Initial Bull Signs in EUR/JPY Now in Place

The FX Specialist view - The decline in values in EUR/JPY earlier in 2010 slowed on the approach to a long term 76.4% support level. This did indeed halt the downmove, and now initial bull signals on the Daily chart are in place. What next...?

• MONTHLY CHART: See how, so far, the 76.4% pullback level has provided good shorter term support. What type of recovery can now be seen is unclear.
• WEEKLY CHART: On the Weekly chart we have now marked in certain retracement levels. The 23.6% mark just below 115.00 has now been tested, and note how higher 38.2% nicely coincides with the 119.63 Feb low.
• DAILY CHART: In the Commodity Specialist Guide we have been waiting for violation of the 113.41 21-Jun high to provide a bull signal, now given. S/term pullbacks should be temporary – ideally support comes at/above the 110.00 area now – a chance for buyers on dips. Beyond the 114.83/115.17 dual Fibo retracement area our main focus would centre 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 – resistance is likely here, a chance for some profit-taking.

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Short Term Gold Losses Confirm Bear Scenario

The Commodity Specialist view - In our last Gold Update we had noted that there was a weakness creeping into the chart structures that put us on the alert for a bear attack. Latest developments have confirmed our suspicions.

• WEEKLY CONTINUATION CHART: For some weeks we have been noting in the Commodity Specialist Guide that the whole recovery from 2008 low looked like a type of 5-wave/ impulsive structure, a third/final upleg presumed commencing from the 1045.20 Feb low. Our latest Fibo projection had been reached, and the subsequent slip back has now given a further bear signal on the Daily chart. Here, keep in mind the 23.6% pullback level, at 1127.
• DAILY CHART – AUG-10: After earlier failure to hold onto higher levels above the previous 1230.70 peak, latest weakness has, after recent violations of small channel base support and 38.2% retracement, breached the 1170 support area. This provides a bear signal, now favouring sellers on rallies. The fact that the Feb/Jun chart structure was similar to that on the Weekly chart (impulsive, but could have run its course) served as a bearish warning too. Now, the first downside target is the 1133 61.8% pullback, which nicely coincides with 23.6% on that Weekly chart. Perhaps more important from the point of view of medium term momentum is the lower support implied by the bull channel base projection at 1080.00 currently.

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Another 76.4% Level Looms in USD/CHF

The FX Specialist view - Since early June a relatively unbroken fall in USD/CHF has been seen, from a 76.4% resistance/recovery level. This has now neared a 76.4% pullback level and signs are creeping in of some bear fatigue...

• WEEKLY CHART: The 2010 recovery found clear resistance from the 1.1735 76.4% level of the whole 2008-09 downmove. Subsequent pullback has been decisive, but the detail on the Daily chart is interesting now...
• DAILY CHART: The pullback from that 76.4% resistance has drawn nearer to the 1.05340 76.4% retracement. We wait to see if support emerges near here, but already note that the s/term chart structure could be showing signs that bears are beginning to tire. This is supported by the relatively oversold nature of the RSI indicator. We await reaction with interest – support is expected.

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Silver Closing in on Key Support

The Commodity Specialist view - An earlier recovery in Silver this year peaked in May, with subsequent price action turning consolidative. The market is now not far from key support, and focus is currently very much on this.

• WEEKLY CONTINUATION CHART: Earlier resistance from the 19.40 area was challenged recently, but the will wasn’t there to break through. Meanwhile note the 23.6% pullback level at 17.20 –key, pivotal support when combined with the 17.15 level on the Daily front month chart below.
• DAILY CHART – SEP-10: The current consolidation continues here, with key support remaining at the 17.15 05-May low, so far avoiding momentum loss. Note how this low nicely coincides with 23.6% on the Weekly continuation chart –a break below would be a clear s/term bear sign. Meanwhile the higher Fibo projection, around 20.80, stays out of reach for now. In the Commodity Specialist Guide we have maintained a bullish stance, but are ready to change.

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Cable perks up: can it be sustained?

The Pound suffered a steep sell-off against both the Euro and the Dollar during the financial crisis/recession as the UK's public finances deteriorated at a faster pace than other developed economies. But a change of government in the UK with a focus on cutting the budget deficit, mainly through public spending cuts has put a floor under the currency, especially against the Dollar. Can Cable continue to go better?

The Macro Trader’s view:

The Pound suffered a steep sell-off against both the Euro and the Dollar during the financial crisis/recession as the UK’s public finances deteriorated at a faster pace than other developed economies.

Indeed, as the recession seemed to go on longer than in many other G7 economies, the Pound at one point looked at risk of breaking par against the Euro and approaching lows not seen since the mid 1980’s against the Dollar.

But a change of government in the UK with a focus on cutting the budget deficit, mainly through public spending cuts has put a floor under the currency, especially against the Dollar. The UK has set out a tough and credible plan to reduce its budget deficit and in 5 years time forecasts a structural budget surplus.

While there are fears that the medicine could tip the economy briefly back into recession, the most likely scenario is a period of slower or indeed flat growth as the Bank of England keeps interest rates at historically low levels.

Although there is some noise from one or two MPC members about the need to begin a gradual tightening process, we judge the majority on the MPC realize that the government’s plans to effectively drain spending and resource utilization from the economy will bear down on inflation and monetary policy needs to remain loose to offset what is set to be a period of aggressive fiscal retrenchment.

Compare and contrast this with the US: The US economy, which until recently looked embarked on a self sustaining recovery, now looks to be weakening. Virtually every area of the US economy is causing some concern:

· The ISM manufacturing and non-manufacturing surveys while still forecasting growth, are doing so at steadily slowing rates,

· Retail sales show consumer demand is weak,

· Non-farm payrolls and Jobless claims report not enough jobs are being created to employ new entrants to the labour market, let alone re-employ the millions thrown out of work during the recession, and

· Inflation is very low, perhaps too low?

The Fed is now concerned inflation may fall too far. And whereas only a few weeks ago the debate was when should the Fed begin to tighten policy, the latest FOMC minutes reveal policy makers are concerned enough to talk about additional easing, albeit judged not necessary quite yet.

While a slowing US economy would ultimately be bad news for the UK economy, the Pound currently benefits from the very different outlook for public spending in the two countries. As previously said the UK is on a mission to eliminate its structural government deficit, the US is still spending with alacrity and if he could get it through Congress, Obama would deploy a second stimulus racking up yet more debt and speeding the US debt to GDP ratio ever closer to 100%.

So, for now, the Pound benefits from the dynamics at work both in the UK and the US economy.

The Technical Trader’s view:

WEEKLY CHART

The market is stuck between two major levels of support and resistance.

And above the market is a critical resistance from the low at 1.5709.

Now look closer.

DAILY CHART

The downtrend was broken in June and with some volatility the market has continued to go better. The prior Highs at 1.5217 and 1.4720 should be good support on any pull-backs.

Note well the band of resistance 1.5536-1.5706.

The Pound can strengthen further, but resistance is approaching and will be powerful in resisting further advances above 1.57

Stand back,

Mark Sturdy

John Lewis

Seven Days Ahead

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Fresh Support in EUR/CHF Now Visible

The FX Specialist view - So far in 2010 the bears in EUR/CHF have been the clear dominant force. Any support found has proved fleeting. Recently a temporary halt in downtrend was seen, so it is appropriate to take stock of the technical position.

• WEEKLY CHART: The second of two bear channel base projections was recently tested – and so far it has provided good support. But there is little in the current chart structure that suggests bear fatigue...
• DAILY CHART: With a temporary low established we have tentatively drawn in a couple of s/term retracement levels: - note how 23.6% has provided s/term resistance, the market currently trying to break higher. Success would be a small positive sign. Besides the intervening 1.3731 09-Jun low, note higher resistance around the 1.4000 area – former May lows and 61.8%. In fact, with the current 1.3070 low, this looks most key, as there are other, longer term, Fibo retracements (not shown) that fall close to this area too. A recovery through this latter would look bullish. One point of technical interest – note that the 1.3070 low was an approximate 2.618 swing target off prior 1.3997/1.4587 May rally.

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Bear Cloud Hanging Over Gold

The Commodity Specialist view - The 2010 recovery in Gold has so far failed to hold the higher levels above its previous peak made last December. There is a weakness creeping into the chart structures that puts us on the alert for a bear attack.

• WEEKLY CONTINUATION CHART: In the Commodity Specialist Guide we have been noting that the whole recovery from 2008 low reveals a type of 5-wave/ impulsive structure, a third/final upleg presumed commencing from the 1045.20 Feb low. How strong this last leg turns out to be is an unknown but, currently, we do note that our most recent Fibo projection has been reached. We have marked in the 23.6% pullback level, at 1127.
• DAILY CHART – AUG-10: So far, price action has disappointed bulls by failing to capitalize on the recent breach of the previous 1230.70 peak, keeping our higher 1342 Fibo projection (1.618 swing projection of prior Dec/Feb downmove) out of reach. S/term support has come from a small channel base projection, but also note the convergence of other supports just under – rising support line, 38.2% pullback and 1170 area. These might yet hold – but we will be taking a breach of these as a bear signal. Note how the Feb/Jun chart structure is similar to that on the Weekly chart (impulsive, but could have run its course). First downside target would be the 1133 61.8% pullback, which nicely coincides with 23.6% on that Weekly chart.

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Is the squeeze over in Dollar Euro?

The Technical Trader’s view:

MONTHLY CHART

The long-term chart is a Head and Shoulders Top suggesting very much lower.

The rally back to the Neckline is taking place after the initial completion.

WEEK CHART

The rally back to the Neckline is clearer here.

There should be good resistance there at 1.2730 or thereabouts…though the scale of the pattern allows some short and medium-term repenetration without prejudicing the whole….

DAILY CHART

Here is the short-term catalyst for the rally.

A completed bull Head and Shoulders reversal opposed to the bear longer-term H&S

Note the minimum move…up as far as 1.30 or so.

But remember the opposing medium and long term resistance at 1.2730, and in the very short term, note the diagonal resistance, today at 1.2722. The coincidence is powerful

A break up through there will lead to a surge of fresh short-term buying.

The Macro Trader’s view:

Despite the Dollar’s recent weakness against the Euro, we sense the market is undergoing a correction rather than a trend reversal. The situation in the Euro zone remains delicate. Indeed, the only thing that has changed in recent weeks is that the endless stream of negative commentary about the Euro zone has virtually dried up.

This has allowed traders to recast their focus and right now the hot news is the surprise miss firing of the US economic recovery. Recent data has remained soft with this week’s release of a below consensus ISM non-manufacturing survey just the latest piece of disappointing news.

But why, if the Euro zone’s problems persist, are traders now buying the Euro?

Currency trading is a function of relative, rather than absolute, strengths and weaknesses, so while in absolute terms the under lying fundamentals of the Euro remain flawed, in relative terms it is the Dollar that is currently suffering from relative weakness due to fears about the US economic recovery.

But the 2nd quarter US corporate profit reporting season is about to start and if the news from the leading Banks and corporates beats market expectation, the Dollar could well recover and throw the spot light back onto the Euro zone.

Moreover, with the Euro zone pledging to release the results of stress tests on leading Euro zone Banks the Euro could quickly come under selling pressure once again. The fear was the Euro zone Banks, especially in Germany and France are heavily exposed to the Sovereign debt of several of the peripheral Euro zone economies that have been heavily downgraded. Since the fear of Sovereign debt default is still very much alive with Greek sovereign debt ranked as the second worst in the world, those stress test results may cause some difficulty for the Banks and the authorities.

On the other hand, we judge the Dollar to be long-term bullish. Although the US fiscal landscape is challenging to put it politely, and US interest rates cannot go any lower, the Fed could still act to help support the flagging recovery.

It could buy Treasuries, thereby relieving some of the potential funding worries the administration might have if they go for a 2nd stimulus. The Fed could also buy corporate Bonds, either in the secondary market or at point of issue, thereby side stepping the Banks and getting money out directly to ‘Main street’ in a direct effort to spur growth.

But however you view the situation, in the long term we judge the Euro to be flawed and in its current incarnation will struggle to survive. Decision making in the Euro zone needs to be centralized both politically and fiscally and we do not think the political will exists to bring that about.

So patience is needed (and long Stops too), if the current correction is going to be ridden by the Dollar Bulls.

Mark Sturdy

John Lewis

Seven Days Ahead

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Natural Gas Bulls Need to do More Now

The Commodity Specialist view - During Apr/May Natural Gas started to find support after earlier weakness this year. Initial bull signals have now been given but the chart has reached the point where bulls need to up their game and push the market higher to confirm a positive outlook.

• DAILY CONTINUATION CHART: In the Commodity Specialist Guide we have, for some time, been looking at the Daily continuation chart as well as the front month – the former is markedly different to the latter but it does reflect the most actively traded prices of the time. Here, it has been useful to note how well support has worked at the 61.8% pullback level. And now, note how 61.8% has also provided recent resistance!
• DAILY CHART – AUG-10: The recent erosion of the bear channel top saw temporary resistance emerge close to a 61.8% retracement on the front month too. But bulls now need to see a break of this to ignite the next stage of the recovery. In our Guide buyers on dips have been favoured and, so far, approximate support has come from near the top of the Apr/May base. We have also marked in the 4.350 76.4% pullback level, which will ideally hold now.

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Bull Signal in GBP/USD Now in Place

The FX Specialist view - When we last looked at GBP/USD the chart had tested a long term 76.4% retracement level, where the initial reaction had been positive. But the required bullish signals from the Daily chart were not in place – and they are now.

• WEEKLY CHART: The 76.4% pullback has provided good support so far, and the chart structure now suggests that, s/term dips notwithstanding, higher values can be seen.
• DAILY CHART: The earlier breach of the 23.6% recovery level followed by recent violations of the bear channel top projection and 1.5125 area have provided a bull signal for us, in the FX Specialist Guide. S/term dips are now more likely to be temporary ahead of a further bull leg. Note first support coming from the prior 1.4780 support/resistance. A deeper slip would turn focus on the 1.4500 area. On the upside, beyond the nearby 38.2% level just above 1.5300, note the stronger resistance at 1.5635/ 1.5705, 50% (a good level in GBP sometimes) and 13-Oct low.

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Euribor wobbles. How nervous should we be?

The Euribor chart has had a nasty lurch down...but the recent sell-off in Euribor that has seen the two month old range break, isn't so much a market view on the ECB tightening interest rates, but a reflection of tightening conditions in the Wholesale interbank money markets.

The Technical Trader's view :

WEEKLY CHART

The market is dithering at the top of a long uptrend.

But is it a reversal of the Trend?

Look closer.

DAILY CHART

The position is less like a Head and Shoulders Reversal than a Multiple Top.

The double low of 98.68 is important if there is a confirmed (ie twice) close beneath it.

The volume on the sell-off today was significant.

But we have seen that sort of volume before – in early May. And, there is a possibility of a large bull flag too, looking at the wider context.

So for the moment we are skeptics, until a close is confirmed beneath 98.68. If that happens then the market will be pressured lower. But even then, other things being equal, the diagonal at 98.55 is important

The Macro Trader’s view:

Since the beginning of May, Euribor has traded in a clearly defined sideways pattern. Our analysis of this contract had broadly been that it had little room to rally further due to the economic recovery clearly underway, but no reason to turn into a bear market yet since that recovery was still too fragile.

More recently, we judged Euribor remained trapped in a period of sideways trading that could last for a considerable period, as a result of the uncertainty caused by the Euro zone sovereign debt crisis.

Until the crisis morphed from being Greek centric, the Euro zone economy was in recovery mode with Germany pulling the rest along much like a locomotive dragging its trucks. But as the crisis began to engulf additional countries, forcing each in turn to adopt austerity measures, until Germany its self was infected, traders began to fret that growth would be the most conspicuous victim.

Even in the US, after initially sounding reasonably relaxed about the consequences of the Euro zone drama, the Fed now fears the US economy could feel more than just “ripple” effects.

The main problem currently is the Euro zone banking system. It is judged to be heavily over-exposed to the Government bonds of those peripheral Euro zone countries that initially sparked the crisis and have suffered steep sovereign debt downgrades.

Other Banks have become reluctant to lend to Euro zone Banks for fear the money might not be repaid and this has forced the Euro LIBOR rate up, which in turn has begun to feed into the Euribor futures markets.

The problem is serious because those Banks thought to be most at risk are those in Germany and France. Some estimate that the affected banks require large capital injections from the state, or the emergency fund created recently by the EU/EZ/IMF designed to bailout any Euro zone state at risk of default.

So the recent sell off in Euribor that has seen the two month old range break, isn’t so much a market view on the ECB tightening interest rates, but a reflection of tightening conditions in the Wholesale interbank money markets.

We saw these conditions develop earlier during the original financial crisis, but then the Global Banking system was affected; now it is more localized. The ECB is alert to this and continues to provide liquidity as needed despite fears it was about to begin removing some emergency support this week.

So is Euribor turning bearish? We don’t think so, yet.

Mark Sturdy

John Lewis

Seven Days Ahead

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EUR/USD Trying to Establish a Base

The FX Specialist view - Earlier in June the Daily EUR/USD chart had shown signs of bear fatigue, although subsequent action proved muted on the upside. However, Thursday’s strength re-focuses attention on nearby resistances, through which a better, albeit temporary, recovery beckons.

• WEEKLY CHART: Breaking the 1.2328 Oct-08 low turned attention towards lower supports, including the 1.1435 equality target (Jul/Oct-08 fall extended off 1.5144 Nov-09 high) and lower bear channel base projection. However, focus is on the Daily chart below, with possibility of a shorter term bull signal which would postpone lower values.
• DAILY CHART: An earlier positive RSI divergence marked a s/term halt in downtrend, and now Thursday has seen an initial breach of the s/term falling resistance line. In the FX Specialist Guide we require a recovery/close through the 23.6% retracement at 1.2645 to open the way for further gains. But also note the higher falling resistance line currently around 1.2800, which is closing in on this Fibo level now. Both resistances need to be overcome to strongly suggest a continued, but temporary recovery.

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Strong Coffee Rouses Bulls from Slumber

The Commodity Specialist view - Until recently the 2010 price action in ICE Coffee was relatively uninteresting, with bears looking a real threat. However, the recent surge upwards has brought the chart to life, with the probability of higher values to come.

• COFFEE MONTHLY CHART - CONTINUATION: In the Commodity Specialist Guide we have taken a step back to look at the major 1997/2001 downmove. With the 169.60 Feb-08 peak under attack the immediate level higher is the 180.00 50% mark (see also Daily chart). Temporary resistance around here would not surprise, but we think the chart should push higher in due course.
• DAILY CHART – SEP-10: Violation of the 153.40 Dec-09 high has quickly led to a move towards our first Fibo projection at 179.00. Pullbacks are assumed to be temporary, the 153.40 area offering first support – ideally this will hold in order to preserve maximum bull momentum. Back-up support comes from the lower 142.75 Apr high. We have marked in a higher Fibo projection around 189.00, a later target.

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