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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