Have the TNote and Eurodollars topped out ?

The Technical Trader’s view:

DAILY CHART
Jun 09 TNoteThe drama of the TNote lies in the smashing of the prior High from 2003 which was firstsurpassed in November. Since then the market has pulled back three times to test that support. The jury’s out as to whether the market can get back down through it. The bulls are hoping that there is a bull falling wedge. For that to complete wait for a break up through the upper falling diagonal above the market at 122-00 or so. Bears on the other hand will want a breakdown through the recent low at 119-06.We are close that level. It seems to us that a break in good volume would confirm the fall back through the long term support from 2003 which is an additionally bearish signal…

DAILY CHART
The short end of the curve illustrates similar bear potential as the longer end and, so far, equal uncertainty.The market is teetering on the brink of completing a neat Head and Shoulders Top. We need a convincing close beneath the neckline at 98.27 or so. If that should happen the support from the prior highs at 98.13 and 98.045 like unlikely to provide much to stop the bear move. The minimum target on completion of the H&S Top? 97.70.But it hasn’t broken yet….

The Macro Trader’s view:

Despite weakening US data, Eurodollars have failed to make any attempt to threaten the highs made in the early part of January. The US 10 year note too, increasingly looks like a market that has run out of bullish impetus.What lies behind the current price action? Have these markets topped out, signaling the beginnings of a bear market, or are we witnessing a correction?

In the case of Eurodollars, we judge it too soon to begin thinking of a new bear market. True official interest rates have all but hit zero and can go no lower, but the futures market never traded in line with official rates during the current easing cycle. There has always been a lag caused by unusually high LIBOR spreads. And since Eurodollar futures ultimately settle at the 3 month LIBOR rate on the day of expiry, the Eurodollar curve over the last several months has been more a comment on expectations of how LIBOR spreads will evolve as much as official interest rate policy. Moreover economic data remains extremely weak with both existing and new home sales released this week hitting new all time lows and Durable goods data released today contracting by 5.2%. In addition, jobless claims also announced today, came in at 667k, a level that signals further sharp increases in the unemployment rate. So do we don’t think a new bear market is creating its foundations in the Eurodollar market. Short-term rates can only go up from here, but not yet.

What then of the 10 Year note? This market is significantly off its December 2008 highs, and despite an attempted rally recently, which failed during a period of volatile price action, this market could be setting its self up for a bear move.

True economic weakness as described above, would usually give this market massive bull impetus, but these are not usual times. Not only is the global economy in recession, but governments are throwing vast amounts of money at their economies in the hope they can stave off recession and restart growth. In the US the much-heralded Obama stimulus was initially awaited with great optimism, but last week, as the deal became law, the markets were not so impressed with the final product. However, as more detail has emerged from the US government about how the Bank support package will work, equity markets have staged a limited rally and Bonds have sold off. This reaction has been caused by Obama’s 1st budget; he has announced a deficit of $1.75T, which has pleased equity traders, but has frightened the wits out of bond traders. These are truly very large numbers, and will test the markets appetite to bursting point as the US and other deficit countries, try to fund these spending plans.

We judge markets will demand higher yields and the US Treasury market could be in for a torrid time over the coming months as a new equilibrium is reached that allows the Government the level of funding it needs, but pays investors the risk premium they will demand, not just for the risk of default, but that inflation may not be contained when the economy does recover.

Mark Sturdy, John Lewis
Seven Days Ahead

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Key Reversal Day in USD/CHF Bodes Bearish

The FX Trader’s view - Following a good recovery from a December low, the market recently marginally overshot a 76.4% level before reversing to produce a Key Reversal Day on 20-Feb. It is, therefore, a good time technically to expect a pullback phase in USD/CHF.

• WEEKLY CHART: It seems worth being obsessed by 76.4% retracements in this market. 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 been thinking that the recent upmove looked tired, backed up by a negative RSI divergence. The 1.1842 76.4% level was briefly pierced, prior to reversal on 20-Feb that produced a Key Reversal Day. We take this to be a bearish sign. First interesting support comes from 1.1278/1.1305/1.1311 (06-Jan high/38.2%/27-Jan low) –our initial target, below which would give s/term bears a boost. Any sellers on upticks have a clear risk level for stops in the 1.1884 high, targeting towards 1.1305 for partial profits. (Note a shorter term 76.4% resistance around 1.1785, which at the time of writing has stayed intact intraday…)

Following on from last week’s Update on GBP/JPY our initial bull trigger of a close above the 137.31 09-Feb high has been given. A further close above the 141.53/70 area has not yet been seen, which would further boost the bullish cause. [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

Still Awaiting a Bull Signal in Crude Oil

The Commodity Trader’s view - The persistent decline in Crude Oil last year found a s/term base in December. Since then the market has been in consolidation mode, requiring continued patience as we wait for the necessary bull signals. The first, minor one, has now appeared.

• WEEKLY CHART – CONTINUATION: The 2008 decline completely unravelled the major 2007-08 upleg. Failure of the 49.90 Jan-07 low was followed by support in Dec, with the market trying to base below that key 50.00 area. This represents key resistance on this chart, and a (weekly) close above this would be a bullish sign, completing a base –also see Daily chart. Currently the Dec low here stays intact here, unlike the front month chart.
• DAILY CHART – APR-09: In the Commodity Trading Guide we had said that the recent break/erosion of the 39.82 Dec low may not mean much. And now the first of our required bull signals has appeared – a close above the small falling resistance line. BUT, we still want to see a further recovery to close above the 50.00 level (see Weekly chart above too) AND, ultimately, a break/close above the 56.86 06-Jan high, for final bull confirmation. Traders will choose which signal to use for their bull trigger – our favoured initial trigger would be a Daily close above 50.00, probably awaiting a subsequent pullback before buying. That falling resistance/return line could then offer some useful support and/or a good risk level for stop purposes. A drop below the 37.12 19-Feb low would crush this fragile green shoot.

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Inverse Head & Shoulders in Sterling/Yen

The FX Trader’s view - After a decisive trend downwards in GBP/JPY, bears may have become less certain – the technical clues are mounting that point to growing risk of a recovery phase. A completed, bullish inverse Head & Shoulders pattern on the Daily chart would be the deciding factor.

• 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).
• WEEKLY CHART: The structure of the Weekly chart could now be implying the downtrend is slowing. In recent FX Trading Guides we have been noting the positive divergence coming from the Weekly RSI indicator, warning of possible trend reversal.
• DAILY CHART: Recovery back above the 130.00 area was the first positive, though inconclusive, sign. A decent break through the small falling resistance line, say a close above the 137.31 09-Feb high, would be a bull trigger now. A further break above the 141.53/70 area (07-Jan high and 23.6%) would be a further boost. Note that that small resistance line can seen as the neckline of an inverse Head & Shoulders base. The 127.03 12-Feb low is currently quite key support – a drop below this would potentially be a negative sign that the Jan 118.78 low could be retested. It is also a good initial risk level for any buyers on a break of the neckline plus 137.31 high.

Note: The GBP/USD and USD/JPY charts are also technically interesting at present – details in the next FX Trading Guide. [For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com]

Silver Rise Reaches Our First Target

The Commodity Trader’s view - In a recent Update we took a look at Gold – this has continued to rise, breaching further interesting technical levels (please refer to the 6th Feb Update, or latest Commodity Guide). After a bout of underperformance last year, Silver has been outperforming in 2009, and should not be neglected.

• MONTHLY CHART – CONTINUATION: The long term chart shows how effective was support from a major 76.4% level (and highs from 2004/2005 too). We have been bullish of Silver for some months now. On this chart note potential resistance offered by the 15.00 area.
• DAILY CHART – MAR-09: The uptrend in 2009 has picked up pace, the latest boost coming from the break above the channel top projection. That said, our long-standing 14.00 initial target has been reached – a pullback soon would not surprise, though this is not immediately signalled. Main support now comes from around the 11.77 05-Jan high. But one observation to be made, which applies to Gold too, is that the current chart structure in no way suggests bear fatigue – higher prices are very likely. The next big level on this chart is the May-08 low, which coincides with one of our 61.8% levels – resistance is likely here.

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Watch the S&P selling triggers

The Technical Trader’s view: MONTHLY CHART: The drama of the market is clear for all to see. A break of the 767.50 in the futures would complete a Double Top. And if that happened the market would be driven down a good deal further. Look closer … DAILY CHART: But the long-run daily detail lacks tructure – though a small Double Top can be identified DAILY CHART: There is the Double Top and note too, thepush down beneath the near low, which shouldact as good bear pressure now.The combination of the Double Top completing at 806.40 and breaking the Prior Low Pivot at797 is convincing for some. Others will be less sure: shouldn’t they wait for a break f the November low of 737? Or a monthly closebeneath the 2002 low of 767.50? These are all selling triggers… The Macro Trader’s view: We still need an answer to the big question: are stocks about to drop through the lows made back in November 2008 as investor confidence and optimism ebbs away? The long period of range-trading that has persisted since October, can be clearly linked to the emergence of Barak Obama as the candidate most likely to win last November’s Presidential election, which, as we all know, he won. Such was his campaign and desire among American voters for change, after 8 years of President Bush, that Obama’s clear message of renewal both economically and in foreign policy resonated with the electorate. So much so, that commentators compared him to JFK and FDR. Some thought he had the qualities of both, so his promise of a huge fiscal stimulus, to be enacted as soon as possible after inauguration day, gave stocks enormous support as traders/investors thought his accession to the Presidency would mark the beginning of economic recovery. When US economic data continued to deteriorate, with unemployment accelerating fast in the 4th quarter of last year and the housing market still shows no sign of a bottom. The equity market as it continued to bide its time until the moment of “salvation”.Then over the last week the shine dimmed: US Treasury secretary Geithner announced a Bank rescue plan last week that was thin on detail and failed to include provision for a Bad Bank. The Houses of Congress passed a version of Obama’s stimulus that gave him much of, but not all he wanted.The Bank rescue plan really rattled equity markets as traders judged it didn’t go far enough, but more importantly, now the stimulus plan was law, hope has given way to reality, which is that the spending will be spread out over 2 – 3 years and those that receive a tax cut are most likely to either pay off existing debts or save it; neither of which will stimulate the economy. Moreover, policy makers past and present are openly acknowledging that this recession is at least as bad as the 1930’s slump and may be worse, with ex-Fed Chairman Alan Greenspansaying in the FT this week, that some US Banks may need to be nationalized as the only way of freeing them of the toxic assets that are dragging them down. His only real concern in all of this was that the senior debt holders of any nationalized bankhave their rights respected, so that that important market remains viable for when the recoverydoes come. Other leading economies continue to sink further into recession, with the World’s 2nd largesteconomy; Japan, reporting a 3.3% decline in Q4 GDP last week.As governments continue to pour billions, if not trillions of Dollars into their economies, theoutlook doesn’t seem to improve and equities have begun to trade lower and look set to testthe lower end of the range that has restrained them.In this environment with most of the policy levers already pulled we judge what is left ofoptimism will evaporate further and the S&P will seriously test the downside in the comingweeks. 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

TNotes look underpinned

The Technical Trader’s view:

MONTHLY CONTINUAITON BAR CHART

The long-term chart emphasizes the simple fact that the market is massively underpinnedfrom the horizontal support from the prior Highs in 2003 and 2008. The initial thrust upthrough those Highs has paused – but the scope for further pullbacks beyond therecent lows looks very limited.

DAILY BAR CHART MAR 09:

The detail of the market shows the pullback towards the support at 120-14. The overall shape of the pull back is close to a flag formation – further encouraging any bulls. Certainly the market’s solid push up through the resistance from the prior low at 123-09 was impressively bullish evidence. So it is tempting to go long, no doubt. But as yet there is no shortterm reversal pattern in place yet. We are waiting for that before committing to the upside.

The Macro Trader’s view:

Since the 18th December, the US 10Year Note has been in a clear downtrend driven byunease in the market over the Obama stimulus plan. Not that anyone doubted that the US andglobal economies were in a severe downturn, probably the worst in living memory, but thesheer size of the monetary numbers being committed to various bail outs were causing tradersto think hard about how the market would digest all the inevitable funding that would result.The equity markets, on the other hand, remained buoyed up by the prospect of a large fiscalstimulus kick starting the economy, with little thought for how the Federal government wouldfund the spending.

The expectation grew in the market that the Fed would expand its bond market intervention toinclude the purchase of Treasury Bonds, but at the Fed’s recent FOMC meeting, policy-makersfailed to include any such commitment and the Treasury market slumped further.Moreover, as expectations grew over recent weeks that the new administration would launch anew Bank rescue plan, possibly including the establishment of a “Bad” bank to house all theUS Banks toxic assets, TNotes further tested lower still as this looked like yet anothermultibillion Dollar expense on top of the TARP fund set up by President Bush and PresidentObama’s much-awaited fiscal stimulus plan.But sentiment was completely changed earlier this week, when the new Treasury secretaryannounced his long awaited Bank rescue plan. Not only did this not include plans to relieve theUS Banks of their toxic assets, it relied on a private/public route that lacked the detail andtransparency the market had been expecting.In addition, though the Senate passed a bill enabling the stimulus, it was smaller than thePresident had requested and differed from the version the lower house had passed.The impact of these two events was immediate:

- The bond market rallied hard, and

- Stocks sold off.

The moves in these two markets were driven by the same thought:- Equity traders immediately doubted that sufficient funds would be made available tosuccessfully kick start the economy,- Bond traders were relieved that the US tax payer wasn’t taking on a potentially openended commitment that could cause the market indigestion and lead to much higherbond yields.Currently the Senate and House seem to have reconciled their two separate versions of thestimulus bill, but the amount made available is smaller than the almost US$1.0T Obama wasseeking. But this hasn’t steadied the markets.Traders remain concerned over what they see as the vagueness of the Bank rescue plan andthe continued weakness in equities is leading to safe-haven buying in Treasuries whichthemselves are supported anyway by bond investors wanting to go long.

Whether or not this marks a shift in the direction of the Treasury market, is at this stage difficultto say. The authorities will not be pleased by the markets assessment of their Bank rescueplan and may rush out greater detail, but paradoxically, the very lack of detail has engineered amore favourable public funding environment (i.e. issuance of, say , TNotes, which couldevaporate upon receipt of greater clarity.We judge the situation to be highly fluid and dangerous for traders. Watch it with great interest,but from the sidelines.

Mark Sturdy, John Lewis

Seven Days Ahead

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USD/CHF Key Resistance Hindering Bulls

The FX Trader’s view - Following the deep Nov/Dec pullback there has been a good recovery so far. We have been keeping in mind key resistance just above the 1.1800 level and, now that this has been neared, it seems bulls need to take a step back prior to a concerted attack on this.

• WEEKLY CHART: 76.4% levels are useful things on USD/CHF charts. Here, the major 2008 recovery failed just ahead of a 76.4% retracement, but not before it had eroded a bear channel top projection – a medium term positive sign for us. The subsequent pullback was deep, finding support from just above the 76.4% correction level. And now, this percentage is looking relevant on the Daily chart below…
• DAILY CHART: We think the chart is looking tired as it approaches the key 1.1828/42 area (25-Nov low and 76.4% bounce). Note the negative RSI divergence now visible, suggesting bull fatigue. Upside s/term is probably restricted now – the better s/term move should be to the downside soon. The first interesting support comes from the 1.2780 06-Jan high, below which would give future s/term bears a boost. Eventually we look for this chart to push higher.

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Base in Sugar Now Looks Complete

The Commodity Trader’s view - After the drop back from last August’s high the Sugar price stabilized around the 10.50 level. From early Dec a recovery has been seen, back to an area of key resistance. An initial break through this suggests a base is now in place, with further bullish implications.

1. WEEKLY CHART – MAR-09: After a low of 10.44 was established last Oct, a possible Double Bottom base has been forming. The recent break above the 13.00 area signals initial completion of this base. See Daily chart for more detail and targets.
2. DAILY CHART – MAR-09: The key 13.00 resistance area in fact extended slightly higher, to include a 50% retracement and prior 13.23/27 lows. Whilst the break is marginal at the time of writing, the chart structure does not suggest any bull fatigue to us, and we maintain our previously held bullish stance – - with the added attraction of an extra boost now. Our target now is the 76.4% level just above 14.50, which coincides with an old rising support/return line. Ideally, to preserve current momentum, the 12.39 05-Feb low will stay intact now.

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Cable Bears Could Be Looking Tired

The FX Trader’s view - After a powerful move down in GBP/USD, without much respite, there are one or two interesting features that could be suggesting that bears are getting tired.

• WEEKLY CHART: The two things to note here are 1. The structure of the chart seems to have changed since Dec – it has taken on the classic appearance of a final leg 2. There is currently a nice positive divergence on the RSI, which suggests bear fatigue creeping in.
• DAILY CHART: In Jan, there was a bear break of sloping support, but it did not extend far. And now, the s/term recovery back above this line, as well as the two correction lows of 1.4353/1.4468, has negated that bear signal. At this stage a recovery through the falling resistance line just below 1.5000 would indicate a likely reversal in progress. Further confirmation would then come from a break above the 1.5372 08-Jan high. A bull signal has not been given yet, but we must be ready for one.

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Gold bulls Remain in Strong Position

The Commodity Trader’s view - The price of Gold has recovered from a low point last October, and is currently knocking on the door of the next key resistance – a break higher would give the next bull signal, as well as strengthening the bull case for the medium term.

• WEEKLY CHART – CONTINUATION: Earlier on we had been suspicious of the overlapping/volatile price swings that made up the 2008 bear move. In the end they did indeed indicate a lack of impulsiveness on the bears’ part. Of course, we must still be prepared for further notable swings, but the medium term bias is more likely to be up now.
• DAILY CHART – APR-09: Bulls have now reached the next 76.4% level, which currently coincides with a falling resistance line, and Oct high – a s/term struggle to breach this is not a surprise. Any pullback at this stage will ideally not be of greater magnitude than the last 892.20-803.60 slip. In the end, bulls desire supports to be found at/above the previous rally high, to imply strength –at current prices it is uncertain whether the 892.20 Dec high can provide such support yet. A higher 76.4% level at 965.00 is deemed the more significant hurdle in the course to a retest/violation of last year’s peak.

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Short Sterling underwhelmed by rate cut

The Technical Trader’s view:

WEEKY CHART:
The long-term chart, once the recent highs were smashed through, has been in a powerful, unhesitating, bull move. No sign yet of a slackening … but look closer.

DAILY CHART:
Are these the seeds of a reversal? Note the small Head and Shoulders top that has been completed. See the minimum target for a bear move…down to 97.80. Deep into the band of support between 97.9250-97.74. But do we first need the added impetus and confirmation of a break down through the horizontal at 98.1550? And anyway, does this mean a reversal of the big weekly trend?

The Macro Trader’s view:

As expected the Bank of England monetary policy committee (MPC) cut interest rates today by 50bp taking interest rates to another all time low of 1.0%. The press release explained the cut as a necessary reaction to an expected undershoot of the 2.0% CPI target later this year, brought about by yet weaker economic conditions both locally and internationally, which includes continued restricted availability of credit, rising unemployment and reduced investment by corporations.

So why did Short Sterling sell off?

It is safe to say that no one yet sees a bottom to this downturn, either in the housing market or the wider economy. Moreover, until Banks begin lending again more freely both to each other and the real economy, the contraction is likely to deepen as restricted credit availability causes a negative loop feedback that makes previously solid-looking assets become non-performing and further weakens the affected Bank’s balance sheet forcing it to further restrict its lending.

So the weak response in the Short Sterling market has nothing to do with traders perceiving an economic recovery is imminent.

The most likely reason is that with interest rates so low, there is very little room left for policy-makers to ease further, and with Libor spreads still elevated, the futures market implied cash rates continue to trade above the implied level of official interest rates. And that spread is flexible. So flexible in fact that, with so many stimuli hitting the economy (monetary policy, fiscal policy the weak exchange rate) traders is refocusing as to where the next big change in policy is likely to lie. Clearly with interest rates at 1.0% there isn’t much left on the downside, and traders think that when the recovery does come, policy will likely move swiftly back towards a more neutral level. That is a likely explanation for today’s market reaction, but are traders premature?

This is a more interesting question moving forward. The Bank is likely to ease further, albeit with only limited room left to maneuver, but this isn’t all they can do. The MPC was recently given new powers to buy debt instruments from the market, effectively by passing the Banking sector and pumping money directly into the economy. This is one type of quantum easing; another would involve the Bank of England directly purchasing Gilts as the Government issues them, and while not currently on the agenda, it may soon be.

In such an environment the MPC will not then be hurrying to increase interest rates. They are likely to remain at low levels for an extended period until it is clear recovery is well underway. So today’s negative reaction may be more likely to be driven by market fatigue as traders assume the MPC might become more ponderous with its policy actions. Only time will tell, but we think official interest rates may fall further as the economy continues to deteriorate, meaning any attempt for now to price in higher UK interest rates may be extremely premature.

Mark Sturdy, John Lewis
Seven Days Ahead

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Can the Yen rally further on economic weakness?

The Macro Trader’s view:

The Yen has clearly outperformed all the other major currencies over recent months. Indeed, since August 2008 the Yen has enjoyed a powerful rally against the Dollar, Sterling and Euro. This could superficially be explained by the well-publicised economic weakness which has hit those economies, together with a rapid and significant deterioration of the public finances in the US, UK and Euro zone as governments have been forced to pump vast amounts of money into their economies and Banks to avert both a collapse of the financial system and the risk of a deep slump.

However, Japan has not been immune to these forces either:

- Growth in Japan has clearly slowed to the point where they are back in recession,

- Exports have suffered enormously through economic weakness abroad and the Yen’s strength, and

- Inflation on the core measure has fallen virtually to zero.

So, why do investors prefer the Yen? In the US, apart from a very weak housing sector and enfeebled banking sector, industry and the real economy are also badly affected. Unemployment rocketed at its fastest pace in over 60 years in the final quarter of 2008, and the once-mighty auto sector is virtually bankrupt, relying on government handouts to stay afloat. In the UK, the position not only looks much the same, but in many cases is worse. In its attempt to avert a financial crisis and support the economy, UK government’s debt to GDP is set to soar from 40% pre-crisis, to well over 70% in the next year or so. And these figures already look overly optimistic as they were based on growth projections issued in the November pre-budget report which are already redundant.

The Euro zone looks no better either. The German economy is set to experience its worst recession since WW2 and member countries have also pumped billions into their banks. Moreover, several smaller Euro zone economies, including the not-so-small Spain, have had their sovereign ratings reduced, on concerns of fiscal sustainability.

This bodes badly for the Euro zone and dents the prestige of the Euro.

And even though Japan seems to be fairing little better industrially:- Car maker Honda has been badly affected,- Nomura has announced a massive loss and needs to sell parts of its business to raise capital, and- Industrial production has recently contracted by 9.6% as bankruptcies soar.she has been has been here before. And the news isn’t full of Japan organising a massive stimulus as in the US, neither do we hear of Japan organising a 2nd bank bailout in less than three months.

So the comparison of Japan to the other major economies is relative than absolute. Japan is experiencing economic difficulties, but the collapse of the US, UK and Euro zone has been so swift and far-reaching that by comparison Japan appears relatively stable.

FX trading is about relative strengths, both real and perceived. The Yen been able to benefit has in the current environment. And the trend looks well set.

The Technical Trader’s view:

EURO YEN WEEKLY CHART

This looks interesting: the trend has paused at an important Fibonacci retracement, and during the pause formed a continuation Triangle which completed last week.

In a wide-ranging week of price action since, the bottom of the Triangle was tested and yet the market looks as if it is about to confirm last week’s breakdown today

And anyway, isn’t that a Double Top? The trouble is we wondered about that last week and the fierce rally early this week was disappointing. But the Triangle still looks good.

EURO YEN DAILY CHART

Here’s the detail of that attempted rally that failed. The bottom of the Triangle was strong and resilient. If only there was a clear bear pattern in the daily charts! Then we would be short. So still we watch and wait. Despite the tempting long and medium-structures ….

Mark Sturdy, John Lewis
Seven Days Ahead

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