Are Silver Bulls Ready For The Next Upleg?

The Commodity Trader’s view - The recovery in Silver reached a high in February, after which point the market entered a consolidation phase. Recently an interesting support level was reached and it may not take much on the upside to trigger another upleg.

• MONTHLY CHART – CONTINUATION: The long term chart shows how effective was support from a major 76.4% level (and highs from 2004/2005 too). On this chart note potential resistance offered by the 15.00 area – the next hurdle still needing to be overcome.
• DAILY CHART – JUL-09: In the Commodity Trading Guide we have been watching the key support coming from the 50% level and 07-Jan high, at 11.73/61. So far this has provided good support, and we had said that a good close above the falling resistance line would be a bullish sign now. This has not yet happened, and now we will take a close above the 13.25 27-Apr high (which pierced the resistance line intraday) as our signal. This would initially target a retest of the 14.64 Feb high, ahead of higher retracements which we will look at in upcoming Guides.

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Why are bonds so directionless?

The Technical Trader’s view:

WEEKLY CHART

The bund has been stuck in a close trading range since the beginning of December 2008.The precise placement of that trading range – around the pivot from the old high in 2005 only adds to the sense of confusion rather than consensus. Because pivots are naturally unstable places- tending to repel price action rather than attract it.

DAILY CHART

The short-term chart is good shows how little useful structure within the range can be discovered –emphasizing the lack of a spring board with which the market might break free from the range.

The Macro Trader’s view:

The Government Bond markets of the major economies have appeared to us to have been in denial for several months. Initially, when the credit crisis struck, before it became a full blown recession, we were bullish of bonds. As economic growth looked set to suffer we judged yields would tumble, and so they did for a while.

But as the crisis intensified and governments began committing tens of billions of Dollars to rescuing failing, yet systemically important banks, we became concerned at the fiscal health of several developed economies - the US and UK in particular.Both of these countries have seen their Governments pour extraordinary sums into theirfinancial systems and economies to ward off what has been judged to be the worst recession since the 1930’s. While it is right to allow government debt and borrowing to rise during a recession, is it right to trash a country’s fiscal stance in pursuit of saving banks whose management allowed themselves to fall victim to dubious investments of which they had little or no understanding?

In any event, right or wrong, the debt build-up that is now materializing could now well result in a bear market in bonds resulting from the UK needing to issue some £220.0B of Gilts this year alone as the Treasury struggles to finance the largest peacetime deficit on record .

While the Gilt market has sold off heavily in the last couple of days in reaction to the UKbudget, the US Treasury and Euro Bund markets seem to be resisting the downside a little better. With this unprecedented build-up of peace time debt, why aren’t investors taking fright and demanding higher yields as compensation for buying bonds?With the Global economy in recession, something that hasn’t occurred for quite some time, the usual bond purchasers are in difficulties themselves:

- China is coping with its own growth slowdown,

- So too is India,

- The Middle East oil exporter are experiencing a substantial decline in revenues from oil exports,And

- Private investors have taken a bath as the Hedge fund industry suffered a very difficult year.- It seems that what is keeping bonds away from a powerful bear trend is great uncertainty.

No one knows which is going to prove the greater of two evils:

- a weak economy, or - a deterioration in government finances.

What is clear to us is that if the answer is the weak economy, then government finances not just in the UK or US, but globally, are going to deteriorate further, and we would expect that to fuel a vicious bear market in bonds.

But while the jury is still out on what matters most: the economy or governmentborrowing, bonds are left teetering.

Mark Sturdy,John Lewis

Seven Days Ahead

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USD/CHF Bears Are Still Winning Favour, As Price Action Slips and S/term Bulls Waver

The FX Trader’s view - After giving back about 50% of this year’s gains in March, there has been a somewhat choppy recovery, which we found hard to interpret – the start of another bull leg or merely a correction ahead of another slip lower? At the moment the latter, bearish, outcome is favoured.

• WEEKLY CHART: Following our 27th Feb Update on this market 76.4% levels are still proving useful. Here, the pullback from near a 76.4% recovery level found support from just above another 76.4% level in late Dec. On the Daily chart resistance has emerged from…a 76.4% level.
• DAILY CHART: In the FX Trading Guide we had decided to retain a bearish stance while the 1.1775 76.4% retracement level stayed intact. It has provided good s/term resistance, and any break of it now would be that much more meaningful for bulls. Meanwhile, we have drawn in today’s price action so far, showing initial (though inconclusive) break of a small channel base, which is s/term negative. As the bear scenario continues to unfold we first target a retest to the 50% level and 1.1157 19-Mar low. However, this should now provide only flimsy support at best - the lower 1.1000 area is of far greater interest. This is where the 61.8% retracement level and a Fibo projection coincide – at the moment we would look for support to emerge around here, unclear if lower 1.0745 76.4% level can be tested.

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Temporary Resistance in Soybeans Ahead

The Commodity Trader’s view - A second upleg in Soybeans has been underway since early March, which follows the significant low seen in Dec-08. We remain bullish of this market but caution against chasing it at the moment, with interesting resistance not far overhead.

• WEEKLY CHART – CONTINUATION: Good support was found late last year from near the 76.4% retracement level. The second leg of a recovery is clearly seen, closing in on the notable 1106.50 Apr-08 low. But also see below…
• DAILY CHART – JUL-09: Price has returned towards the Jan 1076.00 high – while this can offer s/term resistance we believe the more important, and perhaps stronger resistance lies higher – at the 38.2% 1122 rebound level of the prior Jul/Dec-08 major fall, and slightly higher bull channel top projection around 1130 just now. Note how these lie near to the 1106 level on the Weekly chart. A later break through this would provide a boost to the bulls. First support comes from the 978.50 23-Mar high now, and ultimately the rising support line around 870 must not be breached.

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Is there any value in interest rate futures?

The Macro Trader’s view:

Although official interest rates in the leading economies have reached or are very close to zero, the short term interest rate futures markets:

- Eurodollars,

- Short Sterling, and

- Euribor,

Have all failed to converge with official interest rate levels. This was due originally to the enormous LIBOR spreads which opened up in the early stages of the financial crisis, as Banks became petrified of lending unsecured money to each other in the wholesale money markets.

As one by one the largest Banks of the US, UK, Euro zone and Switzerland announced an almost endless round of very large losses, with almost eye watering amounts written off as loss provisions against bad debts, the money markets became almost dysfunctional.

And even today, normality hasn’t returned despite the recapitalisation of the Banking system and record low interest rates. Moreover, with economic recovery still mainly an aspiration rather than reality, one could be forgiven for thinking interest rate futures could even yet rally closer to official levels. But we judge that unlikely to happen. Although several large US Banks have just reported solid profits and UK Bank HSBC had a successful rights issue, house prices in the US and UK continue to fall, with repossession rates in the US starting to rise again as the foreclosure moratorium expires.

Also Swiss Bank; UBS has just reported another large loss and is looking to shed labour worldwide, and with retail sales in the US once again in negative territory the current period of good news could prove a blip as the asset quality of the Banks could once again start to deteriorate and lead to fresh losses.

Far from this having a bullish impact on Short Term interest rates, it could have the reverse as LIBOR spreads widen out once more. Even if the reverse occurs and recovery takes hold, the Banks continue to report an improved profit environment short term interest rate futures still won’t rally, even though LIBOR spreads could quickly narrow, as the Central Banks will want to begin removing the massive liquidity they have collectively pumped into the system, which together with the equally massive fiscal stimulus, could if not drained in a timely manner, lead to an outbreak of inflation.

In all probability, these interest rate futures markets have seen the highs in this cycle and the next move is likely to be a Bear market. But until recovery is clearly underway and self sustaining, official interest rates are likely to remain at current low levels for an extended period, with Eurodollars, Short Sterling and Euribor consigned to a period of range trading.

So in summary, is there any value in Short Term interest rate markets? Not currently, but when the economy turns, there will be very good trading opportunities for the Bears as they start to probe the downside and seek to second guess the timing of the turn in official interest rates.

Mark Sturdy, John Lewis

Seven Days Ahead
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Why gold is weak

The Technical Trader’s view:

Weekly Continuation Chart

Gold is not showing signs of strength.

The charts don’t tell us why obviously.

The third pull back from 1000 may be just a prelude to a surge – a second shoulder of a bull Continuation Head and Shoulders chart – in which case it should hold around these levels or hereabouts.

Is there evidence in the near-term charts for that optimism?

DAILY CHART

Well, the short-term picture is not so encouraging. The recent push down has been because of the penetration down through the prior High support at $892 .

The market has previously bounced from that level four times.There may be a large flag in the making.

We’ll know soon enough. In which case the bulls will be waiting for a break up through the falling diagonal around 930 currently.If not then next support lies at $831.And then there will be growing disappointment with the pull back through the long-term $873 level.That might lead to still more selling.

The Macro Trader’s view:

After briefly retesting the US$1,000.00 level in mid February, the Gold market has been correcting lower, and currently there seems little sign of an end to this period of weak price action.

The reasons for Gold’s weakness aren’t fundamentally clear cut, as several relationships that have held throughout most of the period covering the long bull market in gold appear to have broken down:

-Previously, periods of Dollar weakness have worked in gold’s favour and sent the market higher,

-Equity market weakness also has previously worked in gold’s favour, and

-Bearish price action in Bonds has proved bullish too.

But since late February these factors have been in play at various times, but have failed to support the Gold market.

Even the start of quantum easing by first the Bank of England and then the US Federal Reserve has failed to halt this market’s slide, even though many market operators and analysts have expressed anxiety over the possible return of inflation if the authorities do not remove the sizeable stimulus injected into the leading economies in a timely manner.

What seems to be working against the Gold bulls currently is the belief that a recovery isn’t that far off, as the US Administration is on the verge of gaining Congressional approval for Obama’s US$1.8T budget deficit, which some hail as the equivalent of the New Deal introduced by Roosevelt in the 1930’s and others claim is the road to ruin as the US is set to rack up enormous deficits for many years to come, which will greatly inflate the National debt, and has caused China, the US Governments biggest creditor, to fret over the long term value of its more than US$1.0T of reserve assets.

In fact so worried are the Chinese authorities that they have recently called for an alternative world reserve currency to the Dollar to be established.

But over recent months some US data has shown improvement:

-Retail sales has been stronger than expected,

-Durable goods has beaten consensus on the up side,

-Housing starts and building permits, were both recently stronger than expected, albeit coming from a low base, and

-Possibly of greatest importance, new and existing home sales reported the previous week, were both stronger than expected.

Taken together with the optimism that resulted from the recent G20 meeting, traders cannot be blamed for stepping back from markets that are traditionally safe haven trades during times of economic or geopolitical stress.

But we judge the US economy is far from fixed, and the FOMC minutes released yesterday under line this fact as the Fed downgraded their forecasts for growth. Moreover the markets are worried about the flood of new Sovereign debt that is about to hit, with the US and UK both recently suffering difficult bond actions, which has led one or two leading commentators to suggest the authorities begin printing money as a means of funding their spending and overcoming funding issues; surely another longer term inflationary worry.

In short a recession that has been dominating the markets and the news headlines for a considerable period has matured to an extent where the bad news is “old hat” and traders are eagerly casting around for any good news that can be used to justify the premature view that a recovery is at hand.

If that were the case, conservative institutions like the Federal Reserve, the Bank of England, the Bank of Japan and the ECB wouldn’t either be actively involved with quantum easing, or on the brink of adopting it as a policy tool.

The recession is likely nowhere near over, and when it is the overhang of government debt is likely to restrain economic growth and productivity and prove inflationary, leading us to the conclusion that the Gold market remains long term Bullish and will eventually recover from this period of weakness.

Mark Sturdy,John Lewis
Seven Days Ahead

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Is Bear Risk In Euro/Sterling Growing ?

The FX Trader’s view - We had been wondering whether the Feb/Mar rally in EUR/GBP was a temporary/corrective affair, precursing another move to the downside. Certain s/term bear signs have been seen, keeping the scales skewed in the bears’ favour.

• MONTHLY CHART: The surge in this cross rate failed to reach the topical parity level. We see the 0.8555 38.2% retracement as a key level now – if this fails then the long term chart structure would not favour the bulls.
• DAILY CHART: The recent recovery was thwarted by the key 0.9519/28 area, 26-Jan high and 76.4% rebound level. We had been thinking that this was just a corrective bounce ahead of another notable downleg –and recent breach of the small bull channel base projection (and 0.9072 12-Feb high) supports this view. Further confirmation of this would come after a failure of the small 0.8837 76.4% pullback level. Of course, a recovery and close above 0.9519/28 would be a clear bull sign now. In the FX Trading Guide we have adopted a fresh bear stance now, particularly while key 0.9519/28 stays intact.

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CRB Index in Position to Give Bull Signal Soon

The Commodity Trader’s view - The collapse in the CRB Index from a peak last Jul notably slowed over the last weeks/months. There have been very s/term bullish signs but we are still waiting for a more convincing signal that prices have turned a corner – this corner is nearby.

• WEEKLY CHART – CONTINUATION: The downtrend has slowed. After the required bull signal (see below) we may target the 23.6% 265 area initially.
• DAILY CHART: The break above resistance in the 213.00, and hold above here, is a s/term bull sign. But in the Commodity Trading Guide we have been waiting for a close above the bear channel top projection, currently running through 234.00, for a bull trigger. A close above the higher 244.31 06-Jan high would be further bullish confirmation - we could then start looking at part-retracement levels. Ideally the 213.34 26-Feb high will remain intact in order to preserve s/term bull momentum. Note that we are looking at similar channels on the Oil charts (although we have already adopted a bull stance in the latter).

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Has Oil Turned?

The Technical Trader’s view:

Monthly Continuation Chart

This shows the pullback to the massive long-established supports in the market

Weekly Continuation Chart

This tantalizes with the prospect of a complex Double or TRIPLE Bottom – that may have completed. Watch carefully for the close of this week above the horizontals – especially$50.47.

Daily bar chart May 2009.

This is rather more equivocal. Note the small range that the market is residing within. We need to break that to the upside before getting excited. But the real breakthrough depends on a push up through the $58.31 level.

The Macro Trader’s view:

As first the US then Europe, and then the global economy lurched towards and began recession, the oil price collapsed from an all time high of around $145.00, to a recent low of $33.00 in a matter of 6 months.

With the global financial system staring at complete collapse, the current recession is being compared to the 1930’s depression and the 1907 depression, which was also caused by a financial crisis.

The global economy slowed and world trade has contracted for the first time in 60 years. Demand for oil to fell sharply, forcing OPEC to heavily reduce output. And the price kept falling.

But more recently the market seems to have found a floor and has begun to recover. The question now being asked is:

Is this a more general recovery, leading into a new, but perhaps more sober Bull market, or is it a correction in a Bear market that could yet resolve to further weakness?

Initially we were firm in our view that the market was correcting, the major economies were still reporting ever weakening data, with the spotlight shifting from the US economy onto Euro, Japan and China. But as the world’s leaders embarked on a combination of fiscal stimulus and or quantum easing, expectations have grown that a recovery cannot now be far off. Indeed in the US data has become more mixed with retail sales, New & Existing home sales and durable goods all showing improvement. Even the ISM manufacturing survey has inched away from the lows previously seen.

Maybe this is a false dawn with unemployment in the US continuing to rise, or the labour market acting as usual as a lagging indicator. What is clear though is that markets are currently optimistic, especially after this week’s G20 meeting which produced agreement to increase the IMF’S resources and make money available to support world trade.

If these and earlier measures start to show fruit then oil can begin a more broad-based rally. The longer term issues of adequate supply haven’t gone away, and so far only the US economy looks to be steadying, the other major economies are still weakening. So talk of a new Bull market may yet prove premature.

Mark Sturdy, John Lewis

Seven Days Ahead

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Medium Term Base in Wheat Trying To Form

The Commodity Trader’s view - Late last year Wheat prices showed signs of recovering – in the end a modest recovery, before faltering. Support has been found above the Dec low and it looks as though the market is trying to base – but there are several hurdles that must be jumped before a convincing bullish picture is complete.

• MONTHLY CHART – CONTINUATION: The collapse in Wheat prices has found support from the 76.4% retracement of the 1999-2008 accelerating upmove. This particular Fibo retracement can often be most effective as support/resistance.
• DAILY CHART – MAY-09: The initial Dec/Jan recovery achieved a 23.6% pullback before petering out. The subsequent pullback has been deep, but has stopped short of the 484.25 Dec low. However, there is a good amount of ground to recover before we can talk about medium term base patterns. Looking closer…
• DAILY CHART – MAY-09: The break through the s/term falling resistance was a small positive, but also note how it provided subsequent support on the correction. Bulls now need to see a close above the 563.00 23-Mar high, which would complete a small base pattern – and imply enough power to reach towards the small 76.4% bounce level around 620. Any buyers on the break will likely have initial stops just below the 498.50 03-Mar low, targeting towards 620 for partial profits, and then tightening stops. The 620 area provides the next hurdle, through which is one small step to the 658.25 early Jan high. A close above this latter would signal initial completion of a medium term base.

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A Better Inverse Head & Shoulders in Sterling/Yen

The FX Trader’s view - Back in Feb we looked at GBP/JPY and the growing evidence that a recovery phase was in the pipeline. This is now underway, and there is in place a better Inverse Head and Shoulders base than was first thought to be forming.

• MONTHLY CHART: This cross rate more than halved in value over the last two years. Jan saw a test of a recent Fibo projection around 121.00 (the second leg down from 215.89 high was just over 1.618 of the first leg of 251.09-192.46). Currently the market has come back to retest the significant 148.25 Sep-00 low – immediate resistance.
• WEEKLY CHART: On the Weekly chart we have marked in the usual retracement levels, the first of these, 23.6% 150.00, now nearby. Also see the detail on the Daily chart.
• DAILY CHART: With the break/close above the key 141.53/70 23.6% resistance a bullish Inverse Head and Shoulders was completed. This first targets the 153.75/155.88 area (a Fibo projection and 38.2% level), but also keep in mind the 150.00 level from the Weekly chart and, indeed, that 148.25 Sep-00 low which is today under test. These latter should amount to temporary hurdles only. Ideally support should be at/above the 135.72 30-Mar low, but we can tolerate a test back as far as the 131.46 12-Mar low without having to reconsider the bull view.

Note: GBP/USD, which we covered last week, is still favouring the bulls and we continue to have an initial 1.5070 (a 23.6% level) target here.

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