US Dollar Index Stuck On 76.4% Support

Earlier this year a half-hearted recovery attempt came to naught. The US Dollar Index is currently resting on a 76.4% retracement support –we wait to see if this provides a launch pad for a fresh recovery attempt.

• WEEKLY CHART Earlier support came from the bear channel base projection, following the brief breach of the 74.170 Nov-09 low.
• DAILY CHART See how the Jul pullback has stuck at 76.4% support, fortified by the 73.506 07-Jun low. A clear positive reaction is needed to reduce bear risk. In this respect a better break of the 38.2% recovery area is needed for the first bull signal, when higher targets can be considered. There comes a point when reluctance to drop below the 76.4% level becomes reluctance to recover –we are probably not far off that turning point.

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Sugar Recovery Still Unable to Overcome Resistance

After a recent s/term setback in Sugar an ensuing recovery has found resistance at previous levels. We wait to see if a more lasting pullback phase will get underway should prices keep easing.

• WEEKLY CHART –CONTINUATION The recovery from support near to the old 2006 high looks to be faltering on its approach to the 32.40 76.4% retracement level.
• SUGAR 11 DAILY CHART –Oct-11: Unable to hold below the 27.57 Feb high and 38.2% retracement the market has bounced to retest prior resistance around our earlier Fibo projection. Also keep in mind resistance on the weekly chart –further gains could be a struggle. At this stage a slip below the 26.38 08-Aug low would suggest a more prolonged setback was in process.

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Gold's strength and vulnerability

WEEKLY GOLD CHART

The market’s run from the hesitation and pause at the 1980 high is clear.

The resolution of that pause was the creation of a Head and Shoulders continuation pattern.

That catalyst set in motion the next leg of the market.

The bull momentum has been maintained by two more continuation patterns – triangles.

But note well the acceleration of the market after the second of those.

Note too, the violent price action of this week in the light of a self-evidently overbought situation.

If the market closes beneath the low of last week (1730.80) on Friday, a weekly Key Reversal will have been created. This would suggest further falls – at least to the diagonal trendline support of the move from 2010?

There are, of course, good supports before that, at 1577.40 and the horizontal from a prior High at 1432.50.

The important thing to note is that a fall of $400 in the Price, some 20% from the Highs, would only bring the market back to the bull trend, rather than break it.

DAILY OCT 11 GOLD CHART

The market’s pull-back today broke beneath the short-term bull trend, but bounced off the 50% retracement support. And that support is close to the 1683.50 support from the Prior High there.

We think a break of the band 1683.50/ 1700 is the critical short-term test of the market. If broken expect a retest of the top of the triangle at 15879 or so. And a break of that would of course signal the weekly Key Reversal (requiring a close beneath 1730) in the weekly chart.

(Note the close coincidence of the Fibonacci 23.6% support and the Prior High 1815 – when broken they added great energy to the bears). For the complete and illustrated version of this and future Updates be sure to sign up at www.sevendaysahead.com

USD/ZAR Poised To Make Better 2011 Recovery

After an early, short-lived recovery attempt this year market action has been fairly directionless. A recent fresh rebound off 2011 support has turned attention to key resistance levels which are the portal to a better recovery phase.

• WEEKLY CHART: Support this year has come above the 6.4000 Nov-07 low. Latest strength has turned attention to the old rising support/return line, near 7.6000 now. Note also the 23.6% recovery level of the prior downmove from Oct-08 high, at 7.7770 –a push through this would be a positive sign here.
• DAILY CHART: The sharp recovery from the support area of a Fibo projection and 6.5175 Dec low found clear s/term resistance from a 61.8% retracement. Bulls remain in favour and the next objective is the 7.7140 76.4% level, not that far from the 23.6% level on the Weekly chart. First support has come from the 7.0000 area.

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Carbon Emissions Rebound From Dual Fibonacci Support

The sharp price reversal in EUA Carbon Emissions from the May high sidelined earlier bulls. Finally interesting support has emerged from two adjacent Fibo levels, prompting a bounce.

• WEEKLY CHART –CONTINUATION Following support from around the 10.45 76.4% retracement level, which saw a virtual key reversal week result, a recovery is in process. See Daily Chart for further support.
• DAILY CHART –Dec-11: Earlier in Aug there was a clear rebound off our latest Fibo projection at 10.40, which coincides with the 76.4% level on the Weekly chart. Support here is not a surprise and, shorter term, we wait to see if a more lasting recovery can get underway. Note initial resistance comes from the current 38.2% rebound level at 13.28, ahead of the 13.90 Dec-10 low.

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Oil looks weak

If the developed economies of the US. Euro zone and UK fall into recession, oil demand will weaken. The oil price over recent weeks has begun to price that in, but has it gone far enough?

TECHNICALS:

WEEKLY CHART

The market’s medium-term rally over the last two years from the $40 supports (established by a succession of Prior Highs at the level) looks to be over.

First the diagonal trendline has been smashed.

Second, the two prior Highs supports at 87.15 and 92.58 have been broken…

DAILY CHART

The detail of the breakdown shows the emergence of a bear trend through a succession of bear patterns:

a small Double Top in April,

a bear continuation Triangle in May,

and most recently the powerful resistance from both Prior Lows ( 94.02 and 90.17) and the band of broken supports from Prior Highs (thus becoming resistances) 87.15-92.58.

(Also, the 50% Fibonacci resistance helped halt the market’s bull retracement yesterday)

The bear trend is now well-established.

FUNDAMENTALS:

The Oil market, for so long considered a one way bet for the bulls and potentially ruinous for western economies, no longer looks so sure-footed.

As the developed economies moved out of recession and the economies of China, India etc., continued to expand apace, the argument went that oil prices could only go one way. New oil reserve discoveries were deemed as not keeping pace with demand coming from the fast-growing and emerging economies. And as ever, OPEC made little effort to restrain the price by increasing output, as they sought to cash in on the bonanza.

Things have changed.

The Eurozone sovereign debt crisis remains unresolved, despite several bailouts. The crisis has spread to Italy and France, and though not with the same intensity that engulfed Portugal, Ireland and Greece, it has still forced both Italy and France to rush through austerity measures in an attempt to placate the markets.

But growth in the Euro zone, seen for so long as Teflon-coated, has at last begun to wilt under the strain with German Q2 GDP released earlier this week especially disappointing.

In the US, a self-inflicted default was avoided, and a deficit reduction plan adopted. But the AAA rating was lost, at least on S&P’s measure. The focus now is the underlying health of the US economy.

Recession has emerged as the main fear, now that the debt ceiling issue has been dealt with.

Although the US economy recorded growth in Q2, it was seen as very weak. The labour market continues to cause concern despite an improved Non-Farm Payroll report in August, but the housing market has yet to stage anything that resembles a convincing recovery.

If the US economy can not shake off its current malaise, or worse still, slips into recession, and the Euro zone cannot find the political cohesion to resolve the debt crisis, a period of economic under performance, or outright recession looks likely.

Global equity markets sense this and have been selling off over recent weeks, but of greater interest to us, is oil.

If the developed economies of the US, Euro zone and UK fall into recession, oil demand will weaken. The oil price over recent weeks has begun to price that in, but has it gone far enough?

We judge the oil price could fall further in the current environment:

· Equity markets are selling off hard as we write, and traders are registering their expectation of a new recession.

· The ECB is very active in markets pumping out liquidity and buying bonds.

· The Fed has signalled short-term US interest rates are on hold until 2013 and may start a 3rd round of QE.

· The UK Bank of England is unanimous in not wanting to raise interest rates even though CPI stands at 4.4%; they are worried about growth and are considering a 2nd round of QE.

· Watch the price action in this market as oil traders’ economic expectations catch up with reality.

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Temporary Halt Seen in USD/CHF ‘s Slide

USD/CHF has been grinding lower through 2011 and recently the pace accelerated. A s/term halt and sharp rebound has followed, but at the moment this could only be temporary.

• WEEKLY CHART: The downtrend recently neared the 2.618 swing projection off prior Nov-09/Jun-10 upmove, at 0.6975. Following a s/term rebound note the current 0.8180 23.6% retracement of the move from 1.1730 Jun-10 high, offering first important resistance.
• DAILY CHART: The recent acceleration lower has reversed temporarily after testing the channel base support area. First interesting resistance comes from the congestion area between 0.8550 and 0.8271 28-Jun low. Within this runs the bear channel top at 0.8345 currently. A recovery through this would suggest a more prolonged reversal was underway.

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Copper Back at Pivotal Support Area

The May/Jul recovery in Copper prices, from earlier Fibonacci support, stopped short of the Feb high and, now, the recent quick reversal has seen the market return to key supports on the daily and longer term charts.

• WEEKLY CHART -CONTINUATION Earlier support came from around a 38.2% pullback level. The market has now put fresh pressure on this, which now coincides with the bull channel base. A break below this would mean a more prolonged correction was underway.
• DAILY CHART –Sep-11: The recent fall has retested the earlier 76.4% support, finding further s/term underpinning from a channel base projection (corresponding support on the Dec-11 chart lies at 3.8000). A break below this would call for lower targets, besides those coming from the Weekly chart. Bears are already encouraged and look for further negative confirmation now.

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Pullback In AUD/USD Hits Key Support Area

After reaching a target on the long term chart AUD/USD has pulled back smartly, testing a pivotal Fibonacci support area. Bears will strengthen their ranks on a break of this.

• MONTHLY CHART: Note how clear resistance has been found at an equality target we had marked in in the FX Specialist Guide, the 2001/2008 upmove extended from the 2008 low. On this chart note the 23.6% pullback of the 2008/2011 upleg at 0.9880, which lies not far from the 0.9849 2008 high. This offers first key support here.
• DAILY CHART: The recent violation of the 1.0386 27-Jun low and channel base projection , followed by break below the level of the 1.0253 Dec-10 high, implied loss of upward momentum. The 38.2% 0.9930 pullback level of the upmove from May-10 low has provided initial support and we currently wait to see if s/term strength is temporary only. First resistance is offered by that 1,0386 low.

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Crude Oil Seeping To Lower Levels

The strong rally in Brent Crude in July put bears on a cautious footing. However, a decisive reversal at Fibonacci resistance has kept the medium term bear outlook intact.

• BRENT WEEKLY CHART -CONTINUATION Earlier support around a 38.2% pullback level has now been breached. This provides a boost to medium term bears. The next important support area starts at the longer term 38.2% pullback (of whole 2009/2011 recovery) at 92.32 and includes the shorter term 90.64 61.8% level and 89.58 May-10 high.
• BRENT DAILY CHART –Oct-11: The Jul recovery found clear resistance from the 76.4% retracement near 120.00, keeping bears in favour. Sharp reversal pierced the 103.02 27-Jun low and has found temporary support from the channel base projection that we highlighted in the Commodity Specialist Guide. Rallies should be corrective only at this stage and we have marked in lower Fibo projections, the 1.618 swing off prior 103.02/120.00 bounce, at 92.50, and a lower projection at 89.80. These tie in nicely with the Weekly chart support area.

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The opportunities in UK Gilts and US Bonds

Uk and US bond markets are set to go higher having overcome their Prior All Time Highs and in the case of the Uk Gilts, good clear powerful continuation patterns are on the verge of being completed...

MONTHLY UK GILT CHART

The market has overcome the important Pivot at 124.95 from 2002 - and where it has failed twice before in 2009 and 2010.

Final confirmation of the breakthrough requires a monthly close of course, but the evidence is mounting not least because of the completion of a large bull continuation Triangle in the weekly charts at CLOSE OF BUSINESS TODAY 12TH August.

WEEKLY UK GILT CHART

The detail of the 2011 continuation triangle: A close above the upper diagonal at 127.93 this week confirmed the following week suggests moves up as far as 141 minimum.

WEEKLY UK GILT CHART

The market has smashed up through the recent All Time High of 126.93 in good volume and open interest.

MONTHLY TNOTE CHART

The market has smashed up through the succession of Prior Highs from 1993.

A close on at the end of the month above the 128-01/128-22.5n looks likely, which will fuel moves higher still by established powerful support beneath the market

WEEKLY TNOTE CHART

This is close to a continuation Triangle. but not quite since there is a lack of correct alternation.

But the essential characteristic of Prior Highs acting as good ratcheting support beneath the market holds good.

Watch for a close on the week above 128-22.5.

DAILY TNOTE CHART

The market Looks powerfully set up, the small consolidation above the critical band of prior Highs looks set up for a further bull push – having the appearance of a pennant.

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The anxiety of the S&P bulls

WEEKLY CHART

The market has stumbled since the beginning of the year.

Three times it has tried to get back above the first High made in February of 1332.60.

So, a small triple top or even a Head and Shoulders reversal may be on the cards….

But in the context of the big bull run from the beginning of 2009, even though the diagonal trend support has been broken, (and acted as good resistance when the market tried to break back up through it) the Prior High of 1216 needs to be broken… to convince the bears.

And note the coincident support at that level from the Fibonacci retracement level….

DAILY CHART

The detail of the 2011 price action is full of actual bear energy:

1. The quadruple failure at the 1350 level.
2. The small Double Top that has completed by breaking down through 1290.
3. The completed Head and Shoulders Top on the break of the Neckline at 1259. (minimum target 1140)

and potential bear energy…

1. The Triple Top close to completion on a close beneath 1239.90.

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Will Key 38.2% Support in GBP/USD Last?

Following the late April high in GBP/USD the subsequent slip back found good support from a key 38.2% area, with recovery then triggered. But after recent resistance the key support could once more come under scrutiny.

• WEEKLY CHART: The previous break through falling resistance was bullish –but after the 50% recovery level was neared the market slipped. Support from the old falling return line has held so far.
• DAILY CHART: Note how effective dual support from the 38.2% retracement and channel base projection was. The 1.5785 38.2% level remains a key level and a violation of this would signal a more prolonged correction phase underway. Meanwhile the recent bounce found resistance around the rising old support/return line which we highlighted in the FX Specialist Guide. These lines can be very effective technically, so a pullback from here is no surprise. A drop back to the 38.2% would be a sign of weakness, raising expectations of a break lower.

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Silver Recovery Set To Continue

The earlier 2011 fall back in Silver prices found interesting Fibonacci support on the daily and longer term charts and, now, the initial recovery looks well-placed to further satisfy shorter term bulls.

• WEEKLY CHART -CONTINUATION The sharp drop back earlier in 2011 has found support close to a 38.2% pullback level, prompting recovery. Look closer...
• DAILY CHART –Sep-11: Following on from initial 76.4% support in May a period of indecision has led to a breach of 38.2% resistance and erosion of the channel top. A better break through this channel would spur the shorter term bulls with 44.67/45.48 providing a target area.

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EUR/GBP Picture Not Yet Clearly Bullish

Following new 2011 highs recently the EUR/GBP cross rate has slipped back from long term resistance. Key supports are coming under scrutiny, the first of which being a 38.2% pullback level.

• WEEKLY CHART: The earlier breach of falling resistance looked to be a positive sign but note how the old rising support/return line (underside of an old triangle) resisted bulls’ advances. It is not yet clear if bulls have a clear advantage –note that support has so far come from the 38.2% pullback of the whole recovery from Jun-10 0.8065 low. A break below this would be an initial negative signal.
• DAILY CHART: The slip back from the rising resistance line is not far off key supports here. Besides the 38.2% level from the Weekly chart note the s/term channel base projection at 0.8650 ahead of the 0.8606 26-May low –violation of these would be negative and at least postpone new 2011 highs.

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Next Resistance in Gold

A negative signal in Gold in early May did not come to much, and the bulls have reasserted their authority. Short term we look for the next possible resistance points.

• WEEKLY CHART -CONTINUATION The bull move temporarily halted near our earlier Fibo projection, which has now been breached. Not much overhead lies the next projection at 1635.
• DAILY CHART –Aug-11: Following violation of the 1577.70 early May high the market has kept firm and upside focus is currently on a) the rising resistance line near 1650.00 (1655.00 in Dec), and then b) a bull channel top projection at 1672 (1675 in Dec). Resistance would not be a surprise in this area. Below the old 1577.70 high note the s/term falling resistance/return line at 1545.00 offering support on a future dip.

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Chart Support Prompts EUR/JPY Recovery

Following the Mar/Apr surge in the EUR/JPY cross the drop back has almost been as dramatic. Lower support has now been found but there is currently a question mark over how long this can hold.

• MONTHLY CHART -CONTINUATION The long term 76.4% retracement earlier provided good support , but recovery from this area has been modest so far, and latest weakness could again put it to the test.
• DAILY CHART: The recent bear leg tested interesting dual support from a 76.4% pullback level at 109.64 bear channel base projection. This stands in the way of the main rising support line at 108.85 currently. The s/term rebound has so far neared resistance from the rising support in the low 113.50s. But more key resistance comes from the channel top at 116.50. This latter would have to be breached before earlier bulls could win favour once more.

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Cocoa Recovering Off Key Support Area

The last time we looked at Cocoa the 2011 downmove had halted at a multiple support area. The then prospects of a recovery are now being borne out, although the final bull signal is still awaited.

• MONTHLY CHART -CONTINUATION The drop back from the 3826 peak tested the 38.2% pullback of prior 2004/2011 upmove, at 2860. The rising support line nearby has also helped provide support. Now see the Daily chart.
• DAILY CHART –Sep-11: The break through the 23.6% recovery level was the initial positive sign, after support was found near the 76.4% pullback. Now important resistance from the channel top projection (now at 3225) is under pressure. A clear breach of this would provide a boost to the bulls and turn focus initially to the 3350 area, where 29-Apr high and 61.8% recovery coincide. There should, though, be the strength to push on towards higher 3462 76.4% level where a Fibo projection lies close by.

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The uncertainties of Oil

TECHNICALS:

WEEKLY OIL CHART

The market is testing the integrity of the bull market from early 2009.

Note that the diagonal support has been breached.

But too that the horizontal support from the Prior Highs 87.15-92.58 remains, for the moment, intact

DAILY OIL CHART

The detail of the breakdown through the rising diagonal support is clear.

A continuation triangle completed, that was the catalyst for the breakdown.

In the small rally of recent weeks, see how the lower diagonal of the bear continuation triangle has been good resistance.

Short-term bears need confidence that the rally has failed ( thus need a breakdown through 94.02…

(Medium-term bears need reassurance that the weekly support band 87.15-92.58 has been smashed (see above) … that may take longer!

FUNDAMENTALS:

The Euro zone sovereign debt crisis had barely been quietened by Greece agreeing to the austerity terms of her second financial rescue, when traders turned their attention to the public finances of Italy.

With the 2^nd highest debt to GDP ratio in the Euro zone and 4^th highest globally, it is surprising that Italy hasn’t been under scrutiny previously, but unlike Greece and Portugal and even Ireland, the Italian economy is broader-based and has a solid manufacturing base.

However, after Berlusconi criticised the austerity measures of his finance minister, traders became concerned about the sustainability of Italian public finance. Bonds rallied hard, stocks sold off and the Dollar strengthened against the Euro.

Gold too enjoyed a rally registering a new all time high as the other thorny issue worrying markets, the US budget deficit and lack of agreement about how to reduce it, risks pushing the US towards default. That is, unless the Congress and President can agree a plan to raise the debt ceiling.

But oil has remained well-supported during this period. Apart from being an essential commodity, it is also a risk asset and has tended to track the fortunes of the stock markets, since confidence in equities usually equates to optimism about economic growth and by extension demand for oil, so current price action is impressive.

The current worries concerning the Euro zone and US have growth implications, not just locally, but globally.

If the Euro zone cannot come up with a plan that neutralizes and then corrects the debt problems of its member states, at some point the real economy will suffer. The weaker periphery cannot be expected to adopt ever-harsher austerity measures in exchange for aid that has the affect of crushing growth. And the richer countries like Germany will pobably refuse a situation that becomes a transfer union in all but name.

But even if the Euro zone gets to grips with its problems, should the US fail to agree a plan that lifts the Federal governments debt ceiling, the US will be in default. For a country that borrows vast amounts daily that would be a mistake and a disaster. Once investors lose confidence in the credit worthiness of a country like the US that has for years been the back bone of the global economy, the repercussions would be truly global.

The US would struggle to finance herself at acceptable yields and would probably have to adopt strict austerity measures.

Global markets could be thrown into turmoil. Just think of the size of China’s foreign currency holdings that are mainly in Dollars and largely invested in US Treasuries… add to that India and the oil-exporting states and there could well be a move to divest from US assets on a scale that would create a financial crisis beyond anything so for experienced.

With these risks so very real, it is surprising to see how well oil has held up. Clearly traders have confidence in the Euro zone and US authorities ability and basic common sense to reach a solution that avoids the worst-case scenario.

Moreover, the likes of China and India continue to record strong growth; China’s current growth rate is 9.5% and that is considered a slowdown, so oil has some independent demand.

So looking beyond the current crop of difficulties it is easy to see why oil is a long-term bull market, but getting from the short term to the long term isn’t a trouble-free path.

The Euro zone Sovereign debt crisis has been running for well over a year and we doubt the authorities there really grasp what needs to be done and if they do, political will is lacking.

In the US, policy makers and legislators seem to forget that the US has new global challengers creeping up; China, and India. The US used to be seen as the consumer of last resort; the US sold Treasuries to surplus countries to fund her lifestyle, the surplus countries needed somewhere to invest, but that relationship is slowly being eroded, a US default would likely cause a fatal rupture.

So although oil has held up well so far, what would be the reaction if:

1. the US failed to raise her debt ceiling,
2. the rating agencies slashed the US credit rating,
3. US bond yields soared, and
4. the US was forced into making deep spending cuts.

The US economy would likely go into a deep recession and US military power would decline. Old certainties would vanish and the world economy would be forced to adjust, meaning oil prices would collapse.

Can this happen? It’s in the hands of the Euro zone and more important, US authorities.

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