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]