T Notes under pressure - with still more bear potential

Already this week a US debt issue struggled, that could be a signal for what is to come. We judge that as economic growth becomes more entrenched, traders will become increasingly critical of this government's fiscal policies. When they judge the stimulus has been in place for too long and is likely to feed inflation, US Bonds will surely sell off hard. We believe that day is not long off.

The Technical Trader’s view:

DAILY CHART

The TNote has had a torrid time this week.

The triple failure at the 117-16 level is clear, so too is the failure of the rising diagonal from the beginning of 2010.

Add to that the breakdown through the Prior Low at 116-8.5 completing a small Double Top and the bears look to have the bit between their teeth.

A push beneath 115-14.5 would add to the bear impetus of course.

WEEKLY CONTINUATION CHART

There is no completed pattern here (except, maybe, the bear rising wedge in November 2009)

But there is a clear possibility of a Head and Shoulders Top should the market break down through the diagonal at 114-23 and rising.

There is an intermediate point of reference (that is being tested right now) at the diagonal (115-24) drawn through the two lows from the low of June 2009.

That has not yet broken either.

But should the market break on down through the 114.64 level a large Top will have completed and will send it on down a lot further still.

The Macro Trader’s view:

We have been frustrated bears of the US 10 Year Note for quite some time, and have watched as it has found support from repeated waves of risk aversion driven by the Dubai debt scandal and the Greek debt crisis to name just two of the recent high-profile events that have caused traders/investors to sell stocks and buy government bonds for safety.

But all the time the National debt of several major economies has continued to grow, especially in the US. The US president has said the deficit needs to be reduced, but his actions don’t match those infrequently spoken words.

Indeed, only this week Congress has passed the expensive heathcare reforms many argue will add to the budget deficit.

But why now should the US 10 year Note sell off when it has defied gravity for so long? There are several reasons:

· The US economy has over recent months shown unambiguous strength with Fed officials and several commentators expressing the opinion that the US Labour market is about to turn and start registering Job creation,

· The Greek debt drama remains unresolved, and although the US S&P has refocused, others haven’t. A Chinese Central Banker said today that Greece isn’t the only problem as there are other major economies carrying unsustainably high government deficits,

· Fed Chairman Bernanke said today when testifying in Congress that the US Government needs to come up with a credible debt reduction program.

Are these factors enough to send US bonds lower, or will the backdrop of benign inflation seduce traders into remaining buyers of US IOU’s?

Bond markets trade on several key fundamentals:

- Inflation expectations,

- Short term interest rate expectations,

- National debt ratios and the ability of the government to fund it,

- Current budget deficit levels, and

- Government policy towards the fiscal stance going forward.

The last three factors are already bond market negative. The other two factors soon will be if the US President doesn’t wake up and realise that he cannot keep writing IOU’s at the current pace indefinitely.

Already this week a US debt issue struggled, that could be a signal for what is to come. We judge that as economic growth becomes more entrenched, traders will become increasingly critical of this government’s fiscal policies.

When they judge the stimulus has been in place for too long and is likely to feed inflation, US Bonds will surely sell off hard. We believe that day is not long off.

Mark Sturdy

John Lewis

Seven Days Ahead

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Cotton Rally Falters within Fibonacci Area

The Commodity Specialist view - Earlier this year the game looked as though it was up for Cotton bulls, but fresh interest created new highs. A temporary halt has now been made, within a projection area that we had identified in the Commodity Specialist Guide, but can this develop into something more bearish?

• WEEKLY CHART - CONTINUATION: A recent bull surge breached the long term 76.4% recovery level, but has found resistance near to a Fibo projection we have been showing in the Commodity Specialist Guide, at 85.00. This projection is related to the fact that the early Feb low lies close to the current 38.2% pullback. First interesting support here comes from the higher 73.10 23.6% level.
• DAILY CHART – MAY-10: The recent upsurge faltered just through rising resistance, and also close to a 84.00 Fibo projection (1.6178 swing off prior 77.83-67.80 pullback) – also noting the 85.00 level on the Weekly chart. Initial reaction here has been negative. First support from the 77.83 high is so far holding, with a break below to provide a modest negative sign. More important support lays some way off at present, a s/term channel base projection around 72.00, closing in on the 23.6% level from the Weekly chart. Note possible resistance from a very s/term 76.4% bounce level at 83.20 (not shown). There is currently downside risk, but we must wait to see if this develops into something more serious.

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USD/JPY Bulls Straining at Their Leash

The FX Trader’s view - Last November saw a bear break that, in the end, amounted to a type of blow-off move, with subsequent quick recovery putting the bulls in contention once more. However, there were key resistances to overcome, and one of which has just been violated…

• MONTHLY CHART: In the Commodity Specialist Guide we have this year continued to note an interesting positive RSI divergence on the Monthly chart, suggesting that long term bears were tiring.
• WEEKLY CHART: On the Weekly chart note the clear falling resistance line, providing a cap on action in 2010. This follows the false break below old 87.11 support. This line, running through 91.70 currently, was violated yesterday (although a weekly close above this would be preferable), and now a further recovery past the 93.76 early Jan high would confirm a new bull trend was underway.
• DAILY CHART: This year’s slip back found good support from the 61.8% retracement, coinciding with the early Oct-09 low just under 88.00. In the FX Specialist Guide we have said that a recovery/close above the 92.14 19-Feb high would provide an initial bull signal (just seen yesterday), the second being the continuation above the 93.76 Jan high. A target area opens up – an equality target just above 97.00 (Nov-Jan upleg extended off 88.10 Feb low), the 76.4% recovery level around 97.50 and higher Fibonacci projection at 98.75. At this stage a drop back and close below the 90.00/89.75 area would negate the current s/term positive picture.

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Traders' fears and the S&P

Some analysts have alarmed bulls by pointing out the relative underperformance of the Nasdaq and the Russell indices, the failure to make new highs in key S&P leadership stocks and, yesterday, the 14day RSI registering its highest overbought level since 1971... We think a pause is possible, even a small setback, but note that major patterns and macro forces are still driving the market forward and don't look exhausted - yet.

The Technical Trader’s view:

Some analysts have alarmed bulls by pointing out the relative underperformance of the Nasdaq and the Russell indices, the failure to make new highs in key S&P leadership stocks and, yesterday, the 14day RSI registering its highest overbought level since 1971…

We think a pause is possible even a small set back but note that major patterns are still driving the market forward and don’t look exhausted – yet.

WEEKLY CHART

The chart illustrates the period of the credit crunch – the fall to the 2002 low of 767.

There market got down there and then, eventually, having formed a Head and Shoulders Reversal, bounced.

The reward was the rally throughout 2009 and on (with a blip) into 2010.

Notice that the minimum move indicated buy the pattern is still somewhat higher that present levels.

There is life in the market yet.

Observe too, that the 1219 minimum target is very close to a horizontal resistance so that will be difficult to break up through – when the market gets there.

DAILY CHART

If the medium and long-term charts still have life in them, so too has this daily chart.

But, the small, badly-formed, Head and Shoulders Reversal has almost achieved its minimum target of 1175.

That target is not a resistance level but is frequently accompanied by a pause at the very least.

The bulls will also rightly point to the way the market has superseded the Prior High at 1141 – bull trends ratchet themselves better by finding Prior Highs to be good support. Which incidentally, it already has been.

DAILY CHART

Bears of the market may not have had all their anxieties allayed.

But the path of the VIX over the whole credit crunch period (nearly a mirror of the long-term S&P) has led to levels close to pre-crisis levels.

(Indeed, the March 10 contract fell steeply yesterday to 17.45.)

So downside protection is cheap and may get cheaper still…..

The Macro Trader’s view:

Last week was mainly dominated by two events:

- The strong US retail sales report out last Friday, and

- The FOMC rate decision and policy statement released on Tuesday this week.

The retail sales report was important because it showed strength despite some of the worst snow storms to hit the US for a very long time and bodes well for Q1 GDP due to be released next month.

The FOMC rate decision and policy statement re-assured markets that the Fed still intends holding policy at current low levels for an extended period, even though policy makers see clear signs of improvement in the economy.

So what does all this mean for the markets and especially US equities which are our focus for this week?

We judge the correction that hit the S&P in the early part of this year is now over. The sell off was driven mainly by fears arising from the Greek government debt crisis. That crisis began to be tackled by the Greek government implementing a tough austerity package backed by pledges of financial support from other EU/Euro zone leaders. And although that assistance still looks vague, traders have relaxed and turned once more to riskier assets, namely equities.

But the S&P also benefited from two further developments:

- The run of US data has turned stronger after a period of ambiguity, and

- Concerns have abated that a Greek debt default could have led to a domino effect on other highly indebted developed economies, including the US and UK.

So now we have an US environment in which consumer spending is holding up well, business spending is improving and the labour market could be on the brink of turning.

Add to this a benign inflation environment as evidenced by Wednesday’s PPI report which showed that the Fed does have the luxury of time. Time to wait before monetary policy needs to be tightened.

Although we currently think that tightening could begin later this year, low interest rates and strengthening growth should provide the back drop for the S&P to rally further.

Mark Sturdy

John Lewis

Seven Days Ahead

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EUR/USD Recovery Off 61.8% Support Feeble So Far

The FX Trader’s view - We last looked at EUR/USD when the downmove was approaching a 61.8% retracement/ support level. It has proved effective in halting the bears but there has so far been a lack of enthusiasm to push through first key resistance and set in motion a better recovery phase.

• WEEKLY CHART: The reversal in trend at the 76.4% recovery mark saw a steady decline to the 61.8% pullback level around 1.3400, which has provided nice s/term support. But a failure to push through first key resistance (see below) would turn our focus towards the lower 76.4% just under 1.3000.
• DAILY CHART: The s/term chart structure had previously started to suggest that bears were getting weary on the approach to 61.8%. However, in the FX Specialist Guide we have been looking at the 23.6% retracement area, at 1.3835, as first key resistance. This needs to be overcome in order to signal a better s/term recovery can be seen. In which case tough resistance would be expected at/below the 1.4216 Dec-09 low. Meanwhile the Mar low and 61.8% level stay vulnerable – note that there is currently an interesting Fibo projection (not shown) that nicely coincides with the 76.4% level just below 1.3000…

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What May Trigger A Spring in Wheat?

The Commodity Specialist view - Wheat prices have continued to drift back this year, recently approaching last year’s low. In the Commodity Specialist Guide we have stuck to a bearish outlook, but it is now useful to consider what would provide a s/term bull trigger.

• WHEAT – WEEKLY CONTINUATION CHART: On this long term chart a 23.6% recovery level previously provided clear resistance, and we still look for this retracement to be exceeded in order to adopt a medium term bull outlook. Recent weakness has stopped some way short of the 425.25 Sep-09 low, the 455.00 Dec-08 low offering first support here.
• WHEAT DAILY CHART – MAY-10: On the front month chart last year’s low came in at 472.00, support trying to form above this currently. So far resistance has emerged from the 527.75 17-Dec low, with a s/term bear channel top running below this at 520 now. A break/close above this would be an initial bull signal. However, there is higher 540 resistance from a rising return line which must be overcome for bull confirmation, and warns against chasing price up here. We can then target towards the 587 Jan high initially (near to a

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Euro Sterling is set to go further

The Euro has recently suffered a very pronounced period of weakness against both the US Dollar and the Japanese Yen but against Sterling it has remained strong throughout. Why is that?

The Technical Traders View:

MONTHLY CHART

The compelling force behind the weakening of Sterling since 2007 has been the completion of this massive Head and Shoulders Reversal.

The measured minimum move was up as far as 0.89.

And there the market consolidated – it looks like a Triangle… look closer.

WEEKLY CHART

Were the market to break the upper boundary of the Triangle, a continuation pattern, the market would receive a huge bull impetus.

The minimum move? Up as far as 1.04 or so.

Might that happen?

DAILY CHART

There is a clear bull falling wedge which has completed.

The market has shot ahead as far as the 61.8% Fibonacci retracement resistance -

that may continue to offer resistance.

But the influence of the falling wedge suggests still higher levels – and a test of the diagonal at 0.920.

If that were to break then a massive fresh injection of bull energy for the Euro would drive the Pound lower still towards that 1.04 target.

The Macro Traders View:

The Euro has recently suffered a very pronounced period of weakness against both the US Dollar and the Japanese Yen but against Sterling it has remained strong throughout. Why is that?

First, let’s look at why the Euro came under such intense selling pressure. The main reason has been the well-publicized Greek Debt crisis, which also included Spain and Portugal but took less attention than events in Greece.

The main reason for Greece being in the spotlight was it was found to have lied about is public finances over a period of time with the express intention of gaining entry to the Euro. So although other peripheral Euro zone members have public finances in a similar sorry state, the markets picked on Greece because there was no confidence that even after the lies were admitted the data was believable.

Leading from this came the fear, which spread throughout markets, that a major economy might default on its Sovereign debt. Apart from Greece et al, the US and UK are running similarly large deficits and this too alarmed traders.

Fears receded after Greece agreed to take tough measures to improve its fiscal position with the EU/Euro zone pledging unspecified help. More recently, a European version of the IMF has been proposed, dubbed the “EMF” to deal with any future crisis. But the German leader has warned that Treaty amendments will be required to bring such an institution into being and the Bundesbank president has come out strongly against it.

That’s the story behind the Euro’s weakness, so one needs to look at the UK to see why Sterling alone failed to benefit from the Euro’s recent woes.

It is well documented that the UK economy was later to emerge from recession when compared to other G7 economies. Moreover the UK finances although not materially worse than others, has deteriorated much faster than other G7 economies. And with an election looming and the Government looking unpopular, Prime Minister Brown is reluctant to begin an orderly withdrawal of the stimulus.

His finance minister has set out a timetable to halve the deficit over 4 years, but the route looks unconvincing, making the pledge look less like a commitment than an aspiration. Indeed, despite apparently intending to cut the deficit, Brown keeps on trotting out more plans requiring additional public spending.

Add in the means so far put forward for bridging the Spend/Borrow gap; higher taxation, with the introduction of a new 50p band that has made many high earners think again about working in the UK and the landscape post election should Labour remain in office starts to look unfriendly towards business, or anyone that creates wealth either for themselves and the economy generally.

The rating agencies are unhappy with the current policy mix and periodically warn public finances must improve for the UK to keep its AAA credit rating, loss of which would force up the cost of funding the now large national debt.

So to recap Sterling’s position:

- Recovery underway, but Prime Minister and Central Bank warn it will likely be weak,

- Stimulus in place with no credible route for removing it,

- Political stalemate pointing to a hung Parliament with no party winning an overall majority,

- Likely outcome; difficult to gain agreement on sorting out the fiscal mess and how best to achieve it.

And recent data hasn’t helped. This week has seen a terrible set of trade figures. Usually a weak currency over a prolonged period corrects a large trade deficit. Not so in the UK, which means manufacturing is too weak and too small to satisfy even current reduced demand. This was confirmed again this week by a very disappointing set of industrial production and manufacturing output releases which bode badly for Q1 GDP due middle of next month.

So why has Sterling performed so poorly against the Euro despite all of the Euro’s ills? It is because the UK economy is weak by comparison and a political deadlock looks set to emerge after the May/June elections meaning little hope of any meaningful improvement.

The Pound looks weak.

Mark Sturdy

John Lewis

Seven Days Ahead

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Potential Support in EUR/JPY Towards 76.4%

The FX Trader’s view - A bear move finally got going this year, after a prolonged choppy period in 2009. There are, though, signs that bears could be temporarily tiring now, so we begin to look closer for a recovery phase.

• WEEKLY CHART: Weakness in this market became clearer this year as the prior consolidation phase resolved downward. Losses have nearly extended to the 76.4% 118.45 pullback level, which is sometimes effective in EUR/JPY – we must be on the lookout for a rebound phase.
• DAILY CHART: The downmove has so far stopped short of the 76.4% level and the s/term structure has started to suggest bear interest is waning. Whether we see another dip that closes in on the Fibo level remains to be seen, but a push above the 125.23 22-Feb high would indicate that a recovery phase was underway. Dips can then be assumed to be short-lived ahead of further bull activity. Higher/temporary resistance is likely from the combined forces of the 126.89 Nov-09 low and steadily falling bear channel top projection at 128.75 currently.

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Rebound in Copper Returns Focus On 76.4% Resistance

The Commodity Specialist view - Early this year the prior steady uptrend from a late 2008 low was seen to falter at a key Fibonacci level. After an initial sell-off a strong bounce has unnerved the bears - there is still scope for a resumption of weakness, but the market is at a critical stage.

• COPPER – MONTHLY CONTINUATION CHART: In late 2008 support was seen close to a long term 76.4% pullback level. Subsequent recovery saw a test of the 76.4% retracement, with Jan producing a type of Key Reversal Month. While the Jan high stays intact this negative signal remains valid – the current strong corrective bounce is not uncommon when a trend is in process of turning.
• COPPER DAILY CHART – MAY-10: The 76.4% bounce level on the daily chart was eroded after s/term resistance. But while the 3.5500 early Jan high remains in place there is still scope for a bear scenario to unfold, keeping in mind the Jan reversal month. At this stage a drop back through the 3.1600 support area would be an encouraging sign. Meanwhile we must await developments.

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EUR/CHF Bulls Waiting in the Wings?

The FX Trader’s view - After a dramatic breakdown at the end of 2009 the move lower has notably slowed this year. Clear technical support has recently been found, but bulls so far remain reluctant to move from the shadows.

• WEEKLY CHART: The decisive break below 1.5000 support in Dec-09 has seen an unhindered slip back to the Mar-09 low. Clear support has emerged around here.
• DAILY CHART: Following an unusual price swing in early Feb, which tested the Mar-09 low, we have been looking closer for evidence of a temporary bull resurgence. At this stage a close above the 1.4700 23.6% level would provide an initial bull sign; a further one would be a close above the 1.4785 38.2% level. Higher 1.5000 area, where several former lows reside, offers a tough barrier should any stronger recovery develop. The overall structure of the breakdown from the 1.5150 area in Dec suggests that there is more downside to play for in due course – so any bounce should prove temporary.

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Crude Oil Bears on Alert after Strong Recovery

The Commodity Specialist view - Price action earlier on in 2010 was seen to favour a bearish outlook for the weeks/months ahead. The recent strong correction/recovery, though often a feature when trends are in the process of turning, has now neared key resistance, which bears need to hold.

• BRENT CRUDE WEEKLY CHART - CONTINUATION: Price earlier failed to hold above the 38.2% recovery level (which coincides with the Aug-06 high). The structure of the chart and break of 23.6% pullback level suggested a more prolonged bear phase was unfolding. The current strong bounce does not yet throw doubt on this analysis – now look closer…
• BRENT CRUDE DAILY CHART – APR -10: The stronger-than-expected rebound pushed above the 77.49 03-Feb high, which raised questions for the bears. However, in the Commodity Specialist Guide we have been noting key resistance from a s/term bear channel top projection (now tested), ahead of the 80.00 76.4% bounce level – a clear close above this would confuse the outlook, and sideline previous bears. At time of writing there remains the chance that the s/term recovery will lack staying power, but reversal must happen soon.

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