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

[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...

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

The case for selling Euribor Futures

The Macro Trader’s view:

After the ECB hiked rates at its meeting earlier this month, Trichet announced at the press conference that followed that policy-makers had no plans for further hikes over the medium term.

The rate hike they had just enacted was portrayed as a one-off aimed at containing 2^nd round inflation effects as they recognized there was little they could do to influence the price of oil and other commodities that were behind not only Euro- zone inflation, but the rise of inflation globally.

This seemed a responsible approach since the Euro-zone economy had just begun to show signs of cooling, something policy makers had feared, and the main reason why the ECB had sat on the fence for so long - they feared hiking rates just when economic growth was about to slow.

However, events have moved on: the economy is starting to slow, especially the German economy, but inflation continues to rise, as oil prices etc continue to make new highs. And the ECB thinks it can detect signs of the feared 2^nd round inflation, mainly in the Labour market, and only last week Trichet began dropping hints that policy could be tightened again.

That is quite unlike the Fed and MPC, who are attempting to walk a tight rope between nursing growth and fighting inflation - the Fed having acted decisively by slashing interest rates and the MPC taking a more cautious approach but still finding room to ease policy.

The ECB has a track record of fighting inflation, even during times of relatively weak growth. Are the current conditions such that the ECB will risk a recession to control inflation, even though it is generated externally and at a time when the developed economies are potentially facing one of the most serious financial crisis in generations, which could yet develop into the worst slowdown since WW11?

We think the ECB will ultimately revert to form and judge that fighting inflation is their main priority. They hold the view that the best way to achieve solid sustainable growth is by providing a low inflation environment.

That may well be the case, but in current conditions, we think inflation is beyond the control of any single major Central Bank. The world has truly changed and the co-operation of China and India will be needed to reverse the current inflation trend if no one single country is to suffer disproportionately.

But despite that the ECB will not simply sit back, cross fingers and hope commodity and oil prices will correct lower. For them that would risk inflation becoming imbedded generally and that they will not accept.

So although the Euro zone economy may ultimately suffer a worse downturn than otherwise, might seem necessary, we believe the ECB will hike rates further and take any flak arising from a slowing economy on the chin.

The Technical Trader’s view:

JUNE 08 EURIBOR MONTHLY CONTINUATION CHART

This not a Double Top.

But it is akin to one.

And without doubt the market is at a Pivotal low whence it has bounced before.

So if that prior low at 94.75 from the Autumn of 2000 were to break we feel that it would act as significant overhead resistance to attempted rallies....

But will it break?

WEEKLY CHART:

The detail of the market shows how the market has bounced from that Prior Low – but has run straight into resistance from a Low at 96.21.

Watch carefully to see whether the market has the bull energy to overcome that level.

Certainly, so far, there is no compelling bull reversal pattern in place.

DAILY CHART:

The reluctance to get up through the resistance at 95.21 is clear so far.

But additional bear evidence would be required for us to get bearish for a retest of the long-term pivotal lows.

Wait for a break of the 95.00 Prior High support.

The short run signal for a break down beneath the Long run Pivot would be a close beneath the lows 94.59 and 94.4650.

Mark Sturdy

John Lewis

Seven Days Ahead

Cotton holds key support – what scope for recovery?

Cotton (Dec) had a nice run-up in June from a 71.65 low, but has since fallen all the way back. There is still the chance of support, which we examine below, with clearly defined and limited risk should things go awry. The Commodity Trader’s view WEEKLY CHART - CONTINUATION: The sharp fall from a 91.38 Mar peak has found good support from a 61.8% level on the continuation chart. This is now key to preserving bulls’ medium term hopes. DAILY CHART – DEC-08: After a nice recovery to a 84.04 high in Jun, the 71.65 03-Jun low was revisited. However, support has also been proffered by the falling old resistance/return line. Is this a double bottom in the making..? A fresh break below the 70.86 08-Jul low would put paid to such speculation. Meanwhile, a close above the 75.35 area would be enough signal for some buyers, with stops placed just below 70.86 – clear but limited risk. A further rally through 78.45 resistance would boost the bullish cause, focus then turning to that 84.04 high. There is another bullish clue too… DAILY LINE CHART – DEC-08: Looking at the closing price chart for clarity note an interesting positive divergence on the RSI. There appears to be a good case for anticipating a s/term recovery attempt. CRUDE OIL DAILY CHART – AUG-08: The bearish clues in Crude and Heating oil that we looked at last week were quickly frustrated by another s/term rally. However, this week’s weakness has brought price back to the key area we had been looking at, as the trigger for a bearish signal: - the cluster of Jun lows above 131.33, the 23.6% level (slightly redrawn) PLUS an additional level, a small projected bull channel base. The equivalent support area in Sep is 131.60-132.80. There remains clear s/term bear risk here. Philip Allwright Mark Sturdy Seven Days Ahead