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

[For the complete and illustrated version of this and future Updates be sure to sign up at http://www.sevendaysahead.com/]

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

[For the complete and illustrated version of this and future Updates be sure to sign up at http://www.sevendaysahead.com/]

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]