Are Bunds recovering?

A change in sentiment could drive the Bund much higher, at as far as the highs of August, as traders are now thinking the rest of 2010 is going to be something of a struggle for German and Euro zone growth. Moreover this might re-awaken sovereign debt fears that seemed to have been put to rest over the summer months, since weaker GDP will make the austerity measures adopted by many Euro zone countries seem even more unpopular.

The Technical Trader’s view:

MONTHLY CONT. CHART

The Bund’s long-term chart is fascinating.

The breakout of a long-term parallel channel was reversed, but there appears to be good support from the top of the parallel channel and the price congestion that formed the continuation Triangle that drove the market further on up.

Look closer.

DAILY CHART

Looking specifically at the December contract we can see the very short-term rationale for the bounce in the monthly chart- a completed bull falling wedge.

Note too, the 50% retracement support

and the proximity of the 2.5% yield support at 130.37.

Wedges are not the most reliable of the signals, and there is still telling resistance above the market, for example, the band of Fibonacci and prior Low resistance at 131.82.

So we are not yet entirely convinced of the short-term bull case. But the seeds of a turn are in place.

The Macro Trader’s view:

The story of the Bund throughout much of September was one of decline as traders first took profits and then went short. The Bund had enjoyed a long rally as traders fretted over the global economy and more specifically the US economic recovery, but sentiment changed early in September. Why was that?

There are several reasons:

1. German economic data had been very strong, suggesting the Euro zone as a whole would be dragged better by the German locomotive,

2. Fed Chairman Bernanke in a speech let it be known that the Fed could do more to help the US economy if the US recovery weakened further, and

3. The US non-farm payroll report released at the beginning of September, was better than expected, turning sentiment even more positive.

The impact on the markets was clear:risk aversion subsided, allowing stocks to rally throughout much of the month, drawing traders away from bonds and back into equities, as safe haven trades lost their allure.

So why now are stocks under pressure and Bonds, including the Bund beginning to rally?

Again there are several reasons, but mainly:

1. Euro zone data has turned weaker over recent weeks, with today today’s Euro zone PMI composite survey coming in weaker than expected, led mainly by weaker data from Germany, and

2. The recent FOMC policy statement which again saw the Fed pledge to ease further if the economic recovery weakened further, weighed on stocks this time.

So crucially the Euro zone economy that was fuelling the Euro zone recovery; Germany has cooled off, and the very promises from Bernanke that earlier in the month helped fuel the rally in stocks, has caused traders to rethink.

Instead of taking the promise of additional easing by the Fed as a positive for the economy, they are instead thinking the economy is in bad shape for the Fed to even consider a new round of QE. The result is clear: risk aversion is again rearing its head and the safe haven status of Bonds is once again being sought.

This change in sentiment could drive the Bund much higher, at as far as the highs of August, as traders are now thinking the rest of 2010 is going to be something of a struggle for German and Euro zone growth.

Moreover this might re-awaken sovereign debt fears that seemed to have been put to rest over the summer months, since weaker GDP will make the austerity measures adopted by many Euro zone countries seem even more unpopular.

Mark Sturdy

John Lewis

Seven Days Ahead

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Short Term EUR/GBP Gains Delay Medium Term Bears

The FX Specialist view - The earlier fall in the EUR/GBP cross came to a temporary halt in June, and the market has been reluctant to resume its medium term bear path. Recent strength is not yet seen as the precursor to any major trend turnaround, but it still delays lower values.

• MONTHLY CHART Prior breaks of support signalled a medium term bear move underway, with a 50% pullback level providing effective support. The current rally is presumed temporary – note resistance here from the old triangle underside, just above 0.8800.
• DAILY CHART: Following earlier support from around a s/term 76.4% level bulls have driven price through a bear channel top projection and, initially, through the 0.8532 Jul high. This implies loss of bear momentum and invites further gains. Nearby resistance comes from a 50% recovery level at 0.8607, and small channel top just above at 0.8630. A break through this would provide a boost for the move. S/term dips should currently prove short-lived. Note first support could emerge around the 0.8400 area.

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Soybean Bulls Break From 2010 Range

The Commodity Specialist view - After early 2010 weakness the price of Soybeans (CBOT) has, with some interruption, been moving from the bottom to top of its range for the year. Latest strength has seen a bullish break through the top of this now, so we can start looking at high targets/resistances.

• WEEKLY CONTINUATION CHART: Note the 76.4% retracement level here, which provided effective support. In fact the late 2008 low was also at a long term 76.4% support (not shown). The top of the recent range, the 1078.50 Dec-09 high (slightly lower on the front month chart), has now been exceeded. Focus next turns to the 1134 61.8% recovery level.
• DAILY CHART NOV-10: After the Aug pullback held above first support around the 987.00 21-Apr high the 1060.25 Dec-09 high has now been breached. With bulls remaining in control we note two overhead projections now, the 2.618 swing off prior Apr/Jun downleg, at 1150, and a slightly higher projection around 1166. First support now comes from the 1060 area.

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The Dollar Swiss

The foreign exchange markets were surprised by Japan's intervention last week and the Yen has pulled back, but we look at another favourite; Dollar Swiss

The Technical Trader’s view:

MONTHLY CHART

The weakening Dollar is clearly under pressure to go lower.

See how the two attempts to trade back above the 1.1193 Prior Low(s) have come to naught.

The market is ratcheting lower.

Note too that those two attempts have set up a possible bear Continuation Triangle… but it has yet to complete.

WEEKLY CHART

A closer look at that possible continuation Triangle….

We are testing the lower diagonal at 1.0036 (and rising) – but a confirmed close beneath has yet to be achieved.

The target of the Triangle is a good deal lower (about 0.75).

Cautious traders should wait for a break beneath the band of Pivotal support from the Prior Lows at 0.9729-0.9916.

DAILY CHART

The price action at the lower diagonal is typically volatile.

Note well the failed rally at the diagonal /horizontal resistance above the market at 1.0250/ 1.0324.

Short-term retracements to that level should be sold…for a retest of the Triangular breakout levels around 1.00

We think that will happen

The Macro Trader’s view:

The Swiss Franc has enjoyed a strong rally against the Dollar spread over many years with a brief correction around the turn of the millennia. Although a small economy compared to the US, it is well known how strong the Swiss economy is and the standard of living is among the highest in the World.

Currently the Swiss franc has maintained its strength against the Dollar, even as the Euro has faltered. The Euro zone has many problems and the Sovereign debt crisis of earlier this year was really a manifestation of structural problems known to have long existed within the Euro zone but brought to a head by the financial crisis and deep recession.

So while traders are nervous about the health of the US recovery, they also have strong reservations about the health of the Euro zone and that broadly explains the current inertia of Dollar/Euro.

The Swiss Franc suffers from no such headaches. The Swiss economy remains strong and well run and is still regarded as a safe haven for high net worth individuals and a very competitive place to do business, especially for hedge funds, as other leading financial centres, especially London, have recently been placed under the cloud of tighter regulation and the threat of a relatively less friendly environment for financial companies to do business.

Switzerland has benefited from Hedge Funds in particular, looking to relocate out of London to avoid the feared stricter regime which policy makers regard as necessary to avoid another future financial crisis, but which at best smacks of closing the stable door after the horse has bolted and at worst; looking for a scapegoat to cover for regulatory failings and make political hay.

So traders/investors have turned to the Swiss Franc to express their bearish view of the Dollar.

rather than struggle with:

· timing difficulties currently dogging Dollar/Euro,

· intervention fears surrounding Dollar Yen and

· the fickleness of Gold,

In truth the Swiss authorities may also intervene to stem the Franc’s rise, but longer term the trend is clear; the Swiss Franc is a strong currency with a long Bull trend against the Dollar and

in the current environment it looks set to continue even with official interest rates set at the same level: 0.25%.

Mark Sturdy

John Lewis

Seven Days Ahead

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EUR/JPY Once More Attempts Recovery Off 76.4%

The FX Specialist view - Weakness in the EUR/JPY cross this year saw a test of a long term 76.4% retracement. It hasn’t worked perfectly as support, but still seems to be having a deterrent effect on the bears. Following a s/term recovery we look again at the next signals required to provide bulls with hope.

• MONTHLY CHART The long term chart shows how the 76.4% pullback level has remained effective in curtailing bear activity.
• DAILY CHART: Following this week’s s/term surge we are currently looking at a cluster of resistances: - A s/term bear channel top - 23.6% of the 2009/10 downmove, at 113.40 - The 114.73 28-Jul high Violation of these, particularly the first two, would be a good sign of growing bull strength, with subsequent dips more likely to be temporary. We would then turn focus on higher resistance from around the 119.63 Feb low, as well as higher retracement levels.

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CRB Index Trying to Shake Off the Bears

The Commodity Specialist view - The first half of 2010 was marked by general weakness in the CRB Index, following a modest 2009 recovery. In Aug, however, the signals started changing, and the bear case has weakened.

• MONTHLY CHART Earlier on 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 assumption then had been that rallies would continue to be short-lived, but Daily chart developments have altered this view.
• DAILY CHART The earlier violation of the channel top projection weakened previous bear momentum, suggesting the picture was changing. Initial resistance came from the prior Apr rally high, with subsequent weakness viewed as more likely to precede another bull leg – note that recent support came from a 61.8% pullback level. The 280.83/282.80 resistance area (Apr high and 76.4% recovery level) is again under scrutiny – clear break through this would mark the next stage in the bulls’ campaign and seriously threaten the early Jan 293.75 high.

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Japanese Bonds teeter on the brink

Over recent weeks the JGB has endured a reasonable pull-back, much like other bond markets, as equities staged a rally fuelled by: 1. Bernanke's recent pledge to ease further if the faltering US economic recovery continues to lose traction, and 2. A better-than-expected US non-farm payroll report last Friday. We think it may come back further, but the medium and long-term bull prospects remain good...

The Technical Trader’s view:

MONTHLY CHART

The tantalizing possibility that technicians have found in the Yen bond market is of the completion of a large bull Head and Shoulders Reversal.

The neckline lies above the current level of the market at 142.66.

We have closed above that level once, in the monthly bar chart, but haven’t yet had a confirming second close above that level

WEEKLY CHART

The pull back in the weekly chart has been rather ominous.

The market has pulled back through the support from both the Neckline and the horizontal Prior High at 142 and entered a no man’s land wherein the first support beneath the market here is down at the band 140.35-55.

We think it highly likely that the market will want to come back and test that level…

It certainly remains vulnerable to sell-offs to that level.

DAILY CHART

The pull back in the day chart has found some temporary support at the 38.2% retracement (and possibly the 141.29 Prior High support from the Continuation Chart.

The question remains – have the Bulls sufficient energy to get back up and above the Neckline at 142.66 (see monthly chart). We think that small double failure above that level already suggest that there is more on the downside (probably testing the band 140.35-140.55) in the short-term before the market can build a base…

The Macro Trader’s view:

Over recent weeks the JGB has endured a reasonable pull-back, much like other bond markets, as equities staged a rally fuelled by:

1. Bernanke’s recent pledge to ease further if the faltering US economic recovery continues to lose traction, and

2. A better-than-expected US non-farm payroll report last Friday.

The Bank of Japan’s recent decision to ease monetary policy further also helped the Nikkei, which looks hesitant compared to the S&P and FTSE. Part of the reason for this is the strength of the Yen. Despite recent comments from Japanese officials hinting at intervention, the Yen has remained strong against a Euro that is once again dogged by worries about the health of German Banks, and the Yen is also making fresh multi-year highs against the Dollar, as it is viewed as a safe haven trade.But traders in Japan fear that a strong Yen will damage the competitiveness of exporters and act as a drag on Japanese equities. Moreover, while deflation is still a big concern in Japan long term bond yields will remain on a downward path.

Traditionally the main players in the JGB market have been domestic. But China has recently emerged as a large buyer of JGB’s. This has alarmed the Japanese authorities because they fear China’s purchases will further fuel the Yen’s rally. Indeed, we have often cited, Japan’s proximity to China as a bullish factor for the Yen.

But aside from the Yen’s strength, clearly Chinas decision to diversify her foreign reserve holdings through purchases of JGB’s will act to not only support that market, but send it higher.

So we judge there are several important factors at work that argue for a bull market in the JGB. And when the current equity market rally loses steam as we suspect it eventually will, bonds globally will rally hard.

In summary, the JGB is a bond market representing an economy that:

- relies heavily on manufactured exports,

- runs a large trade surplus,

- has sizeable foreign currency reserves, and

- has found favour with the world’s fastest growing and second largest economy as a store of wealth.

Whatever short-term weakness the bulls are suffering the bulls are powerfully supported in the medium and longer-term.

Mark Sturdy

John Lewis

Seven Days Ahead

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The bull case for S&P's

The Technical Trader’s view:

WEEKLY CHART

The market has the appearance of being between powerful support and resistance.

The support has been the Head and Shoulders Neckline which was coincident with the 38.2% Fibonacci retracement support.

And the resistance is clearly the band from the Prior Lows 1201-1253.

But looking closer…

Daily chart

This daily detail is intriguing: First, notice the two bull patterns within the trading range – a Medium-term bull wedge and then small a short-term bull wedge – both have completed and will have a continuing bull influence on the market.

Note the detail: the recent bull run has driven up through the 61.8% Fibonacci….

But more important still note the potential Neckline above the market currently at 1125 and falling slowly…

Were the market to get up above that level there would be a massive surge in buying, perhaps driving the market up as far as the top of the trading range.

Mark Sturdy

John Lewis

Seven Days Ahead

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Bulls in GBP/USD Remain Uncertain

The FX Specialist view - An earlier recovery in GBP/USD this year, off a 76.4% support area, came to a halt in August, again at a Fibonacci retracement. So far a s/term pullback has been supported by a 38.2% level, but there is currently risk that this could give way in due course.

• WEEKLY CHART: The rebound off a 76.4% pullback area has found clear resistance from the 61.8% recovery level. This means that the market has also failed to hold above resistance from the second low that stands out from 2009, the 1.5705 Oct-09 low. The main question now is whether or not bulls have had their day.
• DAILY CHART: The recent slip back from the 61.8% recovery level found temporary support from the 38.2% pullback. The current s/term chart structure suggests that the decline could have an impulsiveness that will see a failure of this support, so any rebound may prove short-lived... Other than deeper retracements we would then also look for possible support from around the prior 1.4780 01-Mar low.

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Silver Bulls Still Keep Hold of Reins

The Commodity Specialist view - Following a period of consolidation during the summer months bulls were on the alert for a possible violation of key support. However, it held and renewed strength has kept our focus on higher levels.

• SILVER - MONTHLY CONTINUATION CHART: The long term chart shows how effective support was from a major 76.4% level (and highs from 2004/2005 too). The ensuing recovery has not yet reached the 2008 peak, but there is now not much in the way of a return to this.
• SILVER – DAILY CHART DEC-10: Following the summer consolidation another bull leg is underway, with the 19.915 May high now under attack. S/term focus is initially on a Fibo projection around 21.10, with a higher channel top projection at 21.75 also offering resistance. This latter runs close to the 2008 peak on the continuation chart. Meanwhile support now comes from a falling resistance/return line combining with the 18.75 04-Aug high, which bulls will want to hold at this stage, for momentum to be preserved.

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How Committed Are Short Term EUR/GBP Bulls?

The FX Specialist view - Following an earlier downmove in EUR/GBP this year a s/term July bounce soon ran out of steam. Now those temporary bulls could be returning, but their interest will be questionable until certain key resistance can be overcome.

• MONTLHY CHART: A bear signal was given after the break of the long term 38.2% level and Jun-09 low just under 0.8400. Current focus is on the 0.8168 50% pullback level, so far providing temporary support. Lower levels are likely in due course.
• WEEKLY CHART: Breaks of the rising support lines and 0.8397 Jun-09 low implied the longer term chart had topped out. Support from a 76.4% retracement level at 0.8190 was eroded, but only briefly so far.
• DAILY CHART: The recent pullback from just above a 38.2% recovery level has found support from a s/term 76.4% level (which coincides with the longer term 76.4% level). In the Commodity Specialist Guide we have maintained an overall bear stance, but a recovery through the bear channel top projection and also 0.8532 19-Jul high would be bullish. In this event bear momentum would have diminished for the time being, with a better recovery phase then signalled. A clear breach of the current 76.4% support should herald clear new 2010 lows.

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Bulls’ Sugar Rush Could Fade Soon

The Commodity Specialist view - Following a dramatic collapse in Sugar prices earlier this year good support was finally found from a long term 76.4% retracement. Subsequent recovery has been steady so far, but there is a chance now that bulls, at least temporarily, could tire.

• SUGAR 11 - WEEKLY CONTINUATION CHART: Good support came from around the long term 76.4% pullback level. The 13.67 May low on the Oct chart coincides nicely with this 76.4% level. Note how the 38.2% recovery level here coincides with the old early 2006 high, where resistance was recently seen. The market could yet struggle to hold above this over the shorter term.
• SUGAR 11 – DAILY CHART OCT-10: The bull move has stayed in force, with eyes on the 20.63/21.20 area, 76.4% recovery and prior congestion low from early 2010. The chart structure suggests resistance should be likely here, but also note the negative RSI divergence that indicates certain fatigue setting in. At this stage a drop through the rising support line near 19.00 would signal initial momentum loss, to be confirmed by a violation of the 17.51 10-Aug low.

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