Cocoa Bulls Stir from Recent Slumber

The Commodity Trader’s view - In the Commodity Trading Guide we have been reluctant to drop our bullish stance in Cocoa, but came very close to doing so recently. Now, s/term bulls have, phoenix-like, risen from the ashes within a triangle-type consolidation, but a clear break from this pattern is still needed.

• MONTHLY CHART – CONTINUATION: Last year’s sharp reversal in trend found support around the old 2005 high, and not far above the 76.4% level. A type of triangular consolidation has been developing this year, following the initial strong bounce off this support. This is clearer on the Daily chart…
• DAILY CHART – JUL-09: Note how price action has been contained by 76.4% levels here. A recent minor break of the key 2300 support has proved false – we had been looking at the accompanying positive RSI divergence which was a s/term bullish clue. The close above 2519 08/11-May highs is also positive, but in the end the key resistance that must be breached lies around 2670, a s/term 76.4% level and falling resistance line. A close above this signals an initial bull break from the triangle pattern – first target a retest of the 2912/16 resistance. At this stage the 2300/2262 is underpinning key support.
• Speculative buyers on dips (probably ahead of 2400) will likely favour initial stops just below 2262 14-May low. This would be preempting a triangle break though. The more cautious may wait for that break before formulating a dip-buying strategy.

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Which of these bonds is the most bearish?

The Technical Trader’s view:

TNotes: US TNOTE JUN 09 DAILY BAR CHART

The drama of this market lies in the pullback through the alltime- highs that was simultaneous with the completion of a clear Double Top/ Continuation Head and Shoulders.The clear and minimum move suggested by the Top is measurable down to 112-16 or so. (The target is the same for both patterns.)

Bunds: BUNDS JUN 09 DAILY CHART

This Triple Top has completed too. And the All-Time-High acted as more of a resistance level. Now left far behind. But note well that the long-term support from prior Highs remain beneath the market. The minimum move implied by the Triple Top is as far as 115.50. But the 118.50-90 band of support should not be underestimated. It may not reverse the move to the downside. But may slow it up.

Yen Bonds: YEN BOND JUN 09 DAILY CHART

This is altogether different. The Yen market never made it back up to the All-Time-High. A small Triangle may have completed: suggesting move down as far as 135.50. Certainly we can say that the bear market in the Yen bonds is concurrent with western markets, yet lacks a clear Top formation to add energy to the bear moves.

We are clear that all three of these markets are bearish in the long and medium term. In the very short term, the Bund and TNote may both be oversold. But overall, the US TNotes represent the most compelling bear case.

Mark Sturdy Seven Days Ahead

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Is a Bull Break in GBP/CHF Imminent?

The FX Trader’s view - GBP/CHF is one of the cross rates that we don’t cover in the FX Trading Guide so this isn’t an ‘update’. However, there are at least four technical levels now converging on current price action, making this an interesting situation – a break above these should be a clear bullish medium term sign.

• WEEKLY CHART: On the Weekly chart two resistances of note are the falling resistance line and 23.6% retracement of the 2007-09 fall at 1.7440. This latter has already proved effective in Feb. A weekly close above these would be the initial trigger for a push onwards to the next retracement of 1.8880 38.2%. Also see Daily chart…
• DAILY CHART: In the same area, on the Daily chart two resistances of note are the area of previous Nov-08 low/Feb high (1.7422/1.7479) and 38.2% retracement of the May/Dec-08 fall. We think a close at/above 1.7500 should be significant. But there is already a s/term bullish case following the recent close above falling resistance. An initial target would be 1.8200, a Fibo projection, but the strength should be there to push higher in due course. The risk to a bull scenario looks clear – a close back below the 1.6619 24-Apr low (which also breaks rising support) would encourage the bears.
• After a close above 1.7500 it is buyers choice whether to wait for a possible dip or not, but note that falling old resistance/return line near 1.7200 just now – entry may in any case be favoured above this (with initial stops ideally below that 1.6619 low).

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What fundamentals have got oil on the boil?

The Macro Trader’s view:

After making lows in January and February this year, the oil market has been in a slow recovery phase. At first, the price action resembled a correction that held out the possibility the market might go on to make new lows.

But even as the leading economies were reporting their weakest growth rates to date, the oil market consolidated its modest gains. More recently, traders and analysts have turned optimistic about the possibility of recovery in the US, UK and even the Euro zone.

After Q1 GDP data in all of these economies were worse than expected, one could be forgiven for asking; where is the justification for such optimism?In the US the Q1 GDP data was dire, but personal consumption was better than expected and held out the prospect, a view espoused by the Fed, that the recovery could begin in the 2nd half of this year if the inventory cycle put in a bottom and turned.

In the UK, despite equally weak Q1 GDP and continuing anxiety over the nations finances, the PMI services report has steadily improved over recent months, with the last reading coming in at 48.7 - a whisker away from recording growth. Moreover, retail sales have continued to hold up reasonably well.

In the Euro zone, although the pace of contraction has been worse than originally expected, especially in Germany, there are signs there too that the pace of weakening is easing, as recent industrial production data, while still weak, is contracting at a slowing pace. Additionally, the German ZEW and IFO surveys have started to show signs of improvement.

But even allowing for all of this, there is so much spare capacity in the global economy, surely demand for energy can be easily met, without any strain on supply, without driving prices back up?

While this is true, the current rally in the oil market is more to do with the market finding a new equilibrium between current economic conditions and what will likely prevail once recovery is truly under way later this year early next. During the last period of expansion the worry was the demand/supply equation as analysts tried to get a handle on when the dreaded peak oil point will be reached; some say it is already past.

Clearly, with large countries like India, Brazil and China now established as large economies with a huge appetite for energy, the choke-off point in supply/demand could occur much sooner in the next recovery phase, and for this reason, together with the usual fears over security of supply, the oil price looks set to experience a long rally over the coming months andprobably years.

John Lewis, Seven Days Ahead

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Small Bull Signs in EUR/CHF Detected

The FX Trader’s view - Following a mini up-surge in EUR/CHF in March, this cross rate became subject to a prolonged downward drift which has recently stabilized above the 1.5000 area. We had been prepared to see another upleg unfolding here, and an initial bull signal has just been given.

• WEEKLY CHART: We currently view the slip back from 1.5447 Mar high as corrective, rather than impulsive, expecting another bull leg to appear. First resistance is offered by the falling resistance line at 1.5340 currently, but we are unsure how strong this will be. In any case, we would be targeting a better push higher than this.
• DAILY CHART: Support from the 1.4991 20-Feb high has been very effective. In the FX Trading Guide we said that a close above the 1.5178 07-May high would be taken as a s/term bull signal/ trigger, and this has now happened. Beyond the 1.5340 mentioned above our initial focus would be on the 1.5447 16-Mar high and 1.5575 76.4% level. Also note the higher 1.5881/83 remains key (76.4% level and 15-Dec high) as there is now an equality target nearby too, 1.5575 (the 1.4576-1.5447 upleg extended from 1.5006 15-May low.
• In the FX Trading Guide we said that buyers triggered by a close above 1.5178 may place initial stops just below 1.4991, targeting 1.5440 or 1.5550/75 for partial profits. This risk level is clear - a break below 1.4991 would negate the s/term bull scenario that we are currently painting.

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Wheels of the Crude Bull Train Look Nicely Oiled

The Commodity Trader’s view - Trends take time to reverse and Crude Oil is no exception. Now, after a Feb low point, a base has been established and the bull train has left the station. There will, of course, be stops along the way and we look at possible nearer term ones here.

• WEEKLY CHART – JUL-09: On the continuation chart (not shown) it was a break above 50.00 (area of the major Jan-07 low) that gave us an initial bull signal. On the Weekly chart of the new front month this low lies higher, but it has also been exceeded. Two possible station stops here are the Fibo retracements of 23.6% 67.00, and 38.2% 82.40.
• DAILY CHART – JUL-09: We can say that a medium term base completed after the break above falling resistance. The shorter term structure suggests no bull fatigue yet, but we note some (presumed temporary) overhead hurdles:  dual resistance from a channel top projection and equality target (42.19-57.50 upleg extended from 49.07 low, around 64.50 just now  the 23.6% 67.00 level  a Fibo projection at 71.35 These advocate a strategy to buy on dips, such as towards the return line near 56.00, stops at least below rising support at 52.50, if not just below 49.07 21-Apr low. Ideally support for dips will be found above that rising support line, but ultimately we want to see the 49.07 low stay intact – a close below here would be of grave concern to the bulls.

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USD/JPY Turns Negative As Sun Sets on the Bulls

The FX Trader’s view - Between Jan-Apr of this year the USD/JPY chart saw a good recovery. However, resistance was found at a clear technical level and bulls started to look tired. Fresh weakness here has now provided a signal that favours the bears, at least in the shorter term.

• WEEKLY CHART: This year’s recovery from near the base of a medium term bear channel came to a halt close to the 101.66 61.8% retracement. We had expected this would be a tough resistance to breach. Note that the channel top now coincides with this retracement, making this a key technical level.
• DAILY CHART: In the Commodity Trading Guide we had identified the 100.00 area as key resistance, and a recent bounce off 38.2% support failed just ahead of this. We were ready to turn s/term bearish on a break of the 95.59 28-Apr low and the bear channel base projection – this has now happened. Support from around 94.12-28, a Fibo projection and 50% retracement, would not surprise, but the power should be there to push lower in due course. The 90.50 76.4% area may well be targeted later on. Any sellers on rallies towards the rising return line(say ahead of 97.00), will likely have initial stops above 99.72 07-May high, but looking to tighten soon to improve risk/reward. The bear case goes awry if price recovers above that 99.72 high.
• Note: In last week’s Update we highlighted key support in USD/CAD centering on 1.1530. After a brief erosion of this, it seems to be working nicely s/term.

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Cable shock! Sterling bounces…will it continue?

The Technical Trader’s view:

MONTHLY CHART :

The collapse of Sterling first, down through the support at 1.7365 and then down through the rising diagonal at 1.53 or so came to an abrupt halt at the Prior Low Pivot at 1.3866. Twice the market tried to get down through there. And then it bounced.

WEEKLY CHART

That bounce has just enough structure to it to encourage the thought that a Double Bottom may have been completed. Completion level – now support 1.4981.

DAILY CHART

But this is less compelling for the bulls. If 1.4981 is important support (and it should be if the market is bullish) then we must also consider the possibility that 1.5275 is good resistance. So, though the bounce is clear, and impressive, the short-term prospects are cloudy. (Note too, in the monthly chart, that the market is pressing up against the resistance from the broken diagonal above the market.)

Don’t be beguiled. Stand aside.

The Macro Trader’s view:

Since making a low on January 23rd, Cable has slowly but surely rallied. Initially the rally was viewed as a correction after a sharp selloff which saw the Pound fall from highs above $2.0000 because economists forecasted the UK economy would be the worst affected among the G7 economies.

And although the US economy was experiencing a particularly nasty recession of its own, led by a collapse in the housing market which provoked a credit crisis via the now infamous subprime lending market, the UK economy to many looked the most vulnerable, as much of its recent prosperity had been build, or perceived to have been built, on the success of the Cityand wealth generated by financial services (which actually only amounted to 8.0% of GDP).

But it has become clear over recent months that the Japanese and Euro zone economies, once thought less vulnerable to a deep recession, are fairing every bit as badly if not worse than the UK. The Japanese economy is now suffering its worst recession since WW11, as exports havecollapsed. The German economy, the Euro zone’s largest, has also seen industrial production collapse as factory orders etc have also slumped heavily, leaving the Euro zone economy facing a deeper downturn than the UK.

Moreover, despite yesterday’s Bank of England quarterly inflation report, which forecast a gloomier outlook than its previous report in February ( the recession now expected to extend into 2010 and inflation not falling as far as previously thought, albeit still below target during the 2 year forecast period) economic data has started to turn. Last week saw a much stronger-than-expected PMI Services survey at 48.7, only a whisker away from recording economic expansion. Before that, a week earlier, retail sales came in stronger too. So yesterday’s Bank of England inflation report already looks out of step with current economic data.

However, growth is not the only story behind Sterling’s recent weakness. The sharp and unprecedented peacetime deterioration of the Public finances caused many to lose confidencein the UK economy also led to the weak Pound.But again other countries have also been forced to allow their fiscal stance to deteriorate by pumping money into their economies and Banking systems in an attempt to avert a 1930’s style slump. The US is set to run a massive $1.8T budget deficit this year and for the foreseeable future.

This has caused a re-appraisal of the UK’S position relative to the other leading developed economies. Clearly growth in the UK is not now going to be the worst in the G7, and while the public finances are a mess, if current data is accurate the economy has bottomed with recovery likely sooner than originally thought and the public finances may turn out a little betterthan feared. So the Pound’s recent recovery against the Dollar now looks more like a re-assessment of relative strengths, rather than a brief recovery.

How much further it rallies from here depends on the run of data over the coming weeks and months.

Mark Sturdy,John Lewis
Seven Days Ahead

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CRB Index Finally Gives a Bull Signal

The Commodity Trader’s view - The collapse in the CRB Index from a peak last Jul started grinding to a halt last December, with slow recovery attempted since early March. We have been patiently waiting for better bull signals –and these are now being seen.

• MONTHLY CHART – CONTINUATION: After a low of 200.16 the best rebound since the start of the index’s collapse last year is underway. First target on this chart is the 23.6% 264.78 retracement. Also note higher resistance from the significant 284.61 Jan-07 low.
• DAILY CHART: A short term bull signal was given by the Mar break above the 213.34 26-Feb high. This then became a good support level. However, we wanted to see a breach of the small bear channel top projection for a proper bull trigger, which has now happened. And now, a close above 244.31 would provide a further boost, on the way to that initial 23.6% 264.78 target. S/term support offered around 230, while lower 213.34 should keep out of reach now.

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Is that the top for bonds?

The Technical Trader’s view: MONTHLY CHART There’s no doubt that the hesitancy at the 124.95 Prior High is a teasing possibility. What needs to happen to really get the bears going? A break of the 116.08 level surely… Will that happen? DAILY CHART It’s tempting to think so… The break of the 119.45 prior low has now created good resistance there. The break of the long diagonal from the low in October 2008. Volume’s hot … and then, looking at the wider context, a break of the 115 level would complete a mediumterm Double Top. The Macro Trader’s view: Readers of the Macro Traders Guide will be well aware of our long-term bearish view of bonds, especially the Gilt. Our position has rested on the fact that the UK, and other governments from the developed economies have greatly expanded their budget deficits and national debt in an attempt to savethe western banking system and prevent a deep and damaging depression.This, together with record low interest rates and the adoption of quantum easing policies, has pumped an unprecedented stimulus, both monetary and fiscal into the global and UK economies. The borrowing requirement that has resulted has given the UK the worst budget deficit ratios in peace time ever and seen: debt to GDP ratios have almost doubled. The consequence of this has been the need to issue £200.B in gilts this year alone. But the UK isn’t the only major economy issuing unprecedented levels of sovereign debt. The Euro zone and especially the US have found it necessary to increase public spending and borrowing at a time when traditional buyers/investors of public debt are seeing their own revenue flows decrease due to much lower oil prices in the case of the Middle East oil producers and in the case of China, a chill running through their own economies. So, not only do we expect the glut of new issuance to force bond yields higher, but as recovery begins to appear, no matter how fragile, equity markets will rally, as they have been for several weeks already. The fear that has lurked in the back of bond traders and investors minds has been that when recovery does take hold, Central Banks will have to time their withdrawal of the monetary stimulus very carefully to avoid an outbreak of inflation. This will naturally see interest rates rise and long term yields will begin to firm in anticipation of not only the tightening of short term interest rates that will surely occur, but on fears of higher inflation which could, if not controlled, devalue the worth of the bonds governments are current issuing. The tricky calculation of Central Bankers and governments is not to remove the stimulus too soon as recovery needs to be self sustaining. But by the time that is evident, inflation may have already have taken root, requiring higher interest rates and risking another recession. In short, we judge that as equities rally on accumulating evidence of recovery, bonds will sell off and ultimately they have a long way to fall. Whether recent price action represents the beginning of the anticipated bear market, only time will tell, but that bear market is coming. Mark Sturdy,John Lewis, Seven Days Ahead For the complete and illustrated version of this and future Updates be sure to sign up: Technical analysis

Sugar Starts To Break Higher

The Commodity Trader’s view - On the long term charts Sugar has not looked that exciting for many months. From last year’s low it has enjoyed a somewhat choppy recovery, but recently this has been more noticeable and longer term overhead technical levels are rapidly coming into focus.

• MONTHLY CHART – CONTINUATION: After finding 76.4% support in 2007 price action on the long term continuation chart settled into a triangular consolidation pattern. There has been a nice bull break from this now, already testing the 61.8% level. We later target the 76.4% 17.00 area.
• DAILY CHART – JUL-09: Shorter term, after the break through 61.8% resistance the upmove has picked up momentum, and our s/term Fibo projection around 15.50 has today been tested. Combined with the 15.40 61.8% level on the long term chart it would not be surprising to see a temporary pause in uptrend. Any setback at this stage may not be deep – first support of note is offered by the 14.09 19-Mar high (buyers on modest dips may favour initial stops below here). On this chart the 2008 high was 15.99 which we target in due course, ahead of the 17.00 76.4% area (above).

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EUR/USD Tries To Tempt the Bulls

The FX Trader’s view - In March EUR/USD enjoyed a nice recovery, but bulls’ enthusiasm was soon quelled, leading to a longer-than-expected drift back (we had been expecting higher levels before an eventual resumption of a longer term bear move). But we can’t write the bulls off just yet…

• WEEKLY CHART: We have assumed that the late 2008 recovery, to a high of 1.4719, was a temporary interruption to a longer term bear trend that will break the 1.2328 Oct-08 low in due course. But s/term bulls may still have something up their sleeve…
• DAILY CHART: Earlier, we had thought that the break of the 1.2991 support jeopardised the chances of another upleg, one that would challenge/surpass the 1.3737 19-Mar high. However, s/term strength has now seen erosion of a small bear channel (but no close above here as yet) – and now bulls will want a further recovery and close above the 1.3391 13-Apr high to confirm another upleg was underway. 1.3737 would then be the initial target, through which the 1.3855 61.8% could be relatively weak resistance. The higher 1.4185 76.4% level may prove to be of more interest, as would the slightly higher 1.4270 level, a fresh Fibo projection we have calculated. There are no certainties of these higher levels being seen, but it seems a good time to outline the possibilities. The situation will be kept under review in the FX Trading Guide.

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Have stocks decided?

The Technical Trader’s view:

WEEKLY FTSE BAR CHART

The pull back of the market into the continuation triangle is clear. The bears should be losing their short-term optimism. Has a bottom formation been created? Look closer…

DAILY FTSE (JUN09) CHART:

The detail of the market shows how there is indeed a plausible Head and Shoulders reversal.Note too, the break up through the 61.8% retracement of the bear move from January to early March.Note too, the push up through the Prior high Pivot at 4119. And, need we add, there is the completionof a Continuation Triangle? The market is set fair …technically.

The Macro Trader’s view:

All though economic data in the leading economies continues to show weakness, some reports have begun to send mixed signals:

- In the Euro zone the German ZEW and IFO surveys recently came in better than expected,

- In the UK retail sales last Friday were stronger than expected, and

- In the US New home sales came in above consensus.

This has led to a growing sense among traders that a recovery may not be that far off, and equity markets have been steadily rallying away from the lows since early March.Initially we took the move as a correction in a bear market and there has been plenty ofeconomic data released to support our view that economic activity continues to weaken:

- In the UK last Friday the release of a much weaker than expected Q1 GDP figure at -1.9q, -4.1y/y,

- In the US Q1 GDP released on Wednesday was also much weaker than expected at

-6.1%, and- In Japan the authorities there have revised lower their forecasts for GDP to -3.3%.

But still equities continue with their rally. In part this can be attributed to improving results from several leading US Banks, together with an increase in activity in the wholesale money markets as Banks have nervously begun lending to each other again.

Moreover, in the US earnings reports in recent days have been better than expected. But one event that makes us think twice about our long-held view of this market ( as a short-covering rally) is the reaction to the threat posed by the recent outbreak of swine flu. This is deemed to have the potential to cause a pandemic and since it is an unknown strain it could cause many deaths and severely disrupt economic activity at a time when the global economy is already experiencing recession. For sure no one knows how this flu will evolve, it may prove deadly, it may not, but no one knows and markets do not usually take unquantifiable threats easily, but they have, which leads us to conclude that maybe there is something a little more durable about the current rally.

The Fed policy statement released on Wednesday said that the economy was set to remain weak, but that policy makers are detecting a slowing in the pace of weakening, and this appears to be the message the leading equity markets are sending.

Just how reliable this rally is could be put to the test in the coming days and weeks as the world watches to see how the swine flu outbreak evolves; if the worst case scenario hits, with many deaths, locked down economies and a plunge in economic activity, the market may yet sell off, but if the outbreak does prove manageable, then the worst in the equity markets may be over.

Mark Sturdy,John Lewis,
Seven Days Ahead

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