Oil looks vulnerable

For the oil market to test the highs, we judge fresh evidence that the global economy is expanding faster than is currently the case is required, and we don't think it will be forthcoming. So our attention has turned to downside trading opportunities in oil.

The Technical Trader’s view:

MONTHLY CONT. CHART

The market is caught between the 50% Fibonacci retracement resistance at $90.28 of the pull back to the $40 level in 2008.

And the support from the 38.2% Fibonacci retracement support at $66.71….

BUT note the monthly Key Reversal of last month.

DAILY SEP 10 CHART

This suggests the monthly bear possibilities may be close to fruition.

Note the rally from the lows at the end of May failed at the Prior Low resistance $80.36.

Note too, that the prior Lows 77.56/86 offered no support to the bulls yesterday.

And looking wider, see that a bear Rising Wedge is close to the point of completion.

Watch the lower diagonal tomorrow at $73.83 or so which is coincident with the Fibonacci support, adding to its importance if broken

There has been no reaction to that so far, but we think it may yet….

Smashing down through the $66.71 support

DAILY SEP 10 CHART

This suggests the monthly bear possibilities may be close to fruition.

Note the rally from the lows at the end of May failed at the Prior Low resistance $80.36.

Note too, that the prior Lows 77.56/86 offered no support to the bulls yesterday.

And looking wider, see that a bear Rising Wedge is close to the point of completion.

Watch the lower diagonal tomorrow at $73.83 or so which is coincident with the Fibonacci support, adding to its importance if broken

The Macro Trader’s view:

We have remained sidelined in Oil for quite some time now as we judged the market lacked long-term direction. Although a recovery began after the steep sell-off in May, we decided the subsequent rally was probably a correction rather than a resumption of the previous bull trend.

The May 2010 sell off was driven primarily by a spike in risk aversion caused by what became the Euro zone Sovereign debt crisis. As traders began to fear a sovereign default all risky assets were dumped in favour of safe haven trades such as government bonds, the Dollar and Yen.

They reasoned that if a government of a developed economy defaulted the repercussions would be far and wide with growth a likely casualty. But even when the Euro zone finally launched its safety fund worth US$1.0T traders were not re-assured. Only when the budget austerity measures were adopted by virtually all Euro zone economies, including Germany and more recently France, did markets breathe a sigh of relief. The resultant rally in equity markets marked a drop in risk aversion and traders began to buy back into oil too.

But a collateral risk of the rush to fiscal consolidation is a growth pause or worse, a dip back into recession. Equity markets have begun to take this risk seriously and are once again looking vulnerable. The Oil market too is struggling for direction.

The oil price already looked extended to us before the sell off when confidence in the recovery was reasonably high. We thought the recovery was initially unlikely to be as robust as in previous recovery cycles and the overhang of oil supply that had built up during the economic downturn would take time to work off, meaning supply was likely to outstrip demand.

But now with traders worrying about the outlook for the Euro zone economic recovery, where will the extra demand needed to push the oil price higher come from?

Moreover, a big question mark has once again arisen over the US economic recovery. Traders were already nervous after recently weak non-farm payroll and retail sales. But housing market data released over the last two weeks has solidified those worries.

This week has seen the release of much weaker than expected Existing and New home Sales. It is now perfectly clear that the housing market was only being propped up by tax breaks which have now expired. If the strength of the US economic recovery is now in doubt, what then of the oil price?

For the oil market to test the highs, we judge fresh new evidence is required, showing the global economy is expanding faster than is currently the case, and we don’t think it will be forthcoming, at least in the short/medium term, so our attention has turned to downside trading opportunities in oil.

Mark Sturdy

John Lewis

Seven Days Ahead

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Wheat Tries To Find Support Once More

Wheat Tries To Find Support Once More - Wheat is again trying to find support, with the 2009 low having held the latest slide. We are currently waiting to see if certain bull triggers can be activated.

• WHEAT MONTHLY CHART - CONTINUATION: After the collapse in prices in 2008 the downmove slowed after testing the 76.4% retracement of the whole 1999-2008 upmove, also finding support from the lower 434 2002 high. Currently the 2009 low is holding, but initial bull signals are not yet in place.
• WHEAT DAILY CHART – SEP-10: With support on the long term chart in mind (tested and held so far) on the front month chart the first hurdle that bulls need to break through is the 23.6% recovery level around 490.00. Following this the bear channel top projection, at 507.00 currently, must be overcome. The momentum then starts shifting in favour of the bulls, and subsequent pullbacks would more likely become temporary ahead of further upside activity. Meanwhile, in the Commodity Specialist Guide we hold a sidelined stance.

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Will USD/CAD Bounce Off 76.4% Support Continue?

The FX Specialist view - An initial recovery off long term 76.4% support in USD/CAD has been followed by a deep setback, which has just found support from a shorter term 76.4% level. Bulls waiting in the wings now need this to continue, breaching certain resistance points.

• WEEKLY CHART: Earlier this year good support emerged from the long term 1.0000 76.4% retracement, which coincided with the centre of congestion from 2008. First resistance comes from around the 23.6% bounce level – so far the market has failed to sustain above this.
• DAILY CHART: The earlier recovery failed to hold above the 23.6% level, postponing a bull trigger and subsequent move towards the higher 1.1125 38.2% area. The subsequent slip back has now tested the 76.4% level, prompting a smart rebound. However, sidelined bulls need to see continuation higher, with better close above that 23.6% level and break of the 25-May 1.0851 high. A drop back through 76.4% and the 1.0105 13-May low would not be a good sign now.

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Is the S&P right to buy?

Our technical analysis says yes, but our macro reasoning suggests otherwise...

The Technical Trader's view:

WEEKLY JUN 10 CHART

The context of the present situation in the market is clearly illustrated here: the Head and Shoulders Reversal formed at the end of 2008 and the beginning of 2009 drove the market up as far as the measured minimum target of 1219.

That level coincided with the resistance from the low in 2008 at 1235.50.

Both these factors topped the market out and sent it down to the 23.6% retracement support. There it has dithered.

Now look closer

DAILY SEP 10 CHART

The pull-back in detail reveals the creation and completion of a clear Double Bottom.

Note too, the coincidence of the completion level with the Fibonacci cluster just above.

The break up though the two together is important and establishes powerful support beneath the market.

The minimum move for the market is easily measurable – up as far as 1165 or so.

But note well the fib cluster at 1143 which may make the market pause.

The market is well set and ripe for buyers

The Macro Trader’s view:

The S&P500 along with other global equity markets has suffered a deep correction over recent months which erased all the gains made from the beginning of February this year.

The sell-off was driven by the spread of the Sovereign debt crisis, which began as a local Greek problem, but expanded to engulf the entire Euro zone, with traders fearing the global economy could be at risk through contagion.

For now, those fears have eased. The EU/Euro zone authorities have taken several major steps to ward off default:

- Their first act was to launch a US$1.0T rescue fund,

- next they announced deep cuts to their budget deficits, and

- The latest action is an attempt by the French and Germans to put in place an EU-wide economic government.

In the US equity traders had their own reasons for withdrawing from risky assets. The US authorities had pledged to reform the financial sector so that a financial crisis like the one that has recently swept through the global economy, could never happen again.

Some of the reforms caused major concerns on Wall Street and also fuelled the weakness of the S&P500. But over recent days, the market has shown signs of recovery, but how durable is it?

We are long-term bulls of equities. We judge the major economies including the US economy are in recovery, but because the UK and Euro zone have begun a period of fiscal retrenchment, the global recovery could lose some of its dynamism over the short/medium term as those countries’ economies adjust to the new fiscal reality.

In the US, the administration remains convinced that the best way to fight economic weakness is to keep spending and borrowing with the US debt to GDP ratio heading for 100% in the next few years on current plans.

So while Europe tries to get its fiscal house in order, the US is acting as something of a counter weight. But recent US data has been disappointing. Indeed the most recent non-farm payroll report was clearly weak. Retail sales reported last week, were also surprisingly weak. This week has seen some very disappointing Housing starts and Building permits data resulting from the expiry of a tax credit designed to help home buyers.

So is this a good time to buy into the S&P500 or should we wait?

If we are right and the steep sell off was indeed only a vicious correction, then this and other equity markets should recover fully. But the circumstances that brought about the sell-off in the first place are still in play. Despite everything the EU/Euro zone has done in recent weeks to re-assure markets about the health of sovereign risk, Spain is reported to have sought help from the IMF, since denied, but it is clear that traders remain nervous about the fiscal health of several Euro zone economies.

We judge fiscal retrenchment is all very well, but it needs to go hand in glove with growth promoting policies. The US recognizes the need for growth, but the President doesn’t yet accept he needs to reduce spending. And the EU seems unable to grasp the need to generate growth in the Euro zone periphery. Germany has announced big deficit cuts, thereby passing on an opportunity to act as a powerful locomotive for the Euro zone economy.

All of these events lead us to remain cautious about stocks. We do not want to sell, that isn’t our view, but we are not yet ready to buy either, so we remain square but looking for signals to encourage us to believe the sell-off is indeed over.

Mark Sturdy

John Lewis

Seven Days Ahead

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Sugar Bulls Stir After Test of Long Term 76.4% Support

The Commodity Specialist view - A few weeks ago we looked at Sugar’s test of a long term 76.4% pullback level. So far it has held nicely, and initial bull signs have started to appear…

• SUGAR #11 (ICE) WEEKLY CHART - CONTINUATION: So far, good support has been seen from around the long term 76.4% pullback level, after earlier failure of the old 2008 high. The Daily chart has given an initial positive signal too.
• SUGAR #11 (ICE) DAILY CHART – OCT-10: Note how the 13.67 new front month low coincides nicely with the long term 76.4% level above. Following earlier s/term resistance from around the 23.6% recovery level there has now been an initial, albeit modest, close above this. At this stage early bulls will not want to see the 14.32 02-Jun low breached. Upon a continuation higher, while keeping in mind 17.15 38.2% level, the next key resistance points would be the 18.10 15-Apr high (last breakdown point) and18.79 Nov-09 low (base of old range).

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EUR/JPY Tests Mettle of Long Term 76.4% Support

The FX Trader’s view - The EUR/JPY cross has remained weak, but the trend looks to have slowed on the approach to a long term 76.4% retracement level. There are initial, though inconclusive, signs of bear fatigue and we now await further, more conclusive signals.

• MONTHLY CHART: The drop back from resistance near to old highs In 2003/2004 has finally tested the long term 76.4% pullback level close to 108.00. We currently await reaction here – 76.4% can sometimes be very effective.
• DAILY CHART: This chart shows the approach to that long term 76.4% level, with the structure hinting at bear fatigue, not surprisingly accompanied by a positive RSI divergence. The next, more conclusive, bullish signals would come from a push above a s/term 23.6% bounce level at 112.75 (taking 127.91 02-Apr high as the start of the last downleg segment) and then a breach of the 114.16 03-Jun high. Focus would then turn to higher resistance around the 119.63 Feb low.

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Copper Bounce Now Likely

The Commodity Specialist view - We had recently been looking at potential resistance in Copper, from a long term 76.4% level. This was forthcoming and the subsequent slip back has now reached interesting technical support, from which a temporary rebound looks probable.

• WEEKLY CHART - CONTINUATION: The 76.4% level came under pressure, but successfully repelled the bull advance. At the time, a negative RSI divergence suggested bull fatigue. The pullback has now reached the 2.7200 38.2% retracement, a logical place to seek a bounce. However, this is assumed to be temporary.
• DAILY CHART – JUL-10: On this chart the bear case has been strengthened by the breach of the bull channel base projection. The Feb 2.8525 low has now been eroded, but a positive RSI divergence supports expectations of a rebound off the 38.2% area on the Weekly chart. Sometimes these initial corrective rebounds can be quite deep but, initially, note potential resistance around the 3.2675 10-May high.

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Is Gold still a buy, and if so, where?

In the last six months or so, gold has made three new all-time highs and after each one there has been an immediate correction phase. Yet we judge that traders remain negative of the Euro, to the Dollar's benefit, but they are now casting a more critical eye at the US fiscal landscape and Bernanke alluded to this only this week. The result will be a weak Treasury market but stronger gold

The Technical Trader’s view:

MONTHLY CHART

The market is still in the grip of a powerful bull Head and Shoulders continuation pattern.

The pattern has a minimum target of 1350.

The solidity of the Neckline is clear from the way the market bounced off it, completing a bull falling wedge.

But note the reluctance of the market to get above and stay above the Prior High Pivot at 1227.50.

How bad a failure is that?

DAILY CHART

This is rather bad failure - at least in the short term.

It looks like the market has failed twice to sustain a close above 1230.

A return to the rising diagonal from March looks highly likely.

And if that broke, certainly a test of the good support at 1169 would happen fast.

Only if that broke, forming a Double Top, would the bears get really excited.

We don’t think it will.

But as bulls we want to see the present short-term bear momentum clearly exhausted before we buy.

And that may take some days.

The Macro Trader’s view:

A look at the Gold chart (I do look at charts sometimes!) tells the story of a long-term bull market, but it also illustrates the Bulls’ dilemma: where to buy into the current leg of the long Bull run, if not already involved.

In the last six months or so, gold has made three new all time highs and after each one there has been an immediate correction phase. The correction that took place between the December 2009 and May 2010 highs was very frustrating for the bulls since it included several false dawns, and the same is true of the price action between the May and June highs too, but on a smaller scale.

But why does the market trade like this? Why does it seem almost impossible for the gold market to hold new highs and move on in a more typical bull fashion?

Though there are many forces at work here one could be forgiven for taking the most simplistic view that the move is simply showing signs of buyers’ exhaustion. But that would be to miss the complexities of the global economy and governmental interference.

The rally in gold has been fuelled at various times by many concerns, some of which are:

- The earlier weakness of the Dollar,

- As a hedge against inflationary fears,

- As a traditional store of wealth amid the original financial crisis, and

- More recently, the fear that the Euro zone sovereign debt crisis would spread to other advanced highly indebted economies.

But what of the periods of sideways price action already mentioned? These seem to coincide with the recent strength of the Dollar and the growing belief in the US economic recovery. In short, gold has been a complex market to trade.

Our view of it has been rather simplistic: we view gold as the hedge of last resort in a global economic environment that has seen the almost collapse of the financial system, saved only by an unprecedented peace time ballooning of national budget deficits.

Initially, traders viewed the massive fiscal intervention as an act of salvation. Now they are punishing countries with high debt levels unless they cut spending fast. Sentiment has dramatically shifted towards fiscal retrenchment.

This can be seen most clearly in the US Treasury market. Until recently, the Dollar and Treasuries were the preferred safe-haven trade. As the Greek debt crisis became the Euro zone debt crisis, Gold has rallied even as the Dollar has extended its own rally against the Euro but the US Treasury market has not joined in.

We judge that traders remain negative of the Euro, to the Dollar’s benefit, but they are now casting a more critical eye at the US fiscal landscape and Bernanke alluded to this only this week. The result has been a weak Treasury market but stronger gold.

Can this continue? We think yes. And this is why: the Euro is unlikely to stage a convincing recovery against the Dollar, until the Euro zone authorities either:

- come up with a plan to foster private sector growth in the weaker peripheral economies that have relied heavily on public spending, or

- adopt a system of automatic fiscal transfers from the richer countries to the weaker periphery, as occurs in any state sharing a single currency.

But as the focus of attention moves inexorably to Obama’s profligate spending, the US Treasury market looks set to lag its European peers and re-fuel the rally in gold as traders start to fear the long term debasement of the US currency.

So where should one look to buy gold?

How deep are a trader’s pockets? The market is bullish but due to the complexities outlined above, likely to remain prone to frequent corrections.

Mark Sturdy

John Lewis

Seven Days Ahead

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The Euro bears should relax - its coming their way!

We judge the Euro is at risk of further serious weakness. The symptoms of this crisis, the build of government debt through running too large budget deficits over time as a matter of economic policy, are being addressed But is the cause of the crisis being addressed?

The Macro Trader’s view:

The Dollar has benefited greatly from the Sovereign debt crisis in the Euro zone, as traders sold the Euro amid fears the single currency might actually break up. Initially, traders were concerned the debt mountain built up by mainly by Greece, but also Spain and Portugal posed a serious risk, and the authorities acted to address that.

The crisis continued as traders began to fear the entire Euro zone was at risk by means of contagion. Again the authorities acted. And a period of relative calm has emerged as China denied market rumours last week that she intended moving away from the Euro as a reserve currency. And Germany extended its initial limited ban on naked short selling, to include all German stocks and Euro zone denominated government Bonds.

But is this enough to restore confidence in the Euro?

Looking at US equities one might think yes, but the US economy is performing very well and current data releases are showing the Euro zone crisis has had no discernable impact on the US economy.

So what lies ahead for the Euro? Will it slowly start to recover, or will it weaken further?

We judge the Euro is at risk of further serious weakness. As mentioned, the symptoms of this crisis, the build of government debt through running too large budget deficits over time as a matter of economic policy are being addressed

But is the cause being addressed? The Euro zone and especially the likes of Greece, need to devise a recovery strategy that fosters economic growth through private enterprise, and not through public spending. Allowing employees in Greece to retire at 51 is a policy that is un-sustainable and too costly.

Can the Euro zone rise to the challenge? Well if it wants to ensure its long-term survival it must.

The Euro zone needs to evolve and develop a political and fiscal dimension. The US and UK are single currency areas with rich and poor regions. But because they have a unified political and fiscal policy making regime, the rich areas support the poorer areas through fiscal transfers.

One could argue that the recently-created support fund will do just that, but it will not. It was only created to prevent a Euro zone state from defaulting on its sovereign debts. A system needs to be devised so that transfers take place as a matter of course before fears of default even come close to appearing on the radar.

So can the Euro recover or will it sell off further? We believe that it will weaken further, due to the deficiencies highlighted above and because the US economy is entering a stronger recovery phase. Only today a Fed official was talking about the need for policy to be tightened before too long.

So the Dollar benefits from strong domestic growth and the Euro is weakened by domestic policy disarray.

The Technical Trader’s view:

DAILY CHART

Much of the bears’ anxiety has arisen from the market’s reluctance to sell off through and stay below the 1.2333 low…

and the lack of penetration through the 1.2133 Fib support - they have noticed that the market has bounced from it three times and worry about short-covering.

WEEKLY CHART

But the scope for short-covering looks modest:

The market has pushed on down through the Prior Pivotal lows, and close twice beneath them.

That band 1.233 –1.2461 should now be good resistance.

This adds to the bear impetus.

MONTHLY CHART

And anyway, in the longer-term charts, the Euro remains under tremendous pressure.

The Head and Shoulders Top has been completed, the minimum measured move is clear – as far as 0.90.

Which is more or less the lows of the market in 2001.

We remain modestly short and would go shorter on any bounce

Mark Sturdy

John Lewis

Seven Days Ahead

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GBP/CHF Starting to Recover Again

The FX Trader’s view - In 2009 the GBP/CHF cross rate began a recovery following a major low point at the end of the previous year. After a deep pullback some positive signs are re-emerging now.

• WEEKLY CHART: The pullback from the 2009 1.8112 initial recovery high eventually found good support – exactly at the 76.4% retracement level. The chart structure and certain signs on the Daily chart below suggest that the 1.8112 high can be challenged in due course, with a continuation through likely to find next resistance around the 38.2% recovery level.
• DAILY CHART: The bounce off 76.4% found initial resistance from the bear channel top, but has now seen initial violation of this. Once through old Nov/Jan 1.7112 highs resistance the next focus would be on the 1.7570 76.4% recovery level of prior Jun-09/Mar downmove, where recovery could temporarily falter. At this stage s/term dips should hold above the 1.6088 05-May low in order to avoid a collapse in momentum.

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CRB Index Slide Nearing Support Area

The Commodity Specialist view - Early 2010 negative signals in the CRB Index called for a bearish stance, with the Feb/Apr recovery attempt viewed as temporary. A subsequent resumption of the bear move has now seen the Index approaching an interesting technical support area where support, and a rebound, is likely.

• MONTHLY CHART: The Index failed to overcome resistance from around the 284.61 Jan-07 low – this was marked by a negative Key Reversal Month in Jan, heralding a corrective phase. The current assumption is that rallies will continue to be short-lived for now.
• DAILY CHART: The Index earlier tried and failed to overcome resistance at 280.00. Violation of the 38.2% support level and 256.89 Feb low strengthened the bear case, but the downward run could soon be interrupted by support in the 244.00/239.00 area. This includes an equality target (293.75/256.89 downleg extended off the Apr 280.83 high), bear channel base projection, and a lower Fibo projection. S/term support is likely around here, although rally attempts should not be long-lasting. Beyond the 256.89 Feb low note resistance offered by the 266.64 26-Mar low

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