Can Q3 GDP re-ignite the S&P?

In the event, Q3 GDP (released today) came in better than expected. Is this number of itself sufficient to re-establish the Bull trend? Probably not. But it does provide a floor to stocks and a cap on the Dollar's recent recovery.

The Technical Trader's view:

WEEKLY CHART

Technically, in the weekly chart, the market is under some strain through the influence of the Gap resistance 1110-1077.
The bull target of the Head and Shoulders pattern is well known to be a good deal higher still at 1250 or so, coinciding with the horizontal resistance from the Prior Lows in March and July 2007.
But the Gap resistance lies in the way.
The bull run since the completion of the Head and shoulder pattern is impressive, with few pull-backs of note.
But it's certainly plausible, still within the context of a medium-term bull market that there may be more of a pull-back even as far as the Neckline currently at about 960 than we have had hitherto.
Look closer for more short-tem evidence.

DAILY CHART

The short-term signals are not good for the market.
The failure to stay above the 1075 level should be a big disappointment for the bulls.
Volumes have been good on down days
The diagonal above the market at 1064 is now first resistance.
And then just above that the old level of 1075 may yet stifle rallies too.
We think the bulls are on the back foot because the market is still vulnerable to any bad news rather than excited by good news thus a retest of the 1011 level is still likely

The Macro Trader's view:

Until last Thursday the S&P 500 looked on course to extend the recent Bull Run, as Q3 Corporate profit reports were largely positive, luring investors back into equities. But the positive tone was undermined by several weaker-than-expected US data releases throughout the week. Moreover, although US Existing Home sales came in better than expected on Friday, ending the week on a positive tone, traders were un-nerved.

With Q3 GDP data due, traders began taking profit and reducing positions, ahead of a number that was widely expected to mark the end of the US recession. But last Friday the UK Q3 GDP came in much weaker than expected. This was contrary to market consensus which was expecting to see confirmation that the UK recession had drawn to a close.

With this in mind, it is understandable why US and global markets generally have experienced an increase in risk aversion. Sentiment hasn't been helped by a weaker-than-expected New Home sales report released yesterday.

But in the event, Q3 GDP (released today) came in better than expected, with most sectors contributing to the recovery. Yet several analysts sought to play down the data by claiming it was achieved solely on the back of fiscal stimulus, mainly the government's ‘cash for clunkers' scheme and tax credits given to first-time buyers.

But Q3 GDP wasn't only boosted by auto sales. Retail sales generally made a solid contribution, as did corporate investment and durable goods via exports, too.

Is this number of itself sufficient to re-establish the Bull trend? Probably not. But it does provide a floor to stocks and a cap on the Dollar's recent recovery.

With several key data releases due next week: ISM manufacturing, ISM non-manufacturing and non-farm payroll, the stage is set, if all goes well, for the Bulls to regain control.

If next week's data is at least in line with, or better than consensus, especially non-farm payroll at the end of the week, we judge stocks should begin to solidly test the highs. Why wouldn't they?

After a good corporate profit reporting season, strong Q3 GDP, additional good news would serve to cement the message in trader's minds: the US economy is on the mend and with the Fed set to leave policy on hold until Q2 2010, traders will have good reason to buy stocks.

Mark Sturdy, John Lewis
Seven Days Ahead

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Confused and Confusing Bond Markets

From June this year US, UK and European bond markets have lacked any bear impetus. Any medium and long-term structures that have developed are far from completion and markets are locked in trading ranges ...

The US, UK and European bond markets have all experienced recent double failures at long-term all-time highs. So the long-term technical outlook is bearish. But those failures occurred nearly a year ago. They have fallen since, but from June this year they have lacked any bear impetus at all. Any medium and long-term structures that have developed are far from completion and markets are locked in trading ranges. Traders should stand aside and await events.

The Technical Trader's view:

WEEKLY UK GILT CONTINUATION CHART

The UK Gilt chart over the two year period since October 2007 shows a steep rally then the market ranging for the last year.
The Double failure at the old all-time-high from 2003 is an unquestionably bearish context.
But the market's difficulty in penetrating back down beneath the Prior High support - which is the lower boundary of the trading range - is clear.
The possible bull channel since June of this year is interesting, and may be a continuation pattern in the making, but that remains conjecture for the moment.

WEEKLY BUND CONTINUATION CHART

The shape of the Bund chart follows that of the Gilt though the parameters of the trading range since last October have been derived from Highs and Lows that have arose at different times.
The clear double failure at the old all-time-high sets the tone of bearishness But medium-term there is less of a bull channel that has been created - more of a tight trading range.
And the market remains squarely within a wider trading range.

WEEKLY TNOTE CONTINUAITON CHART

The US market only bears comparison with the European markets since the beginning of 2009.
After that all three markets have followed each other closely.
The double failure at the old all-time-highs is there as in the other markets. And most recently still, the US has closely matched the bull channel of the UK Gilt market.
But that shows no sign of completing yet.
Traders might well be intrigued by the future possibility of the formation of a second shoulder to a large Head and Shoulders Top formation...but that too is conjecture for the moment.

Mark Sturdy,
John Lewis
Seven Days Ahead

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Medium Term Uptrend in Crude Oil Re-established

The Commodity Specialist view - S/term strength in Brent Crude Oil has put former bears firmly on the sidelines, with new 2009 highs recently seen. Any pullbacks are now likely to be temporary ahead of further upside action.

• WEEKLY CHART - CONTINUATION: Earlier this year the recovery paused ahead of the 38.2% recovery level, but setbacks proved relatively modest. It has been eroded now, and the recent price swings may be viewed as what textbooks refer to as a ‘running correction’ – a sign of strength. The risk is definitely to the upside now, with next focus on the 50% level on this chart.
• DAILY CHART – DEC-09: The slip back from 77.71 Aug high found effective support from our channel base projection (there was dual Fibo support here too). Subsequent strength proved more than a short-lived affair and break above 77.71 implies strength. S/term note resistance from the rising resistance line and slightly higher channel top projection around 81.00 – a pullback would not surprise from here, but the assumption is that it will be temporary and not too deep. The 72.92 17-Sep high offers support, and also note the lower 61.8% pullback level around 70.75 currently – buyers on dips will ideally favour towards this latter level, though no guarantee this will be seen.
• In the s/term, a break through the channel top resistance would first target towards the 85.67 area, 1.618 swing projection off prior 77.71-64.83 pullback.

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Key Reversal Week in GBP/CHF Lures Bulls

The FX Trader’s view - After nearing an interesting Fibo projection earlier this year the GBP/CHF cross rate recovery came to a halt. Subsequent weakness has been quite deep but we have just seen a potentially bullish Key Reversal Week, marking at least a temporary turning point.

• WEEKLY CHART: This year’s medium term bull signal came at the break through falling resistance. This return line now offers support (runs through the 1.5700 area currently). However, last week saw a bullish Key Reversal Week which favours at least a s/term recovery now.
• DAILY CHART: After failure just ahead of the Fibo projection support has come after erosion of the 61.8% pullback level. Note how the lower 76.4% coincides with the 1.5842 Mar low (this has a bearing on that Fibo projection). The break of the 23.6% bounce level is encouraging and, with the Key Reversal Week in place, we view s/term dips to be temporary ahead of further strength. The 1.6873 38.2% level becomes next target, but key resistance lies higher at 1.7346/1.7379, 61.8% and 13-Jul low. Note that we can’t say if this is a major turnaround yet.
• Buyers on dips will ideally favour a pullback towards the 61.8% retracement, so just around 1.6350/40 currently, with initial stops ideally just below 1.6100. A suggested target of 1.6850 for partial profits, then raising stops to cost. Further profit-taking would be wise ahead of that key 1.7346/79 resistance (no guarantees this can be reached, of course).
• Note that a reverse situation presents itself in EUR/GBP. Our Update of 9th Oct, with a bearish ‘warning’, looks to have been appropriate if not spot on with its timing.

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Copper Bulls Stay Sidelined – Downside Risk Remains

The Commodity Specialist view - The 2009 bull run ran out of steam in August, with price action turning consolidative. After an initial negative sign the bears have been reluctant to follow through, but downside risk stays present.

• WEEKLY CHART - CONTINUATION: Recovery from the 1.2475 Dec-08 low has now reached/eroded the old 2.8500 Dec-07 low. Beyond this lies the 61.8% 3.1155 retracement level –but there is currently pullback risk.
• DAILY CHART – DEC-09: Earlier on we had a Fibo projection marked in – it has provided effective resistance, prompting s/term correction/ consolidation. So far, it has shied away from the 23.6% level of the upmove from Dec-08 low, around 2.5935. The s/term rising support/return line is providing approximate resistance and, at the moment, current strength may still prove to be the precursor to another bear leg. Below the 23.6% level note lower support is offered by the 2.4680 Jun high, but the next bear target would be the 38.2% 2.3485 retracement area.

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Short Term Bull Signal in USD/JPY Now Seen

The FX Trader’s view - The recent downtrend in USD/JPY has been trying to find support above the prior lows of Dec-08/Jan-09. It looks as though a s/term recovery signal has now been given, and it is now time to look at some of the overhead hurdles confronting the s/term bulls.

• WEEKLY CHART: The recovery seen earlier this year came to a halt close to the 101.66 61.8% retracement. Currently a recovery above the main falling resistance line, and then 97.78 Aug high, is needed to clear the way for any longer term bulls. Meanwhile the market is trying to find s/term support at/above the 87.11 low.
• DAILY CHART: In the Commodity Specialist Guide we had a Fibo projection around 88.00 (1.618 swing off prior 91.72/97.78 upswing) which has provided good s/term support. Our initial bull sign was to be a close above the 90.30 23.6% level, which has now been seen. We also note a recent positive RSI divergence. The 91.72 13-Jul low and 38.2% level offer next resistance, followed by the 92.88 50% level – a reasonable near term target. However, the more interesting resistance isn’t seen until the bear channel top projection at 94.70 currently. In the Guide we are now buyers on dips back to the 89.00 area, initial stops just below the 87.98 07-Oct low, targeting a modest 91.50 for partial profits.

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Does the S&P remain good value?

The S&P has enjoyed a sustained rally since March and although there have been periodic corrections driven by doubts over the durability of the fledgling recovery, traders have on each occasion overcome their anxiety and the rally has extended. But having risen 64% from the lows seven months ago is it over-extended?

The Technical Trader's view :

WEEKLY CHART

We remain bulls of the S&P.
The market has been driven better by the Head and Shoulders Reversal in place.
But there is more to go - just 50% of the minimum move has been achieved.
There has been a slight pause at the Gap resistance at 1110-1077.
But now the market appears to be penetrating that resistance.

DAILY CHART

The day chart suggests a solidly-constructed bull trend.
The Prior High at 1011 was good support.
And now the recent High at 1075 has been overcome with an encouraging surge of volume.
That should act as good support and ratchet the market higher still.

The Macro Trader's view:

The S&P has enjoyed a sustained rally since March and although there have been periodic corrections driven by doubts over the durability of the fledgling recovery, traders have on each occasion overcome their anxiety and the rally has extended.

More recently the market suffered another correction after a disappointing ISM manufacturing survey and non-farm payroll report earlier this month, which again raised fears about the staying power of the recovery.

These fears were short-lived. The more important ISM non-manufacturing survey released the next week, beat consensus and showed the service sector of the economy was once again expanding.

Earlier this week another potential hurdle was successfully overcome when retail sales came in better than expected. The expectation in the market was for a steep contraction on the month resulting from the Government's cash for clunkers scheme expiring.

In the event, while a negative number was reported, it was better than consensus and the ex-auto version was in positive territory, offering hope that the consumer remains willing to spend.

But as we are now into the Q3 corporate reporting season, traders are more inclined to react to high profile corporate results, than Macroeconomic data. But here too, the news so far is good.

Apart from some solid results released by non-financials, the S&P has risen on strong profit reports from J P Morgan Chase. Today, Goldman Sachs had stronger-than-expected results.

This is not only good news for shareholders but also for the economy, since as the leading financial institutions repair their balance sheets and profitability, their appetite for advancing new lines of credit will grow. This will feed the recovery and, in turn, feed equity markets.

So although the S&P has done well to get to current levels, we judge the signs are encouraging and it should rally further.

Mark Sturdy, John Lewis
Seven Days Ahead

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How high can Gold go?

The Technical Trader's view:

QUARTERLY CHART

The big picture of the market is familiar: in the seven years to March 2008 the market surged from $255 to over a $1000, and surpassed the previous High of $873 established in early 1980.

Thereafter the market dithered around the $873 level, tried to fall back but was robustly supported

WEEKLY CONT. CHART

The dithering around $873 created a continuation Head and Shoulders pattern which has completed in the last week.

The bulls are triumphant.

But how high can the market go for here?

DAILY DEC09 CHART

Note well the difference between targets ...
... and resistances
First stop then for the bulls looks to be 1106. But if as we expect, the market goes higher there are other level to watch.

Yet, in the very short term ....

DAILY DEC09 CHART

It is worth noting that in the very short-term, the current price of December Gold is 1046.70 having peaked yesterday at 1062.70 - a faction above the Dec09 Prior High in March 2008 of 1060.00.

(We are currently Long Gold in our Key Trades portfolio and will be following the market closely.)

Mark Sturdy
Seven Days Ahead

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Sugar Bears Now Up Their Game

The Commodity Specialist view - Following our 17th Sep Update on Sugar the outlook has remained bearish, on the back of a Key Reversal Week. The signal has proved a good one, with the next bear leg looking to have gotten under way.

• WEEKLY CHART - CONTINUATION: The Key Reversal Day week of early Sep remains the dominant feature here. First notable support on this continuation chart is the old 19.73 2006 high.
• DAILY CHART – MAR-10: After that reversal week we were viewing any s/term bounce as temporary. Now that the 21.95 low 08-Sep low has been revisited we look at lower targets/supports. The first interesting one is around the 20.77 38.2% pullback – there’s a Fibo projection just below at 20.63. Then, note the 1.618 swing projection off prior 21.95-25.43 bounce, at 19.80, RIGHT AT THAT OLD 19.73 HIGH ON THE CONTINUATION CHART. In the up-coming Commodity Specialist Guide we’ll look at a couple of closer supports too. And in the Guide we are theoretically short at 24.50, targeting partial profits at 21.25, stops already tightened to 25.50. Further profit-taking is probably favoured towards that 19.80/73 area.

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Will EUR/GBP Bulls Pause For Breath?

The FX Specialist view - An impressive upmove in EUR/GBP has shaken off medium term bear risk, we believe – any pullbacks now will most likely be temporary/corrective ahead of further upside. It is worth looking at the current technical position, and supports to any slip back.

• WEEKLY CHART: Earlier this year we said there was greater bear risk, following the erosion of the 38.2% pullback level. However, failure to hold below this, and subsequent impressive recovery – including breach of the bear channel top projection which implies serious loss of former bear momentum, has definitely tilted the scales in favour of bulls once more.
• DAILY CHART: Price action has now reached, and paused at, the 61.8% recovery level, finding support from near old 0.9082/72 highs (and just through the 23.6% pullback). Bulls will be targeting the higher 76.4% retracement but we just wonder if the s/term chart structure allows for a further pullback attempt prior to a move to the higher levels. (There is a small negative divergence on the RSI too, not shown) At this stage we would not be looking for a deep pullback – the 0.8976 38.2% area would be the first focus of attention. And the fact that price had dropped back into the old bear channel would not harm the overall bullish outlook in any way.

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Bear Pressure Mounts in EUR/JPY

The FX Trader’s view - Over the last few months the price action in EUR/JPY has been on the choppy side, with the 2009 recovery slowing ahead of a 50% retracement level. The Daily chart now appears to be on the cusp of giving a bear signal, which would further postpone any test/break of this key resistance.

• WEEKLY CHART: This year’s recovery earlier had the 141.00 50% level in its sights (coincides with two prior high areas from 2003/2004) – it remains elusive for now and there is currently bear risk.
• DAILY CHART: The key support at/above the 129.75 76.4% level has now come under pressure (including today) –in the FX Specialist Guide we have said that a break/close below this would be an initial bear signal/trigger now. The recent failure at the 135.53 21-Sep high, back to the rising support line is, in fact, an early bear sign. The first bear target would be the 125.63 50% retracement. Initial support may well be found here, but subsequent move lower could close in on the 118.45 76.4% retracement before next decent support emerges. Only a recovery/close above that 135.53 high would shrug off current bear risk.

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The Surging Gilt

The Macro Trader’s view:

The Gilt has remained well-supported over recent months despite some of the worst public sector borrowing data ever seen, and certainly in peace time. In recent days it has begun to surge -in line with or even better than other bond markets What then, as we have asked before, keeps this market up?

Apart from the Bank of England’s QE program, what other special quality does the gilt posses that allows the UK government to push the debt to GDP ratio from around 39% to a projected 70% in such a short period of time?

For sure, these are difficult times and this recession in many ways has been like nothing else in living memory. But usually when economies start to recover, government bond yields start to rise as investors begin to seek greater rewards in other asset classes, usually equities. Moreover, the fear of collapsing growth is replaced by concerns that inflation may rear its ugly head if monetary policy isn’t tightened in a timely manner.

Right now in the UK official interest rates are effectively at zero and the Bank of England has printed £175.0B of new money. That is money that hasn’t been created as a result of an increase in productive capacity, but by turning on a printing press. This has been done with the sole aim of warding off deflation and encouraging inflation.

But the UK economy is showing definite signs of improving, with the housing market apparently springing back to life and the dominant service sector of the economy recording expansion for several months, via the PMI Services survey. But still the Bank seems far from tightening policy as policy makers are suspicious the recovery may yet prove a false dawn.

In addition, the Bank now seems content to see the value of the Pound slide. This in itself should worry international investors as the money they are investing in UK Gilts is eroding in value, but still the Gilt refuses to bend.

Another consideration is the apparent commitment by this government and the opposition parties to cut public spending by half over four years starting after next year’s general election.

Coming from the opposition Conservative party the pledge seems credible as they have opposed the massive build up of debt and when they were last in government they made difficult choices over public spending. But coming from the incumbent Labour party the pledge is less convincing, unless Gordon Brown has had his own equivalent road to Damascus conversion - which we do not believe.

More likely, the markets too are sceptical of the UK economic recovery and continue to prefer the relative safety of UK government debt which remains AAA rated. Their reasoning may be that if the UK government defaults, then other asset classes and sovereign issuers are likely to be in a similar predicament and with inflation looking tame and expected to remain so for quite some time, at least by the Bank of England, they see little risk in holding Gilts.

But what if the recovery in the housing market proves durable? What if the PMI Services survey is accurately predicting the strength of the recovery? What if the Bank of England is wrong and they have pumped too much liquidity into the economy? The Bank will have to act fast and aggressively with policy and this market together with Short Sterling will be a big sell.

In the US in less than a week two prominent Fed members have briefed about the need for the Fed to act before action appears needed. In the Euro zone the ECB has reported a substantial drop in the liquidity demands of Euro zone Banks.

In short, the global economic environment is improving and that includes the UK so Gilt traders might just be sleep walking towards the edge of a cliff.

The Technical Trader’s view:

DAILY CHART
The monthly continuation chart’s structure is clear enough: a clear trading range, within which the market has found support at the Prior High at 115.08. Look closer.

DAILY DEC 09 CHART
The December chart makes a convincing case that the market may go further still. The bull falling wedge has completed, and the market has overcome the Prior High at 118.87 in some style.

Use that band 118.42- 118.87 as good support on any pull-back….

The market looks well-set short-term yet still remains within a well-defined trading range in the medium-term.

Mark Sturdy, John Lewis
Seven Days Ahead

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Brent Crude Oil – Initial Bear Signal in Place

The Commodity Specialist view - During the summer months Brent Crude Oil bulls got a second wind, but have recently struggled near to resistance on the long term chart. An initial bear signal was given last week, and we now look for the confirming move.

• WEEKLY CHART - CONTINUATION: The 38.2% recovery level has proved a tough hurdle to pass, and remains first key resistance on this long term chart. The recovery from the late Dec-08 low shows signs of maturity now, so a decent pullback at this stage would not be a surprise.
• DAILY CHART – NOV-09: The break/close below both the main rising support line and 66.66 04-Sep low was a clear bear signal. We had thought that the dual Fibo support could prompt a s/term bounce, hence we did not want to chase the market. In the Commodity Specialist Guide we were sellers on a bounce, at 68.75, just ahead of the old rising support/return line, with initial stops just above the 72.20 17-Sep high. A better break of recent support, and the channel base projection just below, would be useful bear confirmation now, with 61.00 targeted for partial profits. A later target centers on the 61.8% level. The current bear signal would be negated on a recovery back through that 72.20 high.

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