Is the correction in the S&P over?

The Macro Trader’s view:

Equity markets had enjoyed a solid rally until a couple of weeks ago when the Greek debt crisis morphed into a full blown Euro zone Sovereign debt crisis. The reaction from traders was swift; stocks were dumped and the Dollar rallied hard against the Euro as traders began to fear what some had long said; the Euro zone is such an imperfect creation it cannot survive.

As we know the authorities in the EU/Euro zone put together a very sizeable support fund expecting this to restore market confidence in both the solidity of the Euro zone and the commitment of the member states to defend it.

However after only a brief 24-36 hour period traders had concluded it wasn’t enough and even some ECB and Bundesbank officials said the fund wouldn’t solve the underlying problem but just buy some time.

So although the crisis was European US equity markets sold off too. Why you might ask?

The reason is also connected with US Sovereign debt. While no one is suggesting the US government is about to default on its debt obligations, traders are none the less alarmed by the size of the US budget deficit and the impact it is having on the US debt to GDP ratio which is fast approaching 90%, and feared a contagion effect.

Your response might then be; why did traders/investors turn so readily to US Treasuries and the Dollar if anxiety about sovereign debt generally forced the stock market selloff. Answer, as I said the US is building up a pile of IOU’s, but the US economy is recovering, and increasingly that recovery is taking the shape of a V shaped recovery, so for now traders see the US economy as a safe haven.

Now after a very severe correction stocks are showing signs of stabilizing. This is for two reasons.

1. The Euro zone governments have virtually all committed themselves to austerity packages, even the Germans who will shoulder the lions share of the rescue find and the Italians who usually manage to avoid difficult issues, and

2. The US economy continues to churn out strong data.

Ok today saw Q1 GDP revised slightly lower, but Existing and New home sales both released this week have shown strength in the housing market leading traders to conclude that despite fears that a Euro zone economy might default, or the Euro zone could potentially break up, the US economy is performing well.

Indeed prior to the correction Q1 corporate earnings were strong and inflation benign. So do we think the correction is over; possibly, but the market may need time to fully retrace the recent sell off, so caution remains the watch word in these very volatile markets.

Mark Sturdy

John Lewis

Seven Days Ahead

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Gold Bulls Well-Placed to Drive Higher

The Commodity Specialist view - The recent breach of last December’s peak was brief, but the current chart structure does not indicate fatigue. Higher prices are likely before better resistance could be seen.

• GOLD (COMEX) WEEKLY CHART - CONTINUATION: The 2010 upleg recently started to push beyond our earlier Fibo projection at 1220. The next projection on this chart is not far off at 1270 (but see also Daily chart). Looking at the whole recovery from 2008 low it is possible that the current upleg (from 1045.20 Feb low) is a third/final upleg, i.e. a 5-wave structure is in the latter stages of formation. How strong this upleg is remains to be seen.
• DAILY CHART – JUN-10: After recent erosion of the previous 1230 peak a s/term slip back this month was not a surprise (type of key reversal day seen on 14-May). At this stage the chart is well-placed to push higher, and we keep in mind the Fibo projection at 1344, the 1.618 swing projection of prior Dec/Feb downmove. First support around the 1170.70 12-Apr high has now been tested – ideally this should hold, in order to preserve momentum. Thereafter the lower rising support line needs to hold to avoid sidelining the bulls.

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EUR/GBP Reaches Pivotal Level

The FX Trader’s view - From the early March high the slide back in EUR/GBP has turned from what might have been a simple correction in a larger bull move into an early indication of a medium term bear phase, though not, as yet, confirmed.

• WEEKLY CHART: The long term 38.2% level has once more been violated, together with certain support lines that include the one shown. This initial bear break still needs the confirmation from a break of the Jun-09 low just under 0.8400. Next focus would then be on the 0.8168 50% pullback level, but with lower levels likely thereafter.
• DAILY CHART: The cross has now neared the Jun-09 low, which lies just above the bear channel base projection. S/term support around here would not surprise, but recovery attempts are not currently expected to be long-lasting – already recent rallies have struggled near the 0.8800 level, and the higher 0.9000 area (channel top) does not look achievable now. Lower bear projections will be calculated following a clear break of the 0 8400 area; meanwhile we keep in mind the 0.8168 50% level from the long term chart.

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UK Gilts ahead of the pack

We wrote a Market Update on the day of the UK General election outlining 3 possible scenarios for the Gilt market post-election. We noted how we thought the market would rally on two of the possible outcomes: 1. An outright Conservative victory, or 2. A conservative led coalition with an overall majority. In the event, the second outcome occurred and the Gilt has indeed rallied far and fast. But we think there is more to come. Quite simply, the Gilt is now seen as a safe haven trade, along with the Bund and US Treasury market but beyond that, because of the new coalition's budgetary plans, it is leading the pack.

The Macro Trader’s view:

We wrote a Market Update on the day of the UK General election outlining 3 possible scenarios for the Gilt market post-election.

We noted how we thought the market would rally on two of the possible outcomes:

1. An outright Conservative victory, or

2. A conservative led coalition with an overall majority.

In the event, the second outcome occurred and the Gilt has indeed rallied. The coalition Government has put fiscal consolidation at the centre of their agreed program. This makes the UK the only major economy with a coherent, coordinated and credible plan to fast track cuts to the budget deficit and public spending.

Although the previous administration also planned to cut the deficit, their plans lacked credibility and the time-frame was probably over too long to prevent either

- the markets from losing confidence, or

- prevent the rating agencies from cutting the UK’S AAA rating.

The new government’s fiscal plans also underscore the Bank of England’s stance on official interest rates. Last week’s quarterly inflation report forecast inflation would fall back below target based on the current level of Bank rate and existing deficit-reduction plans.

With the deficit now set to be cut faster, the Bank will leave short term interest rates at current levels for an extended period allowing the yield curve to flatten.

But these are not the only reasons for the rally in Gilts. Government bond markets have turned decidedly bullish in recent days as traders continue to worry about the Sovereign debt crisis in the Euro zone.

Although peripheral countries are taking steps to cut both spending and their budget deficits, the fear is now that the medicine is so severe that it risks forcing a dip back into recession. The mood hasn’t been helped by Germany’s decision to unilaterally ban naked short-selling in 10 of its key financial stocks and Euro denominated government debt.

In short, the fragmented nature of policy making in the Euro zone led to the initial lack of confidence that first hit Greece, now that fragmentation has been re-enforced by recent German actions: the Euro zone has one monetary policy, but multiple fiscal and political decision centres which have caused the fault lines now so evident.

How has this helped the Gilt?

Quite simply, the Gilt is now seen as a safe haven trade, along with the Bund and US Treasury market and because of the new government’s plans it is leading the pack.

The Technical Trader’s view:

MONTHLY CHART

This market is undeniably well-structured: note well the support from the 1994 High at 105.03, see how well it performed on successive bear attempts - total four …

The note the creation of a bull falling wedge in the last week.

The minimum target of that wedge is surely the Prior high at 124.95…

WEEKLY CHART

The detail of the bull move – and the completion of the falling wedge.

The first point of reference is the old High 120.82, but then 125.58.

On any pull back expect the diagonal at 117.00 to be good support.

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

EUR/CHF Downmove Stalls, Again

The FX Trader’s view - Twice before, this year, the downmove in the EUR/CHF cross has shown signs of trying to find a decent support level, but with bears then driving values lower. For a third time, now, the chart has reached a point where it is worth looking closer for signs of bear fatigue.

• WEEKLY CHART: The latest slip here reached an earlier Fibo projection of ours around 1.4040. The Oct-08 1.4296 low area offers first resistance on this chart.
• DAILY CHART: Note how the latest breakdown point coincides with the current 23.6% bounce level of the downmove from Mar-09 high, around 1.4340 at present. It lays not much above the Oct-08 low. A recovery/close above this key resistance would suggest that a better recovery phase was underway, with subsequent dips then more likely to be corrective only. Next resistance of note would be prior 1.4559/76 lows, which conveniently coincide with the 38.2% level (not shown). Meanwhile the trend must be seen as down still.

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Sugar Testing Long Term 76.4% Support

The Commodity Specialist view - This year’s bear run has continued, with not much interruption. Earlier support points have fallen by the wayside but, now, a long term 76.4% retracement level has been reached, where the market is trying to find support…

• SUGAR #11 (ICE) WEEKLY CHART - CONTINUATION: In the Commodity Specialist Guide we had earlier looked for support from around the old 2008 high. This failed, but focus has now turned to the 76.4% pullback level, the next opportunity for the market to contemplate a change in direction. At least s/term support here is not unexpected.
• SUGAR #11 (ICE) DAILY CHART – JUL-10: On the Daily chart we had marked in the next Fibo projection at 13.40, close to the long term 76.4% level above. S/term this has been supportive, but a recovery through first resistance at 15.45/85, 01-Apr low and current 23.6% bounce level, is needed to signal fading bear momentum and provide an initial bull sign. Meanwhile we must await developments.

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Weak Euro, resurgent Dollar

When the EU/EZ/IMF rescue for Greece was announced, traders viewed it as akin to reorganizing the deck chairs on the Titanic. The Euro came under intense selling pressure and stocks collapsed. So the EU/EZ/IMF launched an even bigger rescue fund amounting to US$1.0T. Initial market reactions were positive and the Euro rallied, especially against the Dollar, but the sense of release soon turned once more to anxiety... why was that?

The Macro Trader’s view:

The Euro has been much in the news over recent weeks, and for all the wrong reasons. The Greek debt crisis which had refused to lie down, even after the EU/EZ/IMF put together a EUR110.0B rescue fund, threatened to engulf the entire Euro zone because traders doubted the problem could be contained.

Looking around the Euro zone several other peripheral states had worrisome public finances, and the Euro zone as a whole had already been warned earlier by the EU commission that without fiscal consolidation, debt to GDP ratios would in a few years hit 100%.

So when the EU/EZ/IMF rescue for Greece was announced traders viewed it as akin to re-organizing the deck chairs on the Titanic while it was sinking. The Euro came under intense selling pressure and stocks collapsed, so the EU/EZ/IMF launched an even bigger rescue fund amounting to US$1.0T. Initial market reactions were positive and the Euro rallied, especially against the Dollar, but the sense of release soon turned once more to anxiety.

As part of the rescue plan, the ECB began buying Eurozone sovereign bonds, as did the Bank of France and Bundesbank. But traders became uncomfortable with this as they judged it was quantum easing without the official announcement.

While quantum easing is a perfectly legitimate response to deflation, in the Euro zone there is no deflation, although CPI inflation is well under target at about1%. The fear then was that the authorities were printing money simply to buy their own debt which could risk a future inflation and the Euro soon weakened.

Switch focus to the US.

The US economy is enjoying what increasingly looks like a V shaped recovery. The two ISM surveys report solid growth. The Pending home sales report recently came in much better than expected and inflation is benign. Add to this last week’s non-farm payroll report which showed the economy created 290,000 new jobs last month and was made to look even better by upward revisions to previous month’s data and the Dollar looks a buy.

And although US Public finances are not exactly a pretty picture, the pace of economic recovery has removed this as a concern for the time being.

So why has the Euro zone suffered so much from anxiety about public finances when other major economies face similar problems?

In a nutshell, the Euro zone is a monetary union without either fiscal or political union. This makes it difficult to correct imbalances as the various sovereign states that make up the Euro zone retain full control over their individual fiscal policy. So while the ECB can set interest rates for the Bloc to control inflation, the member states can loosen fiscal policy to offset this.

Many smaller Euro zone states have clearly been living beyond their means and the markets have called time. While there is now an effort within the Euro zone to try and clear up the fiscal mess, markets will want to see hard evidence that things are improving, until they get it the Euro looks very weak.

The Technical Trader’s view:

Dollar Euro Spot Monthly Bar chart

The market looks to have broken down through the neckline at 1.2723.

If the breakdown is confirmed (Fridays’ close) the impetus for further falls will have been set in motion.

How far? The minimum target about 0.9

To be sure of that move traders will want to be a confirmed break beneath 1.2333

Dollar Euro Spot Daily Bar chart

The rally on the announcement of the Eurozone package could not be sustained.

Watch the close approach to the succession of Prior Lows.

Once through 1.2333 the market will accelerate for the bears.

Stops to be placed at 1.2880

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

USD/JPY Bulls Remain Well-Positioned

The FX Trader’s view - The recovery scenario in USD/JPY recently took a knock, but bulls seem to have quickly regained their poise, and can still target higher levels, particularly on a break through the 95.00 resistance area.

• WEEKLY CHART: We still view the break of the bear channel top as a bull signal, but a better push through the 23.6% area would be a useful confirmation here.
• DAILY CHART: After finding resistance from the 61.8% recovery level the recent sharp shake-out last week found clear support from the key 88.00 area. Following the impressive rebound the bullish outlook must remain in place for now - but at this stage a close above the 95.10 61.8% retracement would provide a useful boost (this would clear the 23.6% level on the Weekly chart). S/term attention would then turn to the 76.4% level and slightly higher (and revised) Fibo projection at 98.30.

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Crude Oil Key Reversal Week Makes Bulls See Red

The Commodity Specialist view - This year’s bull run, from an early Feb low, formerly held the promise of a more sustained move. But a recent negative Key Reversal Week is ignored at ones peril – these can be very good signals – and certain support points must now be closely monitored.

• BRENT CRUDE WEEKLY CHART - CONTINUATION: The Key Reversal Week was seen just ahead of the long term 50% recovery level. In common with other oil markets (Gasoil, NYMEX Light Crude, Heating Oil) initial support has come from the 23.6% retracement on the continuation chart, with break below to be the next bear sign. Note how the lower 38.2% pullback level lies near to the Feb low – the starting point for a final move sometimes ends up coinciding with the 38.2% level…
• BRENT CRUDE DAILY CHART – JUL-10: Initial support for the sell-off came from this year’s 61.8% pullback level, although more key is currently the 75.35 76.4% area, where a bull channel base projection also passes through – a break of this would be a negative momentum signal. This would come on top of a break of the 77.00 23.6% area on the Weekly chart, reinforcing a growing negative picture. Because of the key reversal week there is a better chance that s/term rallies will prove temporary, offering opportunities for sellers.

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Gilts, the elections and the Eurozone

Today the UK votes in the closest fought General election campaign in living memory. With a hung Parliament still looking the most likely outcome, at least according to the opinion polls, we look at how the Gilt might react once the results are known.

The Macro Trader’s view:

Today the UK votes in the closest fought General election campaign in living memory. With a hung Parliament still looking the most likely outcome, at least according to the opinion polls, we look at how the Gilt might react once the results are known.

We judge there are three possible scenarios:

1. The Conservative party wins an overall majority.

2. The Conservative party is the largest party, but needs the support of the Ulster Unionist to achieve a working majority, and

3. The Conservatives or Labour emerge as the largest party, but need the support of the Liberal democrats to secure a working majority.

Under Scenario 1 we judge the Conservative party would indeed cut the deficit more aggressively than current Government plans. Their main focus would be public spending cuts. This would have two economic affects; the recovery could initially weaken before speeding up later, and the Bank of England would leave interest rates on hold throughout the year as they would expect inflation to correct lower. This scenario would be the most bullish for the Gilt. Since it would only be adding to the existing bullish impact of the Gilt’s safe haven status resulting from the Greek debt crisis.

Under Scenario 2, we still judge the Conservative party would seek to cut the deficit faster than under current government plans and the implications for the Gilt and interest rates are eventually the same, but there could be a short-term loss of confidence if negotiations to either form an official coalition or a looser agreement take time to conclude.

Under 3, we judge the outlook for the Gilt to be negative. The price for securing a coalition agreement would be policy set at the lowest common denominator, which is effectively the current government’s deficit reduction projection.

The markets are unimpressed with these plans, so too are the rating agencies and so too is the EU Commission. With the budget deficit to GDP around 12-13% and debt to GDP projected to rise to between 70 – 80%, the UK would probably lose its AAA credit rating. The increased interest rate burden would make the deficit worse, the Gilt and Pound would come under pressure and the Bank of England would judge that interest rates needed to rise sooner than they had previously assumed.

In short, UK public finances are in a mess. The markets and credit rating agencies are holding fire to see who wins the election; hoping for a Conservative victory. If it doesn’t come, note well what has been going on inside the Euro zone. The Gilt has benefited over the last few weeks because the UK is outside of the Euro zone, but unrevised deficit reduction plans would cause a major rethink.

Until the election result is known and the shape of policy to come is revealed, possibly several days yet, we think this market could be very volatile.

The Technical Trader’s view:

WEEKLY CHART

The market is on the brink of completing a bull rising wedge.

The precise breakout level is about 117.42.

The close of Friday evening will be critical.

If the market breaks up, the next reference point will be the Prior High from March 2009 around 125.

DAILY CHART

The June 10 chart is interesting: the rally through the Prior High 115.68 ( also a Fibonacci) was impressively fast, taking out both the falling diagonal from the Prior Highs and the top of the Bull Channel.

Note too, the push and close up through the Fibonacci at 117.18.

Volumes are high and stable.

The bull trend for the moment well-established.

First substantial support on any pull-back lies down at 115.68.

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

Copper Again Struggles at 76.4% Resistance

The Commodity Specialist view - In early 2010 the recovery in Copper (COMEX) was halted by a long term 76.4% retracement level, although the ensuing pullback proved short-lived. More recently this resistance has been tested again, and again the reaction has been negative.

• WEEKLY CHART - CONTINUATION: Resistance around the 76.4% level remains strong, recently prompting another pullback. At this stage note the 3.0675 23.6% pullback level as possible support – a clear break below would imply any subsequent bounce was more likely to be temporary, ahead of further bear activity. Also note the negative RSI divergence which implies medium term bull fatigue.
• DAILY CHART – JUL-10: In the Commodity Specialist Guide we had noted potential s/term support from a shorter term 76.4% level (near to 23.6% on the Weekly chart) – here we also point out a bull channel base projection at 3.0000 currently. Some support is likely around here. A later break below would imply further loss of positive momentum, with medium term bears winning favour. Confirmation would come from a break of the Feb 2.85525 low.

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