NZD/USD Pullback From 76.4% Resistance Underway

The FX Specialist view - A Jun/Jul recovery in NZD/USD seemed to lessen the threat from medium term bears, but recently resistance from the 76.4% retracement level effectively repelled the gains, and the first sign of momentum loss has now appeared.

• WEEKLY CHART: Earlier in 2010 clear support was seen from the 38.2% pullback level, with the subsequent bounce impressive. However, note that, on this chart, at least temporary resistance has been found near to a former 76.4% chart level. Now look at the Daily chart...
• DAILY CHART: On this chart note that resistance has come from a 76.4% recovery level. Momentum loss has now been signalled by the recent breach of the s/term bull channel base. Temporary support is emerging from a falling resistance/return line (and the current chart structure could be suggesting a rebound attempt is not far off) – ideally any s/term bounce will find resistance from around the 0.7186 30-Jul low. A later break of the return line would be further negative, with lower 0.6800 former lows area then becoming the key support.

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Oil pressures are rising

We wrote in early August (Update 6th August) of the pressures on oil - when the market was testing the resistance at the bottom of the Bear Rising Wedge in the weekly chart. Even then we anticipated the Flag noting the 'the coincident resistance of the parallel diagonals' that added to important resistance at that level. Sure enough it was. Now, sixteen trading days later, the market is much lower. Yet it looks set to fall still lower.

The Technical Trader's view:

WEEKLY CHART

The oil market looks set to go lower having completed a series of bear patterns on a large scale.

First a bear rising wedge

Second a parallel flag…

Both have completed in the weekly chart.

Flags typically occur halfway in the move…which suggests a move to the low $50s.

DAILY CHART

The detail of the parallel flag is here – cautious bears will want to wait for a break down through the two Prior Lows at $70.35 and $72.15.

More aggressive traders will watch the short-covering rally and look to sell higher, beneath the resistance that will surely be found at the lower diagonal of the Flag – currently at $74.52 or so.

Mark Sturdy

Seven Days Ahead

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Patient Crude Oil Bears Still Seek Their Reward

The Commodity Specialist view - Following the decisive May downmove a consolidation pattern has been unfolding, with expectations of an eventual further bear leg maintained throughout. Is the market now ready to oblige?

• BRENT CRUDE - WEEKLY CONTINUATION CHART: The May fall was marked by a Key Reversal Week and Month (latter not shown here). Good support came from around the 38.2% pullback level, but in the Climate & Energy and Commodity Specialist Guides we have maintained our expectations of a further bear leg.
• BRENT CRUDE – DAILY CHART OCT-10: The summer consolidation looks to have completed a simple/standard up-down-up shape. The break of a small channel base projection is an initial negative sign now – a further one would a close below the 71.50 06-Jul low. We can then target the 61.00 area, where an equality target resides (May downleg extended off 83.09 04-Aug high). A bear channel base projection also currently runs through here. The whole picture would change markedly should price recover through that 83.09 high.
• US LIGHT CRUDE – DAILY CHART OCT-10: On the US Crude chart the 06-Jul low, 72.15, has already been breached. Eyes are now swivelling towards the equality target, again at 61.00, and bear channel base projection.

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Slip Back in EUR/JPY Currently Assumed Temporary

The FX Specialist view - After EUR/JPY found interesting support from a long term 76.4% level earlier in 2010, initial bull signs appeared. The current s/term slip back might unnerve the early bulls but it is worth them keeping the faith for now.

• WEEKLY CHART: After long term 76.4% support was found (not shown on this Weekly chart) there has been an initial recovery to the 23.6% level. Beyond here, note how higher 38.2% nicely coincides with the 119.63 Feb low.
• DAILY CHART: After adopting an initial bull stance in the Commodity Specialist Guide the market has slipped back – to s/term 76.4% support just above 109.00. Perhaps this level can work again. It offers a limited risk opportunity to aggressive buyers (stops below the 107.30 Jun low), but bulls now need to see recovery. First key resistance now comes from the 114.83/115.17 dual Fibo retracement area. A break through this would bolster the bull argument and turn focus on the 119.63 Feb low, just below which is 38.2% from the Weekly chart and just above a 61.8% level on this chart. This still has the potential for an interesting recovery situation.

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Wheat Cut Back after Recent High Yield for Bulls

The Commodity Specialist view - Price action in Wheat was relatively subdued earlier this year, main interest being long term chart support that had continued to hold. Initial bull signals in July were quickly followed by an impressive surge higher, but a temporary retracement is now in process.

• MONTHLY CONTINUATION CHART: The collapse in Wheat prices put pressure on the 76.4% retracement of the whole1999-2008 upmove. But good support from the lower 434 2002 high has held nicely.
• WEEKLY CONTINUATION CHART: This chart has, phoenix-like, come to life, violating certain obvious resistances - in particular the 38.2% area and former 730/740 lows. Here, the former Nov-09 583.50 high offers next interesting support for the current setback. In the event of another surge our focus would be on prior 952.75/961.75 highs and the 987.00 61.8% recovery level. The interest is as much in this longer term chart as it is in the Daily chart now.
• DAILY CHART – DEC-10: The pullback following a dramatic surge higher found initial support from the 38.2% retracement area. Lower supports of interest now are the 660.00 Nov-09 high area, and 566.00 76.4% retracement level. Note that this latter lies near to the Nov-09 high on the Weekly chart and good support is likely here, if not before. Weakness is currently assumed to be temporary.

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Has the short term move in Euro Yen clarified the long term outlook?

The Yen looks to be a strong currency in a world where old certainties are being questioned. Economic power is inexorably ebbing east. We expect to see the Yen rally further against the Euro, as traders and investors increasingly turn to the only true hard currency left in the world. Add in the fact that the Yen also has the attraction of being something of a proxy trade for China, and the rising sun of Japan seems to be in the ascendency.

The Technical Trader’s view:

WEEKLY CHART

This is an old favourite.

The weekly chart shows the market struggling to trade back up through the band of resistance from the Prior Lows 112.10-113.63.

It looks to have had a good attempt and failed.

Look closer.

DAILY CHART

Yesterday’s sell-off was the last of four failures to get up through and stay above 113.64.

The succession of highs naturally favours the bear tack, but there is no sure short-term sense of a completed breakdown until the lows have been taken out.

Principally that means 107.35.

Yet another look at the long-term chart will have already convinced those with deep pockets and keen buyers of the Yen

The Macro Trader’s view:

For most of May and June the Yen was a strong buy against the Euro, as traders sought safe havens to protect against the Euro zone Sovereign debt crisis. At that time, the Yen and Dollar were considered safe trades, especially the Yen, even though Japan runs a very high debt to GDP ratio and continues to struggle with deflation. But unlike the Dollar, Japan runs a healthy trade surplus, has foreign exchange reserves in excess of US$1.0T and most of her government bonds are owned domestically.

At the end of June the Euro staged a recovery, as a rescue fund was put in place by the EU/EZ/IMF and confidence began to return to the Euro zone economy, with Germany registering some very strong economic data.

But how much of that strength was a product of the Euro’s prior period of weakness, which against the Dollar has largely retraced? Moreover, now the US economy is once again in trouble, will the Euro zone economy be able to maintain the momentum it seems to have begun building, or will US economic weakness act as a drag on the Euro zone.

These are obviously questions that are now running through traders’ minds. But what then of the Yen? Why has it suddenly strengthened so rapidly against the other major currencies? Well, against the Dollar there was no noticeable weakness, the retracement was only against the Euro. Indeed against the Dollar the Yen has made a string of multi-year highs.

But this week, as the Fed revised lower its growth forecasts for the US economy and pledged to re-invest bond purchase principle as it matures, to avoid an unintended monetary tightening, the Euro is the currency that has weakened and most noticeably against the Yen.

We judge the Yen to be the strongest of the major currencies right now. As said earlier, Japan has a strong trade surplus, its government debt is owned mostly domestically and she has a large foreign currency reserve.

These facts have been noticed by Japan’s giant neighbour China, when an official said only yesterday that Japanese government bonds are a safer investment than US Treasuries.

But there are some other reasons why the Yen is seen as a strong currency and that is due to its proximity to China. Clearly Japan benefits from growing trade ties with China as a producer of machine tools. China might be considered the work shop of the world but she still needs to import the tools to make the machines that produce her exports.

In short, the Yen looks to be a strong currency in a world where old certainties are being questioned. Economic power is inexorably ebbing east. The US, while still the world’s largest economy, faces some very serious challenges and the Euro zone does too. Unlike the US, the Euro zone nations have pledged to cut debt and public spending, but just how durable is the Euro zone recovery?

We expect to see the Yen rally further against the Euro, as traders and investors increasingly turn to the only true hard currency left in the world. Add in the fact that the Yen also has the attraction of being something of a proxy trade for China, and the rising sun of Japan seems to be in the ascendency.

Mark Sturdy

John Lewis

Seven Days Ahead

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EUA Carbon Emissions Attempts Recovery

The Commodity Specialist view - After a fresh bull surge in EUA Carbon Emissions in Mar/Apr the subsequent pullback has so far displayed a typical 3-leg structure, with good support recently found from a 76.4% retracement. Bulls must do more to produce a clearer positive picture though.

• WEEKLY CONTINUATION CHART: The 38.2% recovery level has remained first key resistance here, prompting a setback earlier this year which we presume to be temporary. The 12.25/15 area provides the current floor, which bulls need to hold now.
• DAILY CHART – DEC-10: With a typical 3-wave corrective structure now seen, and following earlier erosion of a falling resistance/return line, clear support has emerged from the 76.4% pullback. First resistance now comes from the 14.65 level, but for a more convincing recovery a further push is required through the bear channel top projection, 15.25 just now. Then, subsequent weakness is more likely to be short-lived In the Commodity Specialist Guide we had suggested that buyers ahead of that 76.4% would have stops below. Partial profits may well be sought around 15.00. The 12.25 Jan low should be safe from attack for the foreseeable future.

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USD/CAD Could Still Be Trying to Base

The FX Specialist view - After an initial recovery attempt in Apr/May, USD/CAD has become consolidative - still with the prospect of forming a base, but still without the necessary bull signals to tilt the scales firmly in the bulls’ favour. Not for the first time interesting support has emerged from a 76.4% level...

• WEEKLY CHART: Earlier in the year the market tested the 76.4% level at 1.0000, also the centre of congestion from 2008, where good support emerged. At this stage we keep an eye on the 23.6% recovery level, which has so far has been effective (no close above yet). Beyond here would turn focus on the 38.2% level and Aug-09 high.
• DAILY CHART: See how the 76.4% pullback level on the Daily chart has proved effective. Ideally this will continue to hold, but sidelined bulls need to see a decent close above the 23.6% level and then break of the 25-May 1.0851 high to feel confident of a continuing medium term recovery.

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The pressures on Oil

The Technical Trader’s view:

MONTHLY CHART

The very long term support around the $40 level provided the bounce from the lows in early 2009.

WEEKLY CHART

That bounce can be seen as a Bear Rising Wedge that completed in May 2010.

But far from the bears taking control, the market has paused beneath the lower diagonal of the wedge.

And while doing so, working itself better.

Look closer.

DAILY CHART

The Sept 10 chart shows the strength of the market in the way it has overcome the resistance from the Fibonacci resistance coincident with the Prior Lows at $80.82.

Note though, the coincident resistance of the parallel diagonals and the lower diagonal of the wedge above the market.

That suggests important resistance at that level.

So, for the moment, the market is caught between the support from the Prior High at $80.82 and the resistance from the co-incident diagonals at $83.

The Macro Trader’s view:

Since the sharp sell-off back in May at the height of the Euro zone sovereign debt crisis, oil has experienced a long slow recovery, which for most of that time looked like no more than a prolonged period of sideways trading.

For most of that period we were square of the market, but anticipated a fresh break down through May’s lows. And although the hysteria around the Euro zone crisis began to subside, fears of a US economic slowdown began to intensify, which led us to maintain an underlying bearish view of the market.

But oil has proved surprisingly resilient. Although the US recovery is still causing concern among policy makers, as data continues to slow led by weak housing and Labour markets, the Euro zone economy has began to strengthen, led by a resurgent German economy. While some of this new strength may be due to the earlier sharp sell-off experienced by the Euro, which it has since substantially retraced, something more durable seems underway in the German economy.

Add in the continued vigour of the Chinese and Indian economies and an argument for solid support underpinning this market can be found. But what has driven the market back through the $80 level? And why are even further gains now looking possible?

Clearly, strong demand for energy resulting from a strong recovery would be an important driver in a bull market, but with the US economy struggling for traction, that cannot currently be the reason. Look instead at the weak Dollar.

At times of Dollar weakness, oil has historically rallied. This might sound paradoxical since a weak Dollar is ultimately a reflection of a weak US economy, but nonetheless, periods of extreme or extended Dollar weakness have helped oil rally because oil is priced in Dollars, and the value of revenue flowing to producers is effectively cut as the Dollar weakens. And as the period of Dollar weakness extends, producers begin to production cuts to force the price higher, and traders anticipate this by buying in the futures market.

Of course Dollar revenues from the US are unaffected, but from the rest of the global economy they are and since Oil producers are consumers with most of what they buy being imported, especially luxury goods like Mercedes Benz cars etc, a weak Dollar is like a pay cut.

So we believe Oil can rally further from here.

The engine for that rally will be either a return to stronger growth in the US or failing that, further Dollar weakness. Currently, the later looks most likely as data from the US continues to disappoint.

You might then conclude that oil looks a bull market no matter what happens, so why did it sell off during the financial crisis? Clearly a global recession, like the one recently experienced is a big negative for oil, regardless of the Dollar’s direction as energy demand slumps, but with two thirds of the global economy expanding smartly and the other third, the US bit, expanding slowly, Oil is a market that can be squeezed higher, as geopolitical concerns also have a significant role in this market.

Mark Sturdy

John Lewis

Seven Days Ahead

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Uk Gilts - Set to drive ahead

The Technical Trader’s view:

MONTHLY CHART

The market has bounced from the repeated lows at the 105 level,

and completed a Bull Falling Wedge which looks set to challenge the old highs at 124.95.

WEEKLY CONTINUAITON CHART

That wedge in greater detail.

Note too, the market racheting itself up on Prior Highs…

DAILY CHART

This is very dramatic and exciting.

The break up through the major Pivotal Prior High 120.82 was followed by a pause and pull-back but the short-term supports held and the market has rushed ahead.

Good support immediately beneath the market at 121.51.

Mark Sturdy

Seven Days Ahead

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