing 50% of its value, the Weekly continuation chart has also neared the 76.4% level of the major 2006-2008 rise. This, together with the significant 757.50 Jun-05 low, provides a potentially strong underpinning of the market (but there is no requirement that this area be tested before any rebound phase).
• DAILY CHART – JAN-09: See how the 2.618 swing off prior 1186.50-1388.25 rally, around 860, has provided effective s/term support. Falling resistance just below 900 is the first hurdle for the bulls, but a break/close through the 981.75 04-Nov high is needed to show that a base had completed. Our initial target would be 38.2% of the fall so far, around 1146. A close below the recent 835.25 low would essentially negate this s/term basing scenario. Note that a similar set up exists in Wheat.
• Last week’s Update looked at the basing prospects for Coffee – these still remain. Coffee is another market where a 2.618 swing projection has proved an effective support area.

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US Dollar Index in Fifth and Final Wave?

The Dollar Index has made an impressive recovery attempt this year, but technical levels on the medium term chart plus a particular interpretation of the Daily chart structure combine to suggest that a temporary reversal may not be far off.

• MONTHLY CHART: So far, two signs that long term bears are losing momentum are: the push above the significant 80.390 Dec-04 low, and the breach of the bear channel top projection.
• WEEKLY CHART: Continued strength here has now found resistance from the 76.4% area, which neatly coincides with the 87.330 Jul-06 high. The Daily chart below suggests that bulls could be getting tired.
• DAILY CHART: Recent strength found s/term resistance from around our 2.618 swing projection off prior 80.375-75.890 Sep pullback. A break through this would initially target the next projection at 90.40. But note that a clear 5-wave structure looks to be unfolding –if this is the case then the uptrend is maturing, the final, 5th wave in progress. A period of Dollar weakness may not be far off but, at the moment, this won’t be confirmed until 83.100/83.191 support gives way. [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

Coffee Trying To Base - But a Hurdle Remains

In October the rate of descent slowed, with recent price action showing bears were pausing for breath. However, bulls must find their strength soon, otherwise the shorter term prospects of a base will dwindle.

• WEEKLY CHART – CONTINUATION: Next support on the longer term chart comes from the 76.4% 101.15 level plus the slightly lower 100.00 2007 lows. Should a s/term base fail to materialize then this area becomes next target.
• DAILY CHART – MAR-09: One of our Fibo targets had been the 2.618 swing projection off prior 138.90-155.70 Aug rally (around 111.70) which has worked nicely as s/term support. There remains the chance of a modest base forming (whatever name one might care to give it), requiring at minimum a close above the small falling resistance line at 121.70, a stronger signal coming from a higher close above the 123.35 05-Nov high. We would then target towards the 137.05/140.00 area, incorporating the Mar-08 low and old rising support/return line. A break below 110.10 27-Oct low would negate the basing idea, and open the way instead to the 101.15/100.00 area mentioned above. [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

What Stocks are up against

• S&P CASH CHART (QUARTERLY)This is what the market is up against. There is an enormous POSSIBLE bear Head and Shoulders Top poised to complete on a break beneath 768. If that level breaks then the minimum move suggested by the chart is down to 380 or so.There is very little else to say really, beyond studying the futures charts for the equivalent level and examining their shorter-term charts for evidence of structures that may drive the market through that Pivotal low.
• MONTHLY FUTURES CONTINUATION CHART:The equivalent level in the futures is 767.50. As I write we are trading 768.50. Which is perilously close. Now look closer.
• DAILY DEC 08 FUTURES CHART:This is the evidence that supports the bears. A Triangle looks to have completed, whose measurable move is far beneath the important Pivotal Low that completes the massive Double Top. The target if the break is sustained? About 630. Sellers should place Stops above the horizontals from the prior Lows.The market hasn’t finally closed beneath the Triangle. But it looks grim, and the consequences of a confirmed breakdown look very grave.

The Macro Trader’s view: Frustrated equity bears, ourselves included, have had to endure weeks of intraday volatility that has made holding a short position or even a long position, very expensive. Although equity markets have essentially traded sideways since early October, intraday ranges have been large with a high degree of uncertainty driving volatility. As traders spent time assessing the impact of the global Banking rescue plan on global economic prospects, bear traders became increasingly frustrated. In part this was due to hopes that the US and others would enact a large fiscal stimulus to kick start the economy back to life, and while this remains a possibility, last weekend’s G20 meeting proved this wasn’t happening anytime soon; at least not on a global scale. Now, suddenly, US equities have broken the lows made in early October and other leading markets are again testing the downside, what caused the change? Apart from a never ending stream of negative data from all the leading economies showing the US, UK Euro zone and Japan falling into recession, the Fed and the Bank of England have changed from worrying about the risk of higher inflation, to fearing inflation might fall too far. While deflation isn’t a serious threat, both Central Banks have mentioned it and noted that they are ready to act to prevent it. The Fed revealed in yesterday’s minutes that they stand ready to aggressively ease further if need be even though Fed funds stands as low as 1.0%. The reason behind their thinking is a substantial downward revision to 2009 growth, from 2.0-2.8%, down to -0.2 to +1.1%, with risks to both growth and inflation on the downside. Moreover, they also raised substantially their estimate of the unemployment rate during the period to 7.6%. In the UK, the MPC minutes for November, also released yesterday, showed policy makers were seriously considering a cut of 200bp or more in order to prevent inflation falling too low and in an attempt to support growth. In the event they chose to ease by a “smaller” 150bp in order to retain the ability to respond in the coming months as the economy weakened further, as a means of supporting confidence. In short, the message all this conveys is that the global economy remains in a very tight spot. The US could soon have zero interest rates, never before seen, and rates in the UK could fall as low as 1.0% by the 1st quarter of next year. Elsewhere, conditions are no better and the falling oil price bears testament to just how weak global demand has become. In this environment it is no wonder then that equity markets have resumed their bear trend and they look set to slide further. One small glimmer of hope for the FTSE is Gordon Brown’s intention to unilaterally use fiscal policy to help cushion against the recessions worst effects, but this will likely prove futile. The UK economy relies heavily on services, and the City for highly paid jobs. In this environment they are being lost, not only here but abroad too, so the weak global economy will likely swamp the best efforts of the UK government and drag the UK down too, leaving equities in a true bear market. Mark Sturdy John Lewis Seven Days Ahead

What’s the bond rally all about?

[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com] The Technical Trader’s view: This market has gone nowhere but up since we argued that Bond markets ( in particular US T Notes) looked vulnerable in our Market Update of October 30th entitled: ‘Whither Bonds? Sell ‘em hard! When?’

• T NOTE DAILY DEC 08 CHART:

In mitigation, we identified a series of levels beneath the US T Note market which had to break before we became bearish. Needless to say none of them broke! Instead the market is testing the old highs. And other bonds markets are doing even better: look at the Bunds.

• BUNDS DAILY DEC 08 CHART

Bulls are excited that the succession of Prior Highs has been overcome. Certainly, the market has paused and retraced a little in the last day or so, but those old Highs look good support.

• BUNDS WEEKLY CONT. CHART:

This though, is a little less bullish. Certainly the market has pushed to the top of the trading range. But bulls should wait for a clear confirmed break above the 118.48 High on a weekly basis. If that happens, taken together with the daily chart, the bears will have to capitulate – for quite a while. A bull move of some eight big figures would be suggested by that bull break. Wait for the break! The Macro Trader’s view:

1. Readers of the Macro Trader’s Guide will know our views on Bonds: we have been long-term bears, but due to the price action in the market we have stood aside, judging sentiment and timing were against us ‘short term’.
2. We had viewed the relative strength of Bonds over recent weeks as likely, short term, since our focus had been the clear deterioration of the fiscal stance of not only the UK, but also the US and the Euro zone.
3. Clearly the most negative of these markets is the US 10 year note and UK Gilt, as both governments have been obliged to commit vast amounts of tax payers money, unfunded by tax receipts, to rescues ranging from insurance companies and mortgage giants in the US, to high street Banks and Building societies in the UK.
4. While the Euro zone too, has committed large sums to recapitalize its Banks, most politicians haven’t been trumpeting the need to spend their way out of the crisis, as has the Brown government in the UK with unbridled alacrity.
5. This led us to argue in favour of the relative strength of the Euro Bund over recent weeks. But in general terms we have expected bond yields to rise as governments globally are forced to increase Sovereign bond issuance to cover their many and varied interventions.
6. However, while we haven’t lost money over this stance, (we have remained square), we are struck by not only the resilience of bond markets, but their outright bullishness. How much longer can this last and, indeed, have we been wrong?
7. Clearly, traders have been overwhelmingly pre-occupied with the economic weakness of the global economy, and more importantly, the very nature of the current downturn itself.
8. So why are governments queuing to borrow their way out of this crisis? Ironically, it was over indebtedness of the western populations that led to the crisis in the first place, especially in the UK and US but elsewhere also,.
9. So too much borrowing got us into this mess, but politicians think that even more borrowing will get us out of it.
10. They may be right, but it will only work if what is being proposed looks sustainable and appears temporary. If the general fiscal position is to be materially weakened, and that level then becomes the “base line” moving forward, then we judge bond yields will indeed rise as traders and investors judge the situation untenable, but if a credible plan is simultaneously adopted showing a clear and workable path back towards fiscal rectitude, then bond yields may well fall further.
11. At present it isn’t clear how the global authorities (especially in the UK) intend to manage this. While we are beginning to revise our short and medium-term view about the direction of Bond yields, only evidence that any increase in borrowing will be only temporary would encourage us to go long. And longer term, much depends on the depth of the current recession and the mix of both fiscal and monetary policy moving forward.

Mark Sturdy John Lewis Seven Days Ahead

Dollar-Swiss Up Against Short & Long Term Resistance

[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com] USD/CHF is currently one of the clearer charts to interpret. There are technical reasons for expecting bull fatigue to set in soon, with a pullback becoming more likely. If we are wrong then the inevitable surge through this resistance would itself provide a clear and useful signal.

MONTHLY CHART: Our interest currently lies in the bear channel top projection which combines with other resistances on the Weekly chart below. Meanwhile it is worth observing that a break through this would show that long term bear momentum was weakening. (Such a channel break has already taken place on the US Dollar Index – see our FX Guide for details)

WEEKLY CHART: Now things get more interesting – the channel top nicely coincides with two significant lows from 2006, 1.1879/1.1918, and the 61.8% level of 1.1905. The main case scenario (including further evidence from the Daily chart) calls for a decent corrective phase. BUT, if we are wrong, then the likelihood is of a powerful break higher, which can be turned to advantage. Now see the Daily chart.

DAILY CHART: S/term the trend is still seen as up. However, this year’s recovery has adopted a classic shape - we do not normally count Elliott waves but a 5th/final wave looks to be unfolding now. The essential implication is that bulls could be tiring. We have s/term Fibo projections marked in, besides the current s/term bull channel, and the expectation is that price gains will continue to be a struggle. We must still await bear signals, though, and, for now, remain onthe alert. We’ll be covering developments here in future editions of the weekly FX Trader’s Guide, as well as subsequent Updates.

Philip Allwright Mark Sturdy Seven Days Ahead

Gold looks vulnerable – but timing is difficult

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The Technical Trader’s view:

MONTHLY CHART CONTINUATION

• This is a momentous chart.
• Note the dogged rally from 2000...
• The triumphant achievement of the $873 prior High...
• The hesitancy at those highs for nine months...
• And then the fall.
• The precipitous descent through the steep uptrend ...
• The smashing of the first support like a ... clunking fist.
• It looks poor.

WEEKLY DEC 08 CHART:

• This reinforces the drama of the breakdown through the successive horizontal supports from both the Continuation chart and the Dec chart’s Prior Highs.
• Note too, the untidy Head and Shoulders Top that may have formed.
• The price has traded around the possible Neckline.
• But increasingly looks to have completed....
• If that is an H&S Top, then the minimum target is easily measured...
• Down to the highs of 2004-5 of $525.
• (which is the first clear Prior High support observable in any event)
• Look closer still.

DAILY DEC 08 CHART:

• But the bears (including us in our Key Trades portfolio) have had to wait for a good short-term signal.
• The market broke the twin supports at $749 and $739, and then rallied back.
• The market seems reluctant to get above and stay above the 749-739 band.
• But traders may want a more positive short-term signal before getting involved.
• We think it will come!

Mark Sturdy John Lewis Seven Days Ahead

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Whither Bonds? Sell ‘em hard! When?

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The Technical Trader’s view: There are a series of critical breaks which may fuel a bear market from these rarified levels: Watch for those critical breaks beneath 111-09, 109-20 and 104-00:

1. MONTHLY CONTINUATION CHART:This long term US T Note chart is notable for the repeated failure of the market to get above and stay above the 120 level...And the market has just failed twice recently.If the market were to break down through the two lows at 104 a good, solid, Double Top would have been completed.
2. WEEKLY CONTINUATION CHART:That recent double refusal is all the clearer here.In the medium-term the possibility arises of a Double Top if the market can get beneath 111-0.5.But we feel it should also break the two supports from prior Highs at 110-31 and 109-20.5 before sellers can be sure that the market is truly weak. Look closer still.
3. DAILY DEC 08 CHART:The double failure beneath 120 on the week chart becomes a four times failure at the 117-00 level in the day chart.Note too, the exciting bear possibilities that have now arisen: A push down through the possible Neckline at 111-09 would complete a clear and powerful Head and Shoulders Top. All this has yet to happen.But the bear potential found in the long medium and short-term charts is unmistakable. Watch for those critical breaks beneath 111-09, 109-20 and 104-00.

The Macro Trader’s view: Usually during times of economic weakness, or outright recession, as now, bonds are seen as a bull trade. That is because as an economy approaches recession, inflation usually falls, or is forecast to. And although government borrowing (through bond issuance) tends to rise as tax receipts fall, and benefit payments increase, this doesn't undermine the bull bond trade for a good while since it lags the overall trend in the economy. Of course, as the recession ends then bonds may eventually begin to fall as private demand for money competes with the public debt. But this time the situation looks very different. True, after a long period of relatively strong inflationary pressure, inflation is at last set to ease, as the leading economies all enter recession. But unlike in other post WW11 economic downturns, government borrowing is not just set to grow, it is exploding. In response to the near-collapse of the global financial system, the US, UK, Euro zone and others have pumped huge amounts of money into their Banks by way of state capital injection. Additionally, they have made billions available to guarantee inter-Bank lending in an attempt to get Banks lending to each other again and to the wider economy. Modern economies cannot function without a steady and readily available flow of credit. The drying up of this over the last 14 months is largely responsible for the now un-avoidable recession. These actions mean that governments will not only need to borrow to fund previous spending commitments once covered by tax receipts, but need to borrow even more to finance the financial system rescue plan recently adopted globally. This is the heart of the problem: the market won’t just need to absorb increased sovereign debt from one or two struggling countries, but from virtually every leading economy in the world, including the United States. In the US, the situation is made potentially even worse by the government nationalizing Fannie Mae and Freddie Mac which saw US Government liabilities soar by $5.4T, almost doubling the national debt. While this debt to a degree is self-financing so long as mortgagees continue to service their mortgage, the risk a large proportion will slip into default is very real, or else these two firms wouldn’t have needed to be rescued. In the UK Gordon Brown and Alistair Darling have said the previous fiscal rules will be ripped up and the UK will spend its way out of recession. While this guarantees a substantial deterioration of the fiscal position, it isn’t even clear that it will work, since greater government borrowing acts ultimately to crowd out the private sector, which ultimately is the true creator of wealth. So, faced with a near certain explosion of new government debt issuance globally, we judge long-term bond yields are set to rise substantially, in fact unraveling the last 15-20 years of falling bond yields, as many of the conditions that drove yields down during that period are either no longer in play or are reversed. Timing for a bear bond trade remains a matter of debate, but we sense once traders become accustomed to the reality of recession and fully aware of sovereign debt implications, bonds will sell off hard. Mark Sturdy John Lewis Seven Days Ahead

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How far can the Euro (and other currencies) fall against the Dollar?

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The Technical Trader’s view: DOLLAR EURO MONTHLY CHART The drama of the Dollar is beginning to take centre stage in the markets. The clear failure of the market to hold at the band of support 1.3668-1.3812 has led to a fall against the Euro which spells the end of the weaker Dollar move from 2000. Our Key Trade subscribers have profited from the move. And although we think it looks extended short-term, we think it will go further. 1.20 looks to be the first support of consequence. DOLLAR EURO DAILY CHART: The detail of the market shows a possible head and Shoulders pattern that looks set to drive the market on down – perhaps as far as 1.18 or so.....(close to the long run support in the weekly chart) We have been profit-takers here (the recent leg almost exactly equal to the move from 1.60 to 1.39) But note the good resistance above the market at the low 1.3261, and then again at the Neckline. Even if it bounces we think the market is a sell. The Macro Trader’s view:

Given an economy that: • has been skirting recession for well over a year, driven by a housing market correction that began back in 2005, • has enjoyed a sizeable fiscal boost earlier this year and more recently, • has had to intervene in its financial sector in enormous size one might be forgiven for asking why the Dollar is as strong as it is, especially since the on-off recession is now definitely not only on, but likely to prove deep and protracted. The answer could simply be put as follows: ‘USA first in, USA first out’ but that wouldn’t fully explain what is now unfolding in the global economy. True, the US was the first economy to begin feeling the impact of the Sub-Prime crisis. Its origin after all, was the US. But initially many thought it would just be a US problem, worsened by the housing market correction that began in late 2005. That view enormously over-simplified the matter. The sub-prime bonds secured against sub-prime mortgages were purchased as investments by many other Banks globally; this insured the problem would be global in its reach. But because the initial impact did indeed appear confined to the US, the Dollar weakened greatly against the other major currencies. The UK economy, which completely avoided the 2001 recession, was at first viewed as bomb-proof, although that view has long since changed. And the Euro zone economy, with its greater reliance on manufacturing rather than services/housing market activity, looked even more immune. Now, a year of financial market turmoil and dislocation has almost brought the global financial system to its knees, requiring a global rescue plan designed to recapitalize the Banks of the major economies. No economy looks immune and indeed a severe recession is not only expected in the US, but also in the UK and now the Euro zone. So, although the situation in the US is far from showing improvement, traders are focused on the relative deterioration of the other major economies as measured against the economy of the US and they don’t like what they see. Hence the US Dollar is now embarked firmly on a new Bull Run which has still a long way to go. How far can it go? Well, just look at where Dollar Euro was before the Dollar began the its recent bear trend, now ended, and that will give some guidance. Subscribers to the Macro Trader’s guide and the Technical Trader’s guide and Seven Days Ahead’s Key Trades product have benefited from our detailed analysis of this market and only today taken a 583bp profit. Mark Sturdy John Lewis Seven Days Ahead [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

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The unfolding drama of Stocks – more to come?

[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com] The Technical Trader’s view: MONTHLY BAR CHART It is worth studying the long-term chart with some care: The Head and Shoulders Top has certainly overreached its minimum target of about 980. The market has deeply penetrated through the support from the prior High at 954. The 767 low has yet to be reached. It seems to us likely that, in the absence of any other support of consequence, the market wants to test that crucial level. If so, and that 767 level were to break, a perfect Double Top would have been formed. Check out the consequences of that.... DAILY CHART: If completed the Top has a minimum move down to 380 or so. That’s a large move – which so far is purely conjectural. But worth bearing in mind. (Especially since the Nikkei has already traded very close (7710) to its 2003 low (7600) and remains very close) In the S&P, what if the current yo-yoing around the 950 level creates some sort of a continuation pattern? What are the chances of that? DAILY CHART: The shorter-term Head and Shoulders chart in the Dec 08 contract has been driving the market over the last 15 trading days. That H&S too, has achieved its minimum target - more or less the level of the larger H&S pattern in the continuation chart. But the important question surrounds the unfolding character of the price action over the next few trading days. Watch for a possible Triangle: we need another High - around 1000 would be ideal - and then a break of the lower diagonal that has already been created.... Watch and wait! The Macro Trader’s view: Equities are currently suffering one of their most volatile periods in a very long time. Traders began frantically selling stocks globally a few weeks ago as serious concerns emerged over whether the global financial system would survive in its current form and as a result the Dow Jones suffered its worst sell-off since the 1929 crash. But as has been widely reported, the launch of a ‘Global’ rescue plan for the Banking industry has broadly allayed fears of collapse and on Monday of this week, the Dow Jones enjoyed one of its largest point’s rallies ever, with other equity markets following suit. But the initial euphoria soon gave way to worries over global recession. Although the financial system was no longer deemed at risk of collapse, as governments pumped money into their ailing Banks via part nationalization, the plan was seen as too late to prevent recession in the developed economies. Indeed, despite interest rates in the US of only 1.5%, that economy is now seen as recessionary and, along with the UK and Euro zone, analysts expect it to be a worse recession than any other post WW11. Interest rates are expected to fall further, including those of the US, possibly at this month’s FOMC meeting. Despite the help given the financial system and expectations of further rate cuts, equities remain volatile. It now seems clear that the powerful rally in equities earlier this week was little more than a short covering rally, which turned negative on Wednesday. And even though stocks are trying to rally today, they aren’t much above the lows of the week. Looking ahead, we judge economic data is likely to remain weak: today’s US Housing starts were the lowest since 1991 which was the last deep recession. Yesterday’s industrial production and capacity utilization were also weak and the Fed’s Yellen and former Fed Chairman Paul Volker both said this week the US was in recession. Current Fed Chairman Bernanke is saying the US economy faces serious threats. In short, the financial market rescue plan has prevented the Banking industry from collapsing, but the financial crisis had already been running for over a year, and so the damage to the economy is already done. In the UK and Euro zone the situation has been made worse by the Bank of England and ECB keeping rates too high for too long as they failed to recognize the severity of the threat to economic activity until it was too late. The current situation argues strongly for a continuing bear market in stocks and that is what we expect. Worse still, when the recovery does start it is likely to be anaemic, meaning it could take a long time before a solid Bull market in equities emerges. Mark Sturdy John Lewis Seven Days Ahead [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

Why we are out of the market

THE TECHNICAL TRADER'S VIEW:

• The Technical Trading Guide has been a bear of the Eurostoxx index since July 1st. In that period the index has dropped from 3400 to 2663 or 21%. We have been short of the FTSE the S&P and the Nikkei for much of that period as well.
• In the Market Update sent early yesterday morning we pointed out that the risk return of selling stocks was no longer attractive and so advised going square of all stocks for the first time in three months.
• In large part this is because of the fulfillment of the target of a very clear pattern in the S&P 500 index:

DAILY CHART The achievement of the 1000 target is absolutely clear. Of course targets are minimum target for moves, but the loss of impetus after the achievement of a target renders markets more vulnerable to short-covering and therefore changes the risk-reward of the trend-following trade. In addition look carefully at the long-term charts ... There are at least two other good technical reasons for covering stocks shorts at these levels... MONTHLY CHART: Note the close proximity of the horizontal support from the prior high at 954 in 2002. Look closely too at the target of the large H&S pattern in the long term chart... The target of that pattern too has been exceeded. And the same logic as that used above holds good... This is why we are out of the market in stocks. THE MACRO TRADER'S VIEW After a very successful long Short Sterling trade in our Key Trades recommendation portfolio, (see http://www.sevendaysahead.com/investor-guides/ktguide.php) we closed it out yesterday for a total profit of almost 100bp, we are now standing aside from both interest rate markets and equities. Stock markets remain incredibly volatile even now, and have exhibited great volatility for many months. Indeed subscribers will know that we have been long term-bears of equities - about which see above. But, understandably, traders have found it very difficult to enter trades that were swiftly taken out by large intra-day swings. These were caused by great uncertainty over the fate of the global financial system, which had seen stalwarts of the US and UK Banking establishment either fail or require Government rescue. But even now after both the US and UK authorities have launched massive independent and structurally different rescue packages, stock markets remain unpredictable. We are no longer bears but neither are we bulls: - Equities have tried to rally, but even now are again trading lower, and - Inter-bank lending, so crucial to the entire financial system and global economy remains frozen; even after a coordinated 50bp rate cut from leading Central Banks. So what next? US treasury Secretary Paulson warned only yesterday more Banks could yet fail, and the rescue plans will take time to work and percolate through the plumbing of international finance and re-awaken economic activity that is on the brink of the worst recession since before WW2. This leads us to exercise caution. The crisis isn’t resolved; we are experiencing a lull even though much has now been done to improve the situation. Now the UK recession looks like being bad, previously it looked like being a disaster with the real risk of one or more major Banking institution going bust. The good news is that that scenario no longer looks likely since the Governments of the UK (and US) are poised to either take a direct stake in the leading banks or cleanse their balance sheets of ‘toxic’ debt. For now though, interest rate markets are giving back some of their gains, which may offer better buying opportunities for another bet on lower rates - in the future. That is why we are now square. We sense we will soon be able to re-establish good interest rate positions at more favourable levels as markets move from worry over the financial system, to focus on the coming recession and its impact on the real economy. We doubt whether the risk return in stocks will encourage fresh positions anytime soon. Mark Sturdy John Lewis Seven Days Ahead [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

Cotton bears target lower after latest support failure

During Jul/Aug the fall in Cotton prices had slowed notably, and bears had looked tired. However, a break of key support in early Sep gave them a new life lease, with the risk that the downmove would accelerate. The Commodity Trader’s view

• WEEKLY CHART – CONTINUATION: In the Commodity Trading Guide we had been looking at possible support around the 76.4% 56.70 level (see next chart too). This has not held, due partly, we believe, to the fresh energy that bears have derived from the early Sep break of a key support line (see Daily chart).
• WEEKLY CHART – DEC-08: On the weekly chart of the front month we had noted the ’98.45-71.65’ equality target off 84.04 Jun high, at 57.25 – not far from that 76.4% level. It has not been effective, so the next target on the list lays around 51.60, the 2.618 swing off prior 71.65-84.04 upleg. Looking at the daily chart…
• DAILY CHART – DEC-08: In recent Commodity Guides we had mentioned the risk of a downward acceleration should the (former) key support line fail. This appears to be taking place, and on this chart note two bear channel base projections that currently converge below the 50.00 level – potential support if other levels fail. At this stage the first bull sign would come from a recovery through that old support/return line plus more recent falling resistance line. Any sellers on upticks would likely place stops above this resistance, i.e. above 65.00.

Philip Allwright Mark Sturdy Seven Days Ahead [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

Will the Dollar’s strength continue?

[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com] The Technical Trader’s view: MONTHLY DOLLAR EURO CHART The Dollar has pulled back hard - but we think it may well find good support at the band 1.1875-1.3812. Note well the intersection of the rising diagonal with the horizontals. If that whole area of coincident support were to break the market would feel very vulnerable – nest stop 1.1875. MONTHLY CABLE CHART: Cable too, is approaching a vitally important level of support. But we would be buyers of the Dollar only on a clear break of 1.7365..... Will these levels against the Euro and Sterling break? Look elsewhere.... MONTHLY AUS/ DOLLAR CHART: The Aussie Dollar Cross shows what can happen. It is a broadly similar pattern as, for example, Cable - but the breakdown is far more complete. It doesn’t follow that the Sterling and Euro will collapse, but the odds favour that outcome. The Macro Trader’s view: After an impressive bull run which began back in July, culminating in a high on September 11, the Dollar reversed so abruptly, that it wasn’t clear whether the bull run had foundered or it was merely correcting. Indeed, so far did it correct, that the bull run began to look as though it had only been a correction within the previous long Bear market that traders had judged over. But the Dollar was reacting to great uncertainty in the US financial markets: Lehman brothers had collapsed, Merrill lynch had sold itself to Bank of America and AIG was nationalized. The financial system seemed on the brink of collapse. This was only heightened when Treasury Secretary Paulson announced a rescue package that the House of Representatives rejected after very intense negotiations among policy makers, legislators and the Administration. But that rejection seemed to mark the end of the Dollar’s recent period of weakness. Traders recovered from the shock of rejection and assumed a deal of some sort would be agreed and turned their attention to other major economies. What action were authorities taking in the UK, Euro zone and elsewhere to protect their banking system? In short: none. Their strategy seemed to be little more than to pray that the US passed a rescue plan that included foreign Banks, and as several Banks around the world failed and needed either rescuing or propping up, the Dollar gained strength; so much so it has made new recent highs. So where now for the US economy? In our view the Dollar remains embarked on a bull run. The price action of recent weeks has been a correction, and with or without the rescue plan (which we think will eventually be agreed in one form or another) we judge traders will continue to favour the US currency over its competitors, as both the UK and the Euro zone are on the threshold of recession. And other leading economies are beginning to feel the strain of a US economy that is no longer acting as the consumer of last resort. Already China is failing to fulfil contracts to buy Iron ore since demand has dropped recently, denting the argument that the economies of India and China would be able to keep the global economy moving forward. The global financial system faces challenges that will force leading economies into recession. The Dollar is a buy because the US Government is at least acting proactively in trying to repair the damage rather than hope someone else will do it for them. Mark Sturdy John Lewis Seven Days Ahead

The US vote suspense is ... irrevelent

Whatever happens in the Congressional vote the stock markets look sure to go lower. Note well what happened in the Far Eastern stocks overnight: the sight of export-led economies still anticipating a massive slow-down in Western markets.

The idea that US and European stock markets have discounted the recession coming our way looks unlikely. The Dollar's rise is signalling that Europe will comes over the spotlight next....and though the European short rate markets are beginning to anticipate that rates will fall, their stock markets surely remain very vulnerable. I'm deeply grateful to those buyers to whom I sold two (heavily discounted) properties earlier this summer ...

Mark Sturdy

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Watch the US futures strip – it’s telling us something...

[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com] The Macro Trader’s view: On the 16th September the Eurodollar market spiked to new recent highs and then during the same session abruptly sold off. The reason for this dramatic price action is now well known: the collapse of Lehman brothers followed by the nationalization of AIG. The initial rally was driven by hysteria in equity markets that saw financial stocks sold particularly aggressively, but when the US Government stepped in to rescue AIG and the Fed failed to ease policy to counter market turmoil, as was widely expected, choosing instead to reiterate policy makers’ concerns over inflation, Eurodollars sold off and have sold off hard over succeeding days. A contributory factor was also the announcement by Treasury Secretary Paulson of a plan to create a special vehicle to buy all the ‘Toxic’ assets sitting on Banks balance sheets which lead to the view that policy was more likely to be tightened if this plan went ahead. However there is much dissent among members of Congress and the hoped for rapid passage of a bill enabling the rescue has become bogged down. This has lead to pleas from the administration, from Bush down to support the plan or else the economy will suffer a deep recession. In all likelihood the economy will go into recession anyway: - The housing market correction seems to go on endlessly, and - Jobless claims hit 493k today, a level which is usually consistent with the economy already being in recession. So why are Eurodollars almost uniformly pricing in higher rates across the futures curve? The Fed squashed all optimism of easier policy at the last FOMC meeting, choosing instead to pump in extra liquidity at the same interest rate. But if the Banking industry isn’t fixed soon, the economy will slow inexorably on the lack of credit. This could then turn fears of inflation to fears of deflation and force the Fed to cut rates further, almost to zero. Currently the Fed remains focused on monitoring inflation and providing a flood of liquidity, but if the rescue plan isn’t voted through, or the version that is doesn’t live up to expectations, equity markets will resume their slide and change the Feds priorities. As ever timing is crucial and it isn’t yet right for a trade, but it might soon be. The Technical Trader’s view: DAILY CHART DEC 08 The Eurodollar futures strip is almost flat - uniformly pricing in higher rates in the future. But notice that the near months have fallen hard to the lows of June this year. There was once optimism in the near term – which has now disappeared Now look along the strip... DAILY CHART DEC 09 Even though the market here is still pricing in higher rates notice the technically more powerful position: The market remains well above the June lows. Certainly the support from the prior High 96.44 is being tested (and may have broken today). But the relative strength (technically) of the far end of the futures curve is clear. Mark Sturdy John Lewis Seven Days Ahead [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

We are still sellers of Gold 19th SEPTEMBER 2008

[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com] The Technical Trader’s view: WEEKLY CONTINUATION CHART The market has bounced better from the powerful support at $732. But there is impressive resistance above the market at $848 and above. And the failure of the $873 very long term prior High support from 1980 is still vitally significant. DAILY CHART: The Dec contract shows the wildness of the price action. Dec contract traders will be unconvinced by the bullishness short-term unless the market can get above and stay above the horizontals $858-$868. Dealers will have to make their own minds about stops losses in conditions of such volatility. Watch the price action carefully but we are looking to get short again. The Macro Trader’s view: The rally in gold which occurred earlier this week was a natural and rational reaction to great uncertainty in not only the equity markets but also the financial system in general. Many Banks were finding their very survival under threat following the collapse of Lehman brothers, and not only in the US, but in the UK too. Traders had lost confidence in the Banking industry in general, as it was still impossible to know who was holding non-performing assets, leading to an almost complete freeze in money market inter-Bank lending. Thus the Dollar retraced a good deal of its recent gains. The gold rally was gold fulfilling its role as hedge of last resort. But overnight the US Treasury announced it was working on a plan to create a special Government sponsored vehicle to house the “toxic” securities, thus removing the sense of fear from the market which has lasted for over a year and impeded the normal flow of credit throughout the US and UK economies. The rally underway in stocks now is a rational short term move as short selling of financial stocks is now banned and positions need to be covered. Moreover the optimism generated by the rescue plan announcement, though still not finalized, would be most felt in both equity and wholesale lending markets. This reduces the sense of crisis and reduces the need for safe haven trades, so why the rally in gold today? Possibly the focus of attention has shifted back to inflation, in the belief that think that the economy will be quickly fixed. If so, that is wrong. The economy globally remains weakened and cleaning out bad assets from Bank’s balance sheets won’t fix it over night. Lending standards have been dramatically tightened, not just here in the UK but elsewhere so the credit flow to consumers and home buyers will not quickly return to pre-crisis levels. Additionally, people have lost jobs in large numbers just this week, with the HBOS-Lloyds deal in the UK likely to result in many thousands out of work and in the US Lehman s demise will also see several thousand highly- paid jobs lost. In technology Hewlett-Packard has this week announced the loss of 25,000 jobs. Alternatively, there may be large speculative/safe haven trades are being unwound and the markets are in a state of heightened volatility. In which case it may take a few days/weeks for a clearer picture to emerge and underlying fundamentals to re-assert, but we think they will. In either case the Gold market is a sell. But timing as ever is crucial and so is sentiment. We will be watching the market carefully to finesse our timing. Mark Sturdy John Lewis Seven Days Ahead

Bunds look good!

[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com] The Technical Trader’s view: Daily Bar Chart: The bunds have been going better for a while, but remain the best buy of the Bond markets because of the completion of a neat Double Bottom at 112.88. The minimum target is 116.25. The market has more to go we think, but cautious bulls will wait for a break up through the 114.94-6 previous high before adding on. The Macro Trader’s view: As Euro zone economic data over recent months began to reveal the true extent of the weakness affecting the Euro zone economy, the Bund began to bottom out, even though the ECB continued to focus on inflation as the main risk to economic stability. Then, as the oil price begun to correct lower back in July, traders started to take the Bund higher as it became apparent that the combination of slowing growth and falling oil prices would eventually correct inflation lower, meaning short term interest rates needn’t rise any further. Indeed at the ECB’S August monetary policy meeting, Trichet re-enforced that impression when he said …“the downside risks to growth seem to have materialized”… prompting the market to conclude that the next move in Euro zone interest rates would be an ease. But with inflation still way above target, a rate cut wasn’t about to arrive anytime soon and as growth continued to slow, longer-term yields came lower as the Bund rallied. Only this week the German IFO report came in below consensus and is now well off the highs seen only a few months ago, pointing to yet even weaker conditions in the German economy; the motor of the Euro zone economy, while German inflation even managed to come in just below consensus; an early benefit from lower oil prices. But just to remind the markets that it is too soon to sound the all clear on inflation, ECB policy makers have again warned that inflation is too high and remains a threat, in a move designed to stop traders pricing too much, too soon into Euribor. And although the Bund has eased lower on this, we judge this a short term hiccup. Any delay in cutting short-term interest rates in the Euro zone, will only worsen the slowdown (now so obviously underway) and act to drive long term yields lower, forcing Bund futures higher. We believe the ECB will not rush to cut rates. They will hang on until they see signs of definite progress against inflation. In this environment the yield curve adapts to take the strain of a slowing economy left to cope on its own without the help of monetary policy stimulus and that is why we are bullish of the Bund. Mark Sturdy John Lewis Seven Days Ahead News Link:sevendaysahead.com

Cotton still trying to hold above support

[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com] Cotton has been lackluster for some time now, prices gradually easing. An interesting support line has now been reached – this could be a pivotal point now, with some evidence that bears are tiring. The Commodity Trader’s view WEEKLY CHART – CONTINUATION: The fall from the Mar peak found support at the 61.8% level on the continuation chart. It remains a key level. DAILY CHART – DEC-08: The falling support line is now providing interesting support here. Note how the RSI momentum indicator still shows a positive divergence – possible bear fatigue. A break above the s/term falling resistance line would be of minor encouragement, while a further recovery above 75.00 would be quite a strong bull signal/ confirmation. We could then start looking at bull targets. However, there currently remains the risk of a break below the support line – this would invite acceleration downward, and probable breach of the 61.8% support on the weekly chart. Philip Allwright Mark Sturdy Seven Days Ahead

Are Gold bulls back on track?

The Technical Trader’s view: WEEKLY OCT 08 CHART: The market has pulled back near to excellent support at $732-45 ( from both the long-term continuation chart and the Oct contract) - and bounced. Is this the moment for Gold bulls who missed the rally in 2007 to get back on board? WEEKLY CHART: The failure of the market has been much greater than merely the pull-back through the Low of $848. The failure of the market to hold above the support from the Prior High of 1980 at $873 is very poor and bearish. Only if it managed to get back above that level – say through the falling diagonal – could the long-term bulls gain any confidence. DAILY CHART: And in any event, the market really has (in the short-term) to prove its bullishness by driving up through the resistance from the old low at $855-65. (And indeed, a more convincing reversal formation in the day chart would help convince the bulls.) So, in the short-term, we are sellers on any close approach of the band $855-65. The Macro Trader’s view: Readers of the Macro Trader will know that we judge the long Bull Run in gold is essentially over, but we have held off going short over recent weeks due to heightened geopolitical tension. The long Bull Run in gold was essentially driven by two linked factors: 1.The weakness of the US Dollar which now seems over, and 2.The weakness of the US economy, caused by the Sub-prime mortgage crisis and housing market correction. Over recent months, the US economy appears to have stopped deteriorating, allowing traders to switch focus onto the other major economies which are now flirting with recession. As a result the Dollar has broken its Bear trend and begun what we expect to be a new Bull trend. The emergence of global economic weakness has allowed for a correction in oil, reducing inflationary pressure and removing another key support from gold. But another key element in this market is geopolitics. Aside from the ongoing standoff between the west and Iran, the recent crisis involving Georgia and Russia, which initially had little impact on the Gold, or even, oil markets, has taken a new turn. In response to Russia’s military action in Georgia, NATO has united behind offering Georgia eventual membership, with talks starting around year-end. But more important than this, the US and Poland have in recent days signed an agreement allowing the US to station elements of its anti missile shield on Polish territory. This has angered Russia as it views NATO’S inclusion of former Warsaw pact countries as a direct threat to its own security. As a consequence, Russia has broken off high level military relations with NATO and threatened a response stronger than diplomatic protest. Although a Russian General recently said that Poland would be open to a nuclear strike if it allowed the US to station elements of its missile shield there, it is inconceivable that Russia would carry out such a threat. Poland is part of NATO and the EU, an attack on it would invoke the collective security agreement placing Russia at war with NATO, with a counter US nuclear strike the probable response. Does Russia want to travel down that route when the west intends Russia no harm? No! The likely response would be a disruption to Europe’s gas and oil supplies. While this would be a major inconvenience it would also damage the Russian economy since its new found prosperity is based on Petro-Dollars. What then does this mean for Gold? In our opinion a period of safe haven buying is likely, but unlikely to send the market back towards the highs and once the situation settles, we expect this market to resume its slide, so are we bearish; yes, sellers; not just yet. Mark Sturdy John Lewis Seven Days Ahead

Silver bears may be pausing for breath

[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com] The fall in Silver from the July high has been impressive. Some supports have failed, but now one particular key area is trying to hold, implying scope for a corrective bounce. At the same time Gold has reached potentially interesting support too. The Commodity Trader’s view: WEEKLY CHART – SEP-08: On the weekly chart of the front month first note how the bear channel base projection failed to provide support. HOWEVER, in the Commodity Trading Guide we had noted key support from the 14.25/10 area, which included 76.4% and the 1.618 swing target off prior 16.19-19.55 upmove. Within this also lies the 14.17 Dec-07 low. Technically this would be a logical place for a rebound. DAILY CHART – SEP-08: At this stage we view any s/term recovery with suspicion – there is a good chance that it will be short-lived, and the precursor to another slip. In this regard we do not anticipate a deep (e.g. 76.4%) rebound, and would look closely at the 16.19/60 area (May low and rising old support/return line) for resistance. Sellers on rallies into this area should favour stops comfortably above here. Philip Allwright Mark Sturdy Seven Days Ahead [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

How far can Cable go?

[For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com] The Technical Trader’s view: We have been short Sterling long Dollars in our Key Trades portfolio since 11th August at 1.9196. Since then the Dollar has strengthened mightily. But how far can it go?

1. QUARTERLY CHART:The market has failed to hold above the 2.005 High from 1991.Moreover, the supportive High from 2004 has broken.The long-term case for stronger Sterling is under threat.First long-term support lies at 1.7365.
2. DAILY CHART:The detail of the market shows a number of alternative explanations for the sell-off.It may either be a complex Head and Shoulders Top which completed two weeks ago.( Minimum move to 1.75)Or a continuation Triangle which completed at the same time.(minimum move 1.84)Each has a different measured move.The triangle has almost achieved its measurable move. And the 61.8% retracement may be acting as good support at 1.8624 much as the 50% retracement @1.9115 forced a pause higher up.

But the significance of the medium-term chart breakdown suggests that, though there may be a pause at these levels, the market has no real support of consequence until 1.7375. We remain bears. Mark Sturdy John Lewis Seven Days Ahead [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

Copper bears threaten long term bull triangle

Earlier this year saw a long term bull triangle complete. Our initial upside target was met, but subsequent action has been uninspired – and now, a recent failure of key support threatens the very fabric of the triangle formation. The Commodity Trader’s view:

• WEEKLY CHART – CONTINUATION: The bull break in Feb completed a large bullish triangle pattern, then nicely met our equality target in May (‘238.50-379.50’ upmove measured off 285.00 Dec-07 low). But the pattern implied much better upside potential over time. There is further s/term downside risk (see below), and failure of the triangle’s underside around 320 would completely negate the pattern.
• DAILY CHART – SEP-08: Failure to hold above the 400.00 level was followed by a slump back to the support line. This week’s failure of that line and 351.00 12-Jun low confirms the bears in control. First target 320.00-315.00 area, which includes a 76.4% retracement and 1.618 swing off prior 351.00-408.00 upleg. This coincides nicely with key support on the weekly chart. S/term support may well emerge from 338.40 15-Jan high/61.8% area, but recovery back above 375.50 would be needed to provide bulls with fresh hope.

Last week we looked at Natural Gas (Sep) and key 76.4% support which was currently under test. This support failed, although signals from the oversold daily RSI still hint at a recovery attempt soon. A rally/close back above the 9.60 04-Aug high would now provide an initial bull signal. Philip Allwright Mark Sturdy Seven Days Ahead [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

Has the Dollar turned?

The Macro Trader’s view: After a long bear cycle, the Dollar has spent the last 5 months, March – July, in a well-defined range. The pause in the Dollar’s sell-off was originally attributed to signs the US economy was over the worst of the credit crunch induced economic slowdown, indeed that view germinated from the Fed/J P Morgan rescue of Bear Sterns back in March 08. But with growth in the Euro zone continuing to hold up and inflationary pressures continuing to build, many analyst; ourselves included, judged the Dollar was merely correcting, and would resume its slide as the ECB’S hawkish rhetoric translated into higher interest rates; so far resulting in one hike which may prove to be their last. In the event, the US economy began producing mixed data, but with oil prices seemingly on a one way ticket to US$150.00 a barrel, the Fed joined the chorus of Central Banks that were becoming increasingly alarmed by energy induced inflation. So even when the positive impact of the US Governments tax rebate, had clearly begun to wane, the Dollar found support and remained within its range on growing fears of higher US interest rates. Now the situation has evolved further:

1. The US economy remains vulnerable to serious downside risks, even though inflation continues to vex the Fed
2. Euro zone growth is clearly weakening, with German Q2 GDP expected to have shrunk by 1.0%, but inflation remains stubborn
3. Japan has recently announced it is probably in recession
4. Once the Chinese Olympics are over, China too may see growth slow.

So while conditions in the US when taken on their own are arguably not terribly Dollar supportive, as evidenced by the Feds recent policy statement which explained why policy makers were leaving interest rates unchanged even though they saw inflation as a heightened risk, conditions globally have deteriorated and look like getting worse. Given this back drop Gold might have done better, as no one single currency shines on its own merits, but oil and other commodity prices are in the middle of a significant correction, which if extended will alleviate much of the current inflationary pressure, so traders are by passing gold and looking again at the major currencies. Once again the Dollar is the focus of their attention, as the World’s largest economy, and the first economy to begin slowing, traders’ reason that the US may well be the first to ultimately recover, even though timing on that event remains opaque. So the Dollar is now being used as a bench mark by which to measure the relative strength/weakness of the other leading economies relative to the US, and it looks to have at least topped out and may already be about to begin a new bull run. However, in-spite of the price action of the last few days, a Dollar rally may too prove taxing; the US economy continues to shed labour, and the rate of job loss seems to be accelerating as evidenced by yesterday’s jobless claims report. Moreover, US Banks and financial institutions continue to struggle and are still reporting losses and or significant write downs which will further curtail their lending activities and weigh on the economy’s ability to recover. In short, the Dollar seems poised for a significant recovery, but we judge it may prove a torturous path as the credit crunch is far from over and loop back effects may yet come into play and induce yet greater US economic weakness. Mark Sturdy John Lewis Seven Days Ahead [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

Natural Gas finally reaches a key support area

Market Update 31st July 2008 [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com] Over the last three weeks or so Natural Gas prices have dropped some 35%. This deeper/ faster drop than expected has now found some interesting key support and there is technical reason for expecting a bounce soon. WEEKLY CHART – SEP-08: The weekly candle chart of the front month clearly highlights the drama of recent weakness. But now a key support area has been tested – the significant Jun-07 8.829 high plus 76.4% retracement around 8.90. Technically there is better reason now for anticipating some type of recovery. Also see below… DAILY CHART – SEP-08: The one feature we want to draw attention to here is how relatively oversold the RSI indicator has become. Coupled with the clues from the weekly chart we feel justified in looking closely for a s/term rebound soon. As an initial target we would focus on the 10.70 38.2% rebound level. Philip Allwright Mark Sturdy Seven Days Ahead

Has Gold lost its shine?

Market Update 31st July 2008 [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com] The Macro Trader’s view: The long Bull Run in gold has seen many corrections, which on occasion seemed to mark the peak of the rally, but each time the bulls took the market higher, culminating in an all-time high in March of this year. Since then gold has moved within a range which only a couple of weeks ago looked set to resolve into further bullish price action, with a retest of the all-time high looking likely. What then has so successfully constrained this market, when the economic fundamentals on a global scale still seem negative, and are arguably getting worse? The principle reason, in our opinion, is the correcting US Dollar. As economic data in the Euro zone began to reveal more pronounced weakness, the Euro lost momentum. This coincided with a more Hawkish Fed. On several occasions Fed speakers have communicated clearly their unease over inflation, but have stopped short of flagging any near-term hike in interest rates. However, this has left the market with the clear impression that as soon as growth allows, the Fed would seek to raise interest rates back toward more neutral levels. The only problem is the economy is far from returning to a sound footing. Ok, US Q2 GDP released today was almost in line with consensus, but traders were prepared for a number that beat consensus, and since the main reason for any economic recovery in the 2nd quarter was due to tax rebate cheques, the 1.9% annualised growth rate recorded isn’t that great. Moving forward, the economy now has to survive on its own. The government won’t throw in any more tax cuts. They are busy rescuing Freddie and Fannie, and the Fed isn’t about to ease policy either, unless an economic collapse looks imminent. But with major Wall Street players still reporting additional write-downs or losses, the Banking Industry lacks the health needed to lubricate a recovery. Moreover the ripples have spread throughout the economy as several regional Banks have collapsed requiring the Fed to orchestrate a rescue. Today’s release of Jobless claims at 448k paints a picture of an economy still moving towards recession and with non-farm payroll & ISM manufacturing due tomorrow the true extent of the economy’s weakness may well be revealed. This leads us back to Gold. The current price action is likely a continuation of the consolidation which has extended over several months since March, and when, as we believe, the Dollar’s correction resolves itself in favour of the bears, gold should resume its rally. The Technical Trader’s view: MONTHLY CONTINUATION CHART: The prior high from 1980 has shown itself to be good support already.... In the short-term the market would have to smash down through the $848 level. Only then could the Bears really get excited. DAILY CHART: The detail of the Sep 08 market: Note first, that the $848 level in the continuation chart has turned into a band of support from two prior Highs in the Sep 08 chart. Bulls were excited when that band held throughout May and June of this year. And especially excited when there was a completed bull Head and Shoulders Reversal. The market bounced off the Neckline (and $911 Prior High) before shooting ahead... DAILY CHART: The bull rush did not achieve the minimum move suggested by the H&S Reversal. But the fall back through the $959 level, and then the $940 level was very poor. Then we smashed the horizontal $912. Now we are testing the integrity of the H&S pattern – the Neckline support at about $904 (declining) Is there not a suggestion of another more recent bear H&S Reversal? Use a close beneath the Neckline diagonal before anticipating a retest of the band of support. But only a break of $853 would signal a medium or long-term top in Gold. Mark Sturdy John Lewis Seven Days Ahead [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

Short Sterling poised for action

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Short Sterling poised for action...

The Technical Trader’s view:

Daily Jun 08 Chart

The market is poised.

A push up through the possible. Neckline at 94.4950 would be a powerful boost to the bulls.

A simultaneous break of the resistance from the prior Lows at 94.4350.

The minimum target? 95.55 or thereabouts. (More or less the old highs.)

There’s some resistance above the market at 94.67... but if the H&S pattern completes that shouldn’t get in the way too much...

The Macro Trader’s view:

On Wednesday the MPC minutes for the July meeting left the market with the understanding that a rate hike could be coming in August. The vote was split 7-1-1 with the majority voting for unchanged, one for a cut and one for an immediate hike.

Additionally, the debate seemed to have revolved around whether policy should be tightened. The decision to leave rates unchanged was made based on two considerations:

- To move in July would have upset the market as unchanged was expected, and

- The outlook for growth had deteriorated further, meaning just by leaving rates at 5.0% in such an environment showed a commitment to fighting inflation, which was now looking to rise beyond the Bank’s own forecast.

While this appeared as ‘tough love’ for an economy expected to contract, with the last retail sales report showing annual growth at 8.1%, their tone was understandable, especially if the next retail sales report showed similar resilience.

In the event, retail sales released on Thursday more than reversed the previous month’s gains. The monthly reading was -3.9% and the annual reading dropped sharply to 2.2% - readings that seem more in line with reports issued by retailers themselves.

Although we had expected yesterday’s report to have a greater impact on Q2 GDP, we judge the next release of that data will more accurately reflect the obvious weakness in retail sales.

The clear slowdown underway in the economy, is evident in all sectors:

- The housing market,

- Manufacturing, and now

- Retailing.

We judge the MPC will not hike interest rates in August despite the comment in the July minutes which said “any change would be better communicated at the time of the August inflation report”.

We interpreted this at the time as not necessarily meaning a rate hike as most traders did, and after yesterday’s retail sales report a rate cut remains a possibility.

Hiking rates now , with the economy clearly slowing fast would just heap additional un-necessary pain on everyone as inflation will ease as the economy slows. And although the main source of inflation is from energy, commodities and food, a cooling economy will force domestically-generated inflation much lower; acting as an offset, and with the US and Euro zone flirting with a substantial slowdown, oil prices could yet fall further.

The outlook for Short Sterling is changing, it has been excessively bearish; now the Bulls may begin to take control.

Mark Sturdy

John Lewis

Seven Days Ahead