Seven Days Ahead Market Update

US Dollar Index Stuck On 76.4% Support

2011-09-01T21:47:00.000+01:00

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

2011-09-01T19:00:00.000+01:00

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

2011-08-26T09:43:00.000+01:00

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

2011-08-25T22:47:00.000+01:00

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

2011-08-23T20:35:00.000+01:00

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

2011-08-19T08:28:00.000+01:00

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

2011-08-18T12:02:00.000+01:00

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

2011-08-17T18:21:00.000+01:00

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

2011-08-12T16:59:00.000+01:00

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

2011-08-12T16:57:00.000+01:00

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

2011-08-12T10:51:00.002+01:00

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

2011-08-05T08:35:00.001+01:00

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:

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

and potential bear energy…

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?

2011-08-04T12:11:00.000+01:00

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

2011-08-03T22:05:00.000+01:00

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

2011-07-28T18:13:00.000+01:00

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

2011-07-28T18:11:00.000+01:00

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

2011-07-21T17:22:00.000+01:00

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

2011-07-21T15:25:00.000+01:00

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

2011-07-15T09:46:00.000+01:00

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:

the US failed to raise her debt ceiling,
the rating agencies slashed the US credit rating,
US bond yields soared, and
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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Next Bear Leg in EUR/USD Now in Process

2011-07-14T12:08:00.000+01:00

Our previous Update on EUR/USD highlighted a key reversal week in early May, which has marked the start of a consolidation/correction phase. Following renewed weakness we look at where the next supports reside.

WEEKLY CHART -CONTINUATION The early May key reversal week was just ahead of the 1.5055 76.4% retracement. It marked a pause and at least temporary reversal in uptrend. Next support has been neared, the 38.2% pullback at 1.3770, with rising support line just below. Breaks of these would give bears a boost. Also see Daily chart.
DAILY CHART: Recent weakness, after earlier failure at the former 76.4% level, has kept bears in control, with downside focus on s/term channel base support around 1.3650. This will soon coincide with the lower bull channel base projection at 1.3555 currently, and temporary support would not be a surprise in this area. However, of equal interest is the lower 1.3405/1.3360 area, a Fibo projection and 76.4% pullback level.

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Sugar Surge Nears Interesting Resistance

2011-07-14T12:07:00.000+01:00

After peaking in early Feb the drop back in Sugar 11 found a low in May, from whence a recovery got underway. This has made a new high on the front month chart, but certain resistance levels are now not far off.

WEEKLY CHART -CONTINUATION The earlier fall in 2011 found support not far above the old 19.73 2006 high. Subsequent recovery has been strong and steady, and focus is now on the 32.40 76.4% retracement where we look out for resistance.
DAILY CHART –Oct-11: Continued strength here has exceeded the 27.57 Feb high and eroded our bull channel top projection. With the current structure showing no sign of fatigue note the next target/ possible resistance here comes from the 1.618 swing projection off prior Feb/May downmove, at 31.80, close to the 76.4% level on the Weekly chart. Resistance near here would not surprise.

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US Dollar Index Poised For Recovery?

2011-07-08T10:46:00.000+01:00

The 2011 downleg in the US Dollar Indexearlier found support on the long term chart and produced an initial reversal sign in early May, holding above the major 2008 low. A bull signal is still awaited, however.

WEEKLY CHART Note how support has come from the bear channel base projection, following the brief breach of the 74.170 Nov-09 low. The start of the recovery was marked by a key reversal weekin early May, which provided an initial bull sign. Further recovery could find resistance from the rising return line.
DAILY CHART The Index remains below the 38.2% recovery level, with the early May key reversal week still providing a positive backdrop. A clear break of this would provide the first bull signal. Note that key resistance lies higher, at the channel top at 78.400 –a more lasting recovery phase would be likely if this was clearly breached. Meanwhile s/term support comes from the 76.4% pullback at 73.560.

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A cross-roads for the Bund?

2011-07-08T08:58:00.001+01:00

TECHNICALS:

WEEKLY CHART

The retracement and failure at the 50% Fibonacci retracement resistance is clear.

The failure is especially significant as it is a weekly Key Reversal…

DAILY CHART

The day chart encourages the bears still further.

Note well the rally back up to the 61.8% Fibonacci resistance - and the failure so far, there.

We anticipate a retest of the band of support from the Prior Highs 124.59- 124.32.

And note too the Fib support there – coincident at that levels making it very significant for the bears.

FUNDAMENTALS:

Last week the Greek Parliament voted to accept the austerity measures demanded by the EU/EZ/IMF as a condition of the financial rescue package designed to avert a Greek government default. The Euro rallied, stocks rallied and Bonds sold off as traders moved out of safe haven assets and back into riskier asset classes.

A week later and equities are holding their gains, but the Euro has weakened against the Dollar and the Bund has staged a limited recovery, what has happened?

It has long been our opinion that the rescue deals cobbled together at the last minute by the EU/EZ/IMF are not addressing the root of the sovereign debt problem that has dogged the Euro zone for more than a year.

In truth, Greece, Ireland and Portugal have been lent massive amounts of liquidity to provide them with breathing space to cut their budget deficits and reduce their debt build up. But the terms attached to each rescue are very austere, so much so that growth has shrunk. That shrinkage has meant that the deficit has increased as a percentage of GDP making it more, not less, difficult for the hapless three to service their debts, hence the reason why Greece has required a second rescue.

Both the rating agencies and the markets see the flaw in this process. Portugal has seen her debt downgraded to junk this week by Moody’s as they judge Portugal will soon require a second rescue too and Ireland will also in the near future.

This has seen Irish and Portuguese Bond yields rise to Euro era highs and is primarily the reason why the Bund has held up so well even as stocks continue to recover.

But if the Bund is seeing a fresh wave of safe haven buying, why isn’t the Bund future much higher than it currently is?

Well, there are reasons:

The ECB has today hiked rates a further 25bp despite on going concerns about the debt crisis. Their view is the debt crisis is a political problem for politicians to solve, their job is to keep inflation at or below target, and they are right.

The ECB has also said it will continue to accept Greek bonds so long as there is no default - technical or otherwise - which means debt-restructuring.

For now, traders have re-focused back to stocks. The Q2 corporate reporting season has just begun. Interest rates in the US and UK are set to remain on hold for a considerable time and traders are still relieved that a Greek default has been averted.

But we judge the crisis will resurface sooner than expected. Portugal and Ireland will likely be forced to apply for a 2nd rescue due to sky high financing costs, making the rating agencies’ fears self-fulfilling. Moreover, it is by no means clear that the Greek people are willing to suffer the sacrifices demanded of them or the loss of Sovereignty implied by accepting the rescue.

At some point the debt burden in the Euro zone needs to be dealt with at its root. Certainly, budget deficits need cutting and the state needs to move away from being a major economic force in the weaker peripheral economies, but the debts of the weaker countries will likely need to be rescheduled so that there is a chance they can be serviced without constant recourse to rescue funds.

If this doesn’t occur, because the Euro zone wont allow it, the risk grows that one or more of the weak periphery will leave the Euro zone.

What would be more damaging to Euro zone credibility?

1.A restructuring of debt, which would allow the Euro zone to remain together and remove the distraction of organising repeated bailouts, or

2.An untimely exit from the single currency of one or more of its members.

We judge option two would damage credibility the most. It would prove what many said of the currency union at the start to be true; it was ill-thought out and couldn’t last, and moreover the Euro zone authorities lacked the will or vision to solve their problems.

Whereas a debt restructuring would show there is political will among all members to solve problems collectively and learn from mistakes, rather than punish with punitive measures and move on together.

What then for the Bund?

The answer lies in the way the authorities handle the crisis moving forward. There is a body of opinion that holds the view the Bund sovereign debt would be better and stronger without the weaker economies diluting the Eurozone.

On the other hand, a debt-restructuring is bearish because it would would reduce the need to buy bunds as a hedge against the threat of default. But until one or other route is chosen we see the Bund as likely to remain a crisis-driven bull market.

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Soybeans Pushing on Pivotal Support

2011-07-07T12:45:00.000+01:00

In early 2011 a Soybean recovery encountered clear resistance from a long term Fibonacci level, and the market has since turned consolidative. Pressure is currently bearing on a pivotal support area.

WEEKLY CHART -CONTINUATION The market earlier pulled back from dual resistance from a bull channel top projection and 76.4% retracement level. First support from around the 1291.25 2009 high was earlier tested, and has again come under scrutiny. This ties in well with Daily chart support.
DAILY CHART –Nov-11: The slip back from near the Apr 1411.25 high initially breached a rising support line , which was not viewed as significant. However, fresh pressure is now being put on the 23.6% retracement –this coincides nicely with Weekly chart support and is seen as a pivotal level. A break below this would provide an initial bear sign here, and invite a test of the 12.18.70 38.2% level next.

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Is the Euro in the clear?

2011-07-01T10:13:00.000+01:00

TECHNICALS:

WEEKLY CHART

The dithering short-term market cannot disguise the completion of a bull wedge and the refusal of the market - the euro bears - to break back into it.

Both the falling diagonal and the horizontal from 1.4281 are good support.

DAILY CHART

Looking closer, the day chart shows the near completion of a bull triangle, a clear break and close above 1.4550 is required to do that.

Notice too the possible Double Bottom already in place – the catalyst for a break of the triangle, surely.

Cautious Euro bulls will wait for the break.

FUNDAMENTALS:

The Greek Parliament has voted to accept the austerity measures demanded by the IMF/EU/EZ in return for additional financial assistance, is the crisis for the Euro zone over or is it just a sticking plaster applied to a deeper wound?

Until the latest saga of the Euro zone debt crisis, centred on Greece emerged early in May, the Euro looked set to extend what was a well-established bull trend against the Dollar, driven on by:

1.the continuing weakness of the US economy,

2.the inability of the US administration to take concrete steps to shrink the over sized US budget deficit, and

3.The extraordinary economic recovery enjoyed by Germany

But all that was pushed to one side when the Greek debt crisis forced its way back to centre stage. It was immediately clear that without a new rescue package Greece would more than likely default.

The rating agencies saw this and repeatedly downgraded Greek debt to a level consistent with imminent default. Much was written about the crisis and it was suggested Greece leave the Euro and devalue its way out of trouble, but both the Greek and Euro zone authorities ruled this out as even a remote possibility.

Now the Greek Parliament has narrowly voted to accept the austerity measures the Euro has rallied, but the Greek people are on the streets protesting against measures that they intuitively judge will retard economic growth and impoverish them for many years, and for what? Membership of the Euro.

For now the markets have breathed a sigh of relief. Greece will get her money and default has been avoided. The spotlight is now back on the US with its sluggish growth, bloated budget deficit and quarrelling politicians that are unable to agree a debt reduction plan.

The House Republicans are refusing to allow an extension of the US debt ceiling, using it as a stick to force Obama into agree to a broad-based debt reduction strategy. But unless the ceiling is lifted, the US will be unable to meet an interest payment on Government debt that falls due on August 4th; that’s Monday of next week.

In an effort to nudge the US towards commonsense, the rating agencies have said the US credit ratting would be reduced several notches to reflect the fact of selective default, while we think the authorities will raise the ceiling, the Dollar is the victim.

The Euro zone debt crisis has dominated for more than a year, but the US is running its own fiscal circus. Many US states have a debt situation at least as bad as Greece, so if the Greeks are able to get their house in order, will the US become the next point of focus for those fearing a developed nation will soon default?

We don’t think the US will default. We doubt a meaningful debt reduction program will be agreed before the 2012 US Presidential elections and suspect there may well be several more chapters of this high stakes game of ‘Chicken’ before a deal is finally reached, but the US authorities on both sides of the political spectrum are smart enough to understand the damage even a limited default would do to US credibility and the financial system.

What then of the Euro?

We judge the Euro is likely to enjoy a limited rally on relief that a Greek default has for now been avoided. But why did Greece need extra help when the 1st deal she reached was deemed sufficient, if not generous enough to ensure set the Greek house in order.

The reason is clear. The austerity measures shrink GDP, this makes it harder for Greece to service her debts as the pot from which her wealth is drawn has shrunk. We judge the same spiral of despair will start all over again and in several months time Greece will be back with the begging bowl seeking more help.

So in summary, yes the Euro can enjoy a relief rally, but longer term, unless the likes of Greece are offered either:

A.A longer term solution which deals with the debt and doesn’t just provide liquidity, or

B.Greece leaves the Euro and defaults or renegotiates her debt,

●

This whole sorry saga is set to repeat, sending the Euro lower.

Clinton turned record budget deficits into sizeable surpluses. The difference between now and then is the US is fighting a costly war in Afghanistan and has recently fought a costly war in Iraq and they are draining US resources. Nonetheless, in the long run the US will tackle her debt burden..

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USD/CAD Recovery Holding Below Key Resistance

2011-06-30T11:39:00.000+01:00

Our last USD/CAD Update (06thMay) highlighted certain downside Fibo projections which looked supportive. Subsequent recovery has so far been unable to overcome initial key resistance though.

WEEKLY CHART -CONTINUATION Our Fibo projection at 0.9485 has provided initial support. A modest recovery has so far found resistance from the Apr-10 low.
DAILY CHART: A different Fibo projection on the Daily chart also provided support. The recovery has so far made heavy weather of extending to first key resistance offered by the 0.9973 15-Mar high, which coincides with a 38.2% retracement. Bear channel top resistance is not much above now, around 1.0000. A break through this is needed for a clear positive signal.

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Lower Targets Open For Brent Crude

2011-06-30T11:37:00.000+01:00

An earlier fall in Brent Crude Prices in May found initial support from a 38.2% level. This has now come under pressure again, inviting calculation of lower targets.

WEEKLY CHART -CONTINUATION The first 38.2% support has come under pressure once more, and a breach would herald a more prolonged pullback phase. Note the longer term 38.2% retracement, of the whole 2009/2011 upmove, at 92.32 which offers the next downside target. This lies close to a 61.8% level and the May-10 high.
DAILY CHART –Aug-11: A second bear leg got underway after resistance from the 120.00 area. Downside focus is now on an equality target at 98.80 and lower channel base projection at 97.30. S/term support here would not surprise. On the support side the interest is as much in the longer term charts at present.

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Uk Gilts rally on hint of more QE

2011-06-24T08:33:00.001+01:00

The prospect of the QE policy being re-activated has begun to drive gilt yields lower and sent Gilt futures higher.

The Bank is more likely than not going to restart QE and the Gilt will enjoy the support restarting that program will offer, together with the support traditionally offered bonds from slower growth and declining inflation.

TECHNICALS:

WEEKLY CHART

The market is being driven better from the clear completed Head and Shoulders pattern, the minimum move set to be up just beyond the 61.8% Fibonacci resistance.

DAILY CHART

The bull trend remains very much intact. The medium-term pattern is sustaining the bulls’ hopes, though a careful watch on the effect of the small resistance above the market should be kept.

Cautious bulls will wait for a break up through those levels. Others will be long from lower down and looking to add!

FUNDAMENTALS:

The rally in government bond markets over recent months has been driven by two anxieties:

The health of the global economic recovery, and
The Euro zone Sovereign debt crisis.

In the US, the economy has been slowing for several months despite the Fed’s QE2 program which worryingly draws to a close at the end of this month. The Fed acknowledges the weakness but so far hasn’t proposed any new measures designed to reverse the slowdown due to fears of gradually accelerating inflation.

In China, the authorities have tightened monetary policy on several occasions as they try to contain inflation and prevent an asset bubble from developing in an economy that has invested heavily in manufacturing capacity designed to fuel export-led growth.

In the Euro zone the recovery continues to be propelled by fast-growing Germany. But strip out German growth and the picture looks very different, with weaker peripheral economies struggling to cope with the burden of public debt and austerity measures designed to bring public finances back under control. But despite this, Greece and a few others remain in intensive care with default, at least in Greece looking like a real possibility.

IN the UK the coalition government has put into place deep spending cuts designed to bring public finances back to controllable levels that don’t hinder private sector growth, but the short/medium term consequences are slower growth, maybe even recession?

Over the last 1–2 years the Bank of England has walked a policy tightrope that this year has become ever more demanding.

As the austerity measures have begun to bite, the economy has rapidly cooled with the most recent retail sales report coming in at -1.6% month on month. This is bad news for a service sector led economy.

The Bank until recently had been widely expected to begin tightening policy later this year in an attempt to gradually return CPI inflation to its target of 2.0% from the current and persistent overshoot of 4.5%.

Indeed, the committee had for several months been split over how to respond to the dichotomy facing the economy. Six members had consistently voted for policy to remain on hold, but with various caveats about growth and inflation, the other three had voted for an immediate rate hike, with one seeking 50bp.

As if that wasn’t enough of a split, one of the group of six wanted to increase the QE program from its current level of £200.0B, but was constantly out-voted. This week the Bank of England released the MPC minutes for the meeting held earlier this month and there was a clear change of tone.

Although inflation remains substantially above targets, policy makers are becoming increasingly concerned about growth which looks set to slow further over the coming months.

The Government has little choice but to see through its fiscal retrenchment or else risk a debt crisis similar to the one playing out in the Euro zone.

So fiscal policy isn’t an option. The Bank of England can not cut interest rates since they are already at 0.25% where they have been for about two years. The only option open is to restart QE and that seems to be the direction policy makers are heading.

If the economy does slow further as feared, the thinking is that inflation will correct substantially lower. Interest rate hikes will be unnecessary. But then deflation could conceivably become a risk once more.

The Bank then would have to start buying bonds once more and it is the prospect of the QE policy being re-activated that has begun to drive gilt yields lower and send Gilt futures higher.

We judge the Bank is more likely than not going to restart QE and the Gilt will enjoy the support restarting that program will offer, together with the support traditionally offered bonds from slower growth and declining inflation.

In short, the gilt rally seems far from over.

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Is GBP/USD Momentum on the Wane?

2011-06-23T18:06:00.000+01:00

After positive signs were seen on the GBP/USD chart earlier this year a recent drift back threatens to develop into something more lasting.

WEEKLY CHART -CONTINUATION The previous break through falling resistance was bullish –but after the 50% recovery level was neared the market has slipped. Support from the old falling return line just below 1.6000 is now being tested.
DAILY CHART: The recent break of rising support was an initial sign of momentum loss. However, lower supports are more crucial, including the 1.5934 28-Mar low and, in particular, the channel base projection around 1.5800. This latter combines with a 38.2% pullback level nearby at 1.5785 –a violation of this would signal a more prolonged correction phase was underway.

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Coffee Bears At The Helm

2011-06-23T11:54:00.000+01:00

The steady surge in Coffee started to falter earlier this year, and after a peak in early May the chart structure began to change. Recent weakness has confirmed a bearish outlook.

WEEKLY CHART -CONTINUATION The chart structure has changed, implying fatigue. This was particularly the case when temporary support from around the 23.6% pullback level gave way. Focus has now turned on the lower 228.00 38.2% retracement, as next potential support.
DAILY CHART –Sep-11: Recent support from around the 259.40 05-Apr low has yielded now, after s/term consolidation. This followed the negative signal that came from the break of the channel base projection. Bear focus turns to the 220.00 area where a Fibo projection resides (not much below the 38.2% level on the Weekly chart). First resistance now comes from congestion below the 276.75 03-Jun high.

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Stocks are weak, especially the DJ EuroStoxx

2011-06-17T06:48:00.002+01:00

TECHNICALS:

WEEKLY CHART

The market’s double failure at the 3050 High is very troubling for the bulls.

Note the support at the 50% pull-back which has already forced a substantial bounce once before…

But there is no clear Top formation in place here…

DAILY CHART

The day chart has a near Double failure (not apparent on the weekly chart) at the 3000 level.

Note too the completion of a bear head and Shoulders at the 2760 level (though there was some uncertainty at the Neckline).

Minimum move for the bears measured from the Neckline?

About the Prior Low at 2591.

The bears are in charge.

FUNDAMENTALS:

The rally in equity markets globally looks at risk now as traders start to re-assess the health of the global economy. And no matter where one looks, all the major economies are experiencing their own unique and sometimes shared difficulties.

In the US the burden of run away fiscal deficits and clear signs of persistent economic weakness are taking toll on equity markets as investors turn to bonds.

In the UK, the fiscal retrenchment has turned a recovery that was pumped up on fiscal stimulus under Labour, into a more sluggish affair as the current administration struggles to return UK public finances to a healthier path, leading the Bank of England to turn a blind eye to clear inflationary pressure.

In Japan, that economy was already struggling to free its self from the grip of a deflation that has persisted for the best part of two decades, and cruelly just as the authorities seemed to be on the verge of improving conditions, a natural disaster struck earlier this year that swamped the economy and pushed Japan back into recession, requiring the authorities to spend Billions at a time when the rating agencies are starting to feel uneasy about Japans fiscal health.

Even in the much-heralded economies of India and China the authorities are trying to tame inflation induced by growth rates in excess of 8% a year.

But it is the Euro zone that seems to have the most difficult task ahead. The Euro zone came about by the force of political will even though many of the conditions required for an optimal currency area had either not been met or even prescribed.

Many Euro zone countries have maintained their 1^st world lifestyles on the back of public spending. As members of the EU funds were made available to the poorer regions to help develop infrastructure and support regional economies, there has never been an imposed discipline requiring EU member states to keep budgets to GDP or debt to GDP ratios in a sustainable range.

The Maastricht treaty did stipulate acceptable ratios as part of the Euros launch, but have never really been imposed. When core Countries like France and Germany have exceeded these on occasion, how can the weaker periphery be expected to behave any differently?

When economic times were good, these problems were conveniently ignored, but the financial crisis/recession exposed all of these weaknesses and despite repeated efforts to rescue the likes of Greece, Portugal and Ireland with huge amounts of money and externally imposed fiscal retrenchment, the Euro zone sovereign debt crisis goes on.

With the health of the global economy once more under scrutiny and the US sleep-walking towards its own fiscal crisis, are equity markets and in particular the DJ EUROSTOXX50 such a good buy?

Over recent weeks this market has corrected lower, but the correction risks becoming a new bear trend. Greece has seen its debt downgraded to a level where default is imminently expected and although the spot light shines on the hapless Greeks several other peripheral economies aren’t fairing much better.

We judge the DJ EUROSTOXX50 looks vulnerable to further material downside weakness since the problems outlined are yet to be convincingly addressed, let alone solved.

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USD/CHF Bears Show Short Term Fatigue

2011-06-16T16:32:00.000+01:00

The USD/CHF chart has continued to grind lower during 2011, offering little reason to suggest a change in trend is due. There is now one small sign of bear fatigue, but further signs are required before a recovery is presumed.

MONTHLY CHART Continued weakness has tested the credibility of support from around the bear channel base projection on the long term chart.
DAILY CHART Note how a positive divergence has developed on the RSI indicator, the first sign that bears are temporarily tiring. However, recovery through the falling resistance line at 0.8830 is required, followed by a further push through possible resistance from the current 23.6% level at 0.9125, before a more lasting upmove will look underway.

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Cocoa Drop Pauses at Multiple Support Area

2011-06-16T11:24:00.000+01:00

The fall back in Cocoa prices from a multi-year peak in early March recently found interesting Fibo support which the market seems reluctant to break through –is a temporary recovery just round the corner?

MONTHLY CHART -CONTINUATION The drop back from the 3826 peak recently tested the 38.2% pullback of prior 2004/2011 upmove, at 2860. Also note the rising support line nearby –we keep a lookout for better support to emerge here.
DAILY CHART –Sep-11: See how support continues to be influential from the recently-eroded 76.4% pullback. With potential support suggested by the longer term continuation chart too we must be on the lookout for a recovery phase getting underway. This would mean lower levels such as the Sep-10 low and 2660 equality target ( (Mar downmove extended off the late Apr 3351 high) stay out of reach for now. Initial resistance has come from the 23.6% recovery level (of the whole downmove from Mar) with higher 3165 38.2% and 3280 channel top projection looking more key at this stage.

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Growth woes hit the S&P

2011-06-10T08:39:00.002+01:00

The S&P is looking vulnerable to further downside price action. Early last week, the market looked set to snap out of what then looked like a correctionm but a run of weak data, that began with the ISM Manufacturing survey sent the market lower...

TECHNICALS:

WEEKLY CHART

The bull progress of the market is clear. Successive H&S patterns have spring-boarded the market better…until the prevarication at the 1342.30 level.

DAILY CHART

There is a lack of structural clarity, but the inability of the market to ratchet better on the back of Prior Highs is clear – the failure of the small rally to get back through 1332-1329 was revealing.

And the bears have gained some momentum there is no doubt.

The Prior Lows at 1311.70 and 1305.20 are now good resistance above the market.

The question of when a multiple Top is in place arises: the break of 1285 is not conclusive, and the 1240 looks more compelling for the bears…

FUNDAMENTALS:

The S&P is looking vulnerable to further downside price action.

Early last week, the market looked set to snap out of what then looked like a correction, but a run of weak data, that began with the ISM Manufacturing survey sent the market lower.

The move extended on the back of a disappointing ISM non-manufacturing survey and weak non-farm payroll. Traders began to speculate the Fed might respond to what is clearly a weakening economy with a rethink on their QE policy which expires at the end of this month.

Indeed, there were two opportunities for the Fed to communicate a willingness to offer fresh support this week:

The Beige book released on Wednesday, and
A speech from Bernanke on Tuesday.

The Beige book acknowledged the economy has slowed but attributed the weakness to a break down in the supply chain caused by events in Japan, which should ease when the crisis in Japan eventually eases.

Bernanke also acknowledged the weaker economic performance, but omitted any new commitment to a “QE3”.

Faced with an indeterminate period of economic weakness both in the US and abroad, traders retreated further from equities and the S&P looks set to sell off further. The pull-back already exceeds the sell-off that occurred in March, caused by the earthquake/Tsunami/nuclear crisis, in both duration and points and traders are now worrying if it will revisit the March lows.

We judge the market’s performance from here will be dictated by both US and Global economic performance. The US economy has been showing weakness for several weeks. The housing market is experiencing a double-dip and the labour market is again weak. Jobless claims have re-established firmly above the important 400k mark, the unemployment rate is back above 9.0% with the non-farm payroll report showing the economy simply isn’t creating enough new jobs to absorb new labour force entrants, let alone re-employ the unemployed.

The other negative weighing on the market is the still small but growing threat of a US debt default. The administration and Congress are locked in a battle over how and by how much to reduce the US budget deficit. The Federal government keeps bumping up against its debt limit requiring congress to raise the ceiling on how much the government can borrow.

The House Republicans see refusing to automatically raise the ceiling as a means of forcing Obama to negotiate about a broader debt reduction, but if they fail to authorise a bigger spending limit, there is a real risk the US will perhaps miss interest payments that fall due on its bonds or be unable to repay maturing debt. Either scenario is a default and the impact that would have is serious, not just for the US but globally.

So until that threat is removed this market has several reasons to attract the bears.

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USD/JPY Still in Pullback Mode

2011-06-09T15:19:00.000+01:00

In March the sharp spike down in USD/JPY and rapid reversal gave a bull signal, and subsequent weakness is still viewed as corrective ahead of another upward push.

WEEKLY CHART Note how the Mar sharp sell-off saw a test of the projected bear channel base before recovery set in. First resistance here, from the late 2009 84.81 low, was earlier tested -a push through this would be a bull sign.
DAILY CHART The pullback has been trying to hold around the 80.00 support area. Pressure is still bearing on this so we are keeping in mind the lower 76.4% pullback at 78.58 for the time being. At this stage a rebound back above the 82.23 19-May high would be a useful sign for the bulls. In due course we look for a return to the 50% recovery area.

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Short Term Natural Gas Bulls Up Against Resistance

2011-06-09T15:18:00.000+01:00

Price swings in Natural Gas have so far avoided giving a clear directional signal in 2011. Latest strength has brought the market to key resistance, and a breach would provide an initial green light to the bulls.

WEEKLY CHART -CONTINUATION Price swings in 2011 have had an upward bias, but no clear break to the upside. If better recovery off the dual support (from near the 3.155 May-09 low and 76.4% pullback) is seen then note possible resistance from the 76.4% 5.425 retracement. Further out we would target the 38.2% recovery level at 6.720 plus equality target just above at 6.910.
DAILY CHART –Jul-11: In the Commodity Specialist Guide we were recently looking at support from the 4.154/4.141 area (former 76.4% pullback and 11-Apr low). This worked nicely and the recovery has now put resistance from the channel top projection under scrutiny (at 4.870 currently). A break through this channel would be bullish, initial focus turning to a Fibo projection at 5.220, ahead of levels on the weekly continuation chart.

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AUD/USD Bulls on the Alert

2011-06-03T11:44:00.000+01:00

Bulls have been making the running in AUD/USD but this is another market where a key reversal week was seen, in early May, which could encourage a better pullback phase.

MONTHLY CHART The bull move here recently overcame resistance from a long term channel top projection. However, there is now potential resistance at an equality target, the 2001/2008 upmove measured off 0.6004 Oct-08 low, at 1.1080.
WEEKLY CHART In common with some other FX charts there was an early May key reversal week, which sets up the possibility of a better corrective phase.
DAILY CHARTThe bull trend remains intact so far but the key reversal week requires caution.First support has come from around a prior channel top, at 1.0500 now (also close to a 38.2% pullback, not shown).The next lines of defence are •the old trading range top starting at the 1.0253 Dec-10 high •the rising support line at 1.0150 currentlyBreaks of these latter would be a strong indication that a more prolonged setback was underway.

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Silver -Temporary Recovery Off Fibonacci Support

2011-06-03T11:43:00.000+01:00

The surge in Silver came to a halt in Apr, and subsequent pullback was sharp. Interesting Fibo levels have recently provided support but we remain on the lookout for a further bear advance.

WEEKLY CHART -CONTINUATION The sharp drop back recently found support near the 38.2% level. Failure here would confirm a medium term setback underway.
DAILY CHART –Jul-11: Clear support on the Daily chart emerged from around the 32.00 76.4% pullback level, ahead of the 31.37 early Jan high. In the Commodity Specialist Guide we had said that a s/term recovery from here would not be a surprise. Initial resistance has come from the 39.00 38.2% bounce level. It is unclear how strong the rebound can be, but also keep in mind higher potential resistance from the 44.64 26-Apr low. A later break of 76.4% support would target the late Jan 26.45 low next.

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The Dollar is unable to strengthen

2011-06-03T10:44:00.000+01:00

TECHNICALS:

MONTHLY CHART

We last wrote about the Euro on 14^th April when the wedge had just been completed….there has been a pause since, within which there has been a retest of the breakout levels….

DAILY CHART

The two critical levels are the upper diagonal of the wedge and the Horizontal from the Prior High at 1.4281.

They were twice tested, and found to be solid.

There is no clear short-term reversal pattern in place yet, but the medium and long term pressures for a lower Dollar and higher Euro look to be firmly in place.

Our Euro optimism looks to be well founded.

FUNDAMENTALS:

The Dollar’s recent rally appears over, or is it?

Until the start of May the Dollar had been under relentless selling pressure that drove it to within a whisker of 1.50 against the Euro. Then suddenly it corrected, very vigorously. The catalyst was a mix of events, but the Portuguese debt crisis was at the centre of the drama weakening the Euro.

After a period of uncertainty the Portuguese government finally sought financial help from the EU/EZ/IMF and this seemed to bring the Euro zone’s debt crisis into sharp relief with Spain seen as the next victim.

Additionally, speculation had built that the ECB would follow up April’s rate hike with a move in May helped the Euro rally through April. But when the ECB left policy unchanged and Trichet failed to offer guidance on the next policy move, the Euro lost its support and the Dollar staged a lightning rally.

Switching to the Dollar, the US released a non-farm payroll report at the start of May that was better than expected and traders took this as a sign that the Labour market was at last repairing the damage caused during the Financial/crisis recession.

Moreover, the Dollar was back in favour as a safe-haven trade. The Chinese were concerned about controlling domestic inflation, Japan was still in the middle of her natural/nuclear disaster and the Sovereign debt in Europe crisis raged on. So questions were being asked about the sustainability of the global recovery, especially as oil prices had recently hit $115.00 and threatened to go higher.

But over the last few days the Dollar’s rally has run out of steam. What has changed?

The Euro zone Sovereign debt crisis if anything has deepened as Greece is once again in the spot light for all the wrong reasons: more financial assistance is required and the Euro zone authorities are working to arrange assistance.

But traders wonder if that is the answer. Greek debt has been downgraded to junk, and traders doubt that country as a nation has the will to see through the restructuring needed. A debt rescheduling is seen as a way out, but the Greek PM has said no, the markets now wonder if Greece will ultimately default or leave the Euro zone.

While all of these options are apparently not on the table, the Greek economy doesn’t seem able to cope with the prescribed medicine.

However the Euro doesn’t seem undermined by this as it has rallied over recent days, but in reality recent price movements in Dollar/Euro aren’t Euro zone driven, they derive now from the US.

The US housing market seems to be in a double dip recession as house prices have fallen back, erasing gains made since the depth of the recession. Other data releases over recent week’s have turn weak and that is despite the still very easy fiscal and monetary policy.

Worryingly the Feds QE2 program ends at the end of this month. What then for US growth?

So the Dollar is again under selling pressure because the US economy is again looking weak, only this week the PMI manufacturing survey unexpectedly weakened.

But that isn’t all that weighs on the Dollar. The Administration and Congress are still at loggerheads over the Government debt ceiling. The House Republicans refuse to vote through a debt ceiling extension, as they want to use it as a bargaining chip in negotiations with the White house over reducing the budget deficit. If agreement can not be reached the federal government will be forced to shut down.

In short, the US economy is again showing weakness.

Politicians cannot agree on how to tackle the Country’s growing debt mountain.

The Fed’s QE2 policy is near closure, and despite all of this, some policy makers at the Federal reserve are worried about inflation, even though the CPI and PPI readings are still mainly benign.

All is not well with the US economy and as the World’s largest economy, the woes of the US currently eclipse those of the Euro zone and are set to drive the Dollar lower.

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Sugar Bounce Getting Underway

2011-05-26T17:22:00.001+01:00

2011 has so far favoured the bears in Sugar, following the test of a long term Fibonacci level which provided strong resistance. Certain supports have been reached, or neared, which suggest a recovery phase is in the offing.

SUGAR 11 –MONTHLY CONTINUATION CHART There was a clear negative reaction after the test of the long term76.4% retracement. The downmove has now got close to the level of the old 19.73 2006 high, as well as a bull channel base projection not far beneath.
DAILY CHART –Jul-11: In our 17thMar Update on Sugar we said that the bear picture should have the power to extend to the 61.8% pullback. On the Jul-11 chart this nicely coincided with the Nov-10 low area. There is now a good prospect of a better recovery phase getting underway. Note the last downleg segment from the 24.00 area coincides with the 38.2% bounce –temporary resistance would be likely here. Higher resistance of interest comes from the rising return line around 25.50 currently.

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Another Key Reversal Signal –in EUR/GBP

2011-05-26T17:21:00.000+01:00

As in the EUR/USD (Update 12/05/11) the EUR/GBP cross recently displayed a key reversal week, which implied at least a temporary halt in the 2011 uptrend. This week’s violation of key support now suggests a weakening in upward momentum.

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 the old triangle) resisted bulls’ advances. A negative key reversal week resulted, suggesting a better pullback phase to come. See how previous key reversal weeks have worked.
DAILY CHART In fact there was also a key reversal day on 05-May which encouraged the s/term bears. In the FX Specialist Guide we have been looking at key support from the area of the 0.8672 26-Jan high and bull channel base projection. The recent breach of these signals loss of upward momentum and is a boost for the bears. One possible lower support comes from the 0.8462 76.4% retracement of the 2011 gains. More key though would be the longer term channel base support.

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Bunds Uncertainty

2011-05-20T09:46:00.001+01:00

Over recent weeks Government Bond markets have staged a strong rally, at a time when traders and investors have become increasingly concerned about the Euro zone Sovereign debt crisis and the US budget deficit. Why is that? And will it continue?

TECHNICALS

MONTHLY BUND CHART

The market’s fall from the All Time Highs of 2010 has been brisk.

More than that, it has smashed multiple supports that have destroyed hopes of the rally continuing: for example, the breakdowns through 126.53, 124.60 and the steep rising diagonal trendline support.

So medium-term bulls are dashed, but are the bears in charge?

WEEKLY BUND CHART

The rally from mid April broke the sharp downtrend, but has paused beneath the band of broken supports, which (classically) now becomes resistance.

And note too that the market has failed there before…

Look closer still.

Daily Jun 11 Bund CHART

The pause in the very short-term is interesting and though not a reversal, merits close attention.

A push up through 124.60 would be convincing strength; equally, a pull-back through the rising diagonal would be telling weakness…

FUNDAMENTALS

Given that government bonds are no more than IOU’s, one could be forgiven for expecting US and Euro zone bond markets to sell off on these anxieties. But there have been several factors at work that have driven bond markets higher, which are:

1.Fear of resurgent inflation driven by lose monetary policy,

2.Fear rising oil prices would pose a downside risk to the global economic recovery,

3.Correcting equity markets driven by risk aversion derived from the above, and

4.And general safe haven buying driven paradoxically by the Sovereign debt crisis.

But since the Sovereign debt crisis has been a Euro zone phenomenon, why has the Bund performed so well?

A significant part of the answer is to do with traders fearing that one or more of the peripheral economies in difficulty with debt and receiving financial support, might yet default on their debt.

Although the EU/EZ/IMF rescue fund was set up to prevent such an occurrence, the terms imposed on states taking the help are so draconian that they have retarded economic recovery and in some cases deepened recession making it even more difficult to meet credit obligations.

Rumours have been circulating in both the press and the markets recently that Greece is on the verge of rescheduling her debts, and while these have been denied they have persisted and contributed to the Bund rally. Investors have sought to hedge against default of a Euro zone country by buying what is essentially Blue chip German debt.

In fact, some finance ministers have publicly begun to entertain the thought of a Greek debt restructure. This has helped ease the current wave of risk aversion and the Bund has eased lower.

The ECB has today let it be known it is against a debt restructure and said it would no longer accept Greek bonds if a restructuring went ahead.

While those remarks are unhelpful, it does indicate the level of discussion concerning debt restructuring. In the end the politicians, not the ECB, will decide whether or not a Greek or indeed Irish or even Portuguese debt restructure is acceptable.

The markets seem to take the idea positively: stocks have begun to recover, and the Bund has eased lower. While a debt restructure could be viewed as a soft default, since bond holders would have to accept longer repayment periods etc. it would create them breathing space the Euro zone needs.

Simply put, one year after the Sovereign debt crisis broke, the problem remains unresolved. The effect of massive rescue fund which was meant to reassure has been neutralized because of the strict conditions insisted upon by Germany. A debt restructure would allow individual states greater room to manoeuvre.

If such a solution were to be adopted, the Bund could begin a long correction lower.

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Reversal Signs in US Dollar Index

2011-05-19T11:10:00.000+01:00

The 2011 downleg in the US Dollar Index recently violated the 2009 low but has held above the more major 2008 low, finding support on the long term chart and producing an initial reversal sign too.

WEEKLY CHART Current support is coming from the bear channel base projection, following the brief breach of the 74.170 Nov-09 low. Note that the rebound has been marked by a key reversal week, which provides an initial bull sign. Further recovery could find resistance from the rising return line at 77.25 just now.
DAILY CHART On the Daily chart another bear channel base has provided support. S/term resistance has come from the area of the 75.631 Nov-10 low and a 38.2% recovery level around 76.000. A push through here would be s/term positive, building on the reversal week. However, key resistance lies higher, at the channel top and 76.4% level just above, at 79.380 –a more lasting recovery phase would be probable if this was overcome.

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Initial Reversal Signs Appear in Gold

2011-05-18T23:07:00.000+01:00

The upmove in Gold recently stalled after reaching interesting resistance on the longer term chart. An initial reversal indication calls for shorter term bulls to be cautious now.

WEEKLY CHART -CONTINUATION Our last Gold Update on 21stApril showed resistance on the Weekly chart which we were looking at closely. A recent key reversal week at this dual resistance (from the projected bull channel top and 2.618 swing projection off prior 2008 downmove) now suggests that further correction is likely.
DAILY CHART –Jun-11: Besides resistance on the Weekly chart resistance on the Daily chart was found from the bull channel top projection, leaving our higher 1640 Fibo projection out of reach. In light of the recent weekly key reversal further s/term weakness is likely. Support firstly comes from the Dec high and a break below this would be first sign of momentum loss. More serious, though, would be a violation of channel base support around 1400.

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Negative Key Reversal Week in EUR/USD Gives Bulls Pause

2011-05-12T18:45:00.000+01:00

This year’s uptrend recently neared a 76.4% recovery level, but a sell-off last week has stopped bulls in their tracks for now, with current risk of further losses shorter term.

WEEKLY CHART A warning to the bulls appeared last week by way of a key reversal week. This implies a better pullback could well be seen now, leaving the 1.5055 76.4% retracement out of reach.
DAILY CHART In the FX Specialist Guide a s/term Fibo projection we had marked in was tested last week, prior to a retreat. S/term support looks to be coming from around the 1.4155 18-Apr low, which coincides with a 38.2% pullback. Failure here would imply momentum loss. Modest support is then offered by the 1.3861 02-Feb high, while key support comes from the current channel base and 1.3426 14-Feb low area. In light of the key reversal week s/term rallies may well prove short-lived.

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Crude Oil Slip Finds Temporary Support

2011-05-12T16:26:00.000+01:00

In recent issues of the Commodity Specialist Guide we had been noting possible bull fatigue in Brent Crude Oil. A sharp sell-off found temporary support from a 38.2% pullback level, but failure here would herald a more prolonged correction phase.

WEEKLY CHART -CONTINUATION Bulls have not been able to hold the higher ground above the 121.25 76.4% mark (& an equality target). The current interest here is a 38.2% pullback level at 104.53, which also lies close to a longer term 23.6% pullback, not shown. It has provided temporary support, but a subsequent breach would herald a more prolonged pullback phase.
DAILY CHART –Jul-11: In the Commodity Specialist Guide we had pointed out that the Mar/Apr structure was hinting at bull fatigue. This proved correct, and the market has collapsed after testing the 2.618 swing projection (using the prior May-10 downmove) close to 126.00. The 107.28 16-Mar low has not provided accurate support, but held on a closing basis last week Note initial resistance has come from the 117.81 118.25 07-Mar high so far –there is a good chance that s/term rallies will prove temporary ahead of further bear activity. The interest is as much in the longer term charts at present.

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USD/CAD Finds Support at Fibonacci Area

2011-05-11T18:13:00.000+01:00

Since May last year the USD/CAD chart has been drifting lower, eventually breaking support from a 76.4% retracement level. In the FX Specialist Guide we have been keeping an eye on certain Fibo projections, which have now been reached.

WEEKLY CHART Our Fibo projection at 0.9485 has now been tested. Initial support has been seen, but we currently await a better reaction around here.
DAILY CHART Recent losses have tested a different Fibo projection on the Daily chart at 0.9430, not much below the level on the Weekly chart. Initial reaction here has been positive but a recovery above the 0.9973 15-Mar high is needed to provide a clear bull signal. This represents key resistance, coinciding with a 38.2% retracement (our Fibo projection is related to this fact). Meanwhile the downtrend must still command respect.

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Copper Nearing Key Support Once More

2011-05-11T18:11:00.000+01:00

In our last Copper Update (16thFeb) Copper was in the process of testing long term resistance. The market has drifted back since then, with key support coming under scrutiny.

WEEKLY CHART -CONTINUATION The upmove earlier found resistance from the bull channel top projection. Our higher targets remain out of reach for now. Note first support has come from a 38.2% pullback at 3.9000 on the continuation chart. Lower support is offered by the 3.6295 Apr-10 high and channel base.
DAILY CHART –Jul-11: Initial support in Mar came ahead of the Nov-10 high. More key, though, are the projected channel base around 4.0000 and slightly lower 3.9500 38.2% pullback level. Temporary support from this area would not surprise. In the Commodity Specialist Guide we already hold a bear stance, and a break through these supports in due course would provide a boost to the bear view, and call for lower targets.

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Sterling Euro and parity!

2011-05-06T11:14:00.002+01:00

The Euro has emerged over recent weeks as one of the strongest of the major currencies and this has been felt particularly acutely against Sterling. This time last year the Euro zone was engulfed in the early stages of the Sovereign debt crisis. Pundits, analysts, economists and almost anyone with a view on the Euro zone was queuing up to forecast the death of the Euro and break up of the Euro zone. What's changed?

TECHNICALS:

WEEKLY CHART

The market has completed a bull falling wedge – using the bull momentum from a completed Head and Shoulders reversal…..if the market can establish itself above the Prior High at 0.8955 that would act to drive the market on further still.

DAILY CHART

The violent bear move of today broke back through both the 0.8955 support and the 0.8922 support….

But the bull diagonal support is in place and beneath that the neckline support at 0.8780 or so.

We remain bulls of the Euro.

FUNDAMENTALS:

The Euro has emerged over recent weeks as one of the strongest of the major currencies and this has been felt particularly acutely against Sterling.

This time last year the Euro zone was engulfed in the early stages of the Sovereign debt crisis. Pundits, analysts, economists and almost anyone with a view on the Euro zone was queuing up to forecast the death of the Euro and break up of the Euro zone.

One year later, the Sovereign debt crisis goes on, with no end in sight, but people are no longer forecasting the Euros death, to the contrary, it is enjoying a period of strength.

The transformation is all the more amazing when contrasted with Sterling and the way the UK government has decided to deal with the UK debt build up under the previous Labour administration.

In the Euro zone countries have adopted a degree of fiscal rectitude, especially those seeking financial rescue, but sometimes at the expense of growth.

In the UK, the coalition government has put in place one of the harshest peace time fiscal tightening's of modern times in an attempt to reduce the budget deficit and reduce the debt to GDP ratio.

Their rationale was; the Country was living well beyond its means and judged action was needed before the rating agencies downgraded the UK’s sovereign debt and Bond markets forced UK long term yields up to levels that would make the debt difficult to service.

At first glance one would think the Pound would garner support from such a policy, but no. The government knew there was a risk the economy would weaken, even slip back into recession, but judged the gamble unavoidable, and although the economy hasn’t slipped into recession, it has clearly weakened and this is undermining the Pound.

Traders are worried that if the economy weakens much more from here there are few policy levers available to add support. Interest rates at 0.5% are already rock bottom, and the Bank of England seems set to leave policy on hold for several months yet, even as inflation stands at double the mandated target level. But what else can they do?

They cannot reduce rates any further to support growth, but neither dare they raise them to fight inflation for fear of inducing a recession. The Pound indeed looks beleaguered.

In the Euro zone, the ECB has decided to leave the Euro zone’s fiscal crisis to the politicians and focus instead on controlling inflation, which at 2.8% is also above target. The ECB’s response has been to tighten policy, with further hikes expected.

Unlike the UK economy, the Euro zone economy is being pulled along by a dynamic German expansion, so although several weaker peripheral economies are still struggling to grow, the strength of the German economy is masking this.

In short the Pound is hobbled by a sluggish fragile recovery and impotent Central Bank. The Euro is strengthened by strong German and French growth and a Central Bank already taking action to control inflation. Widening interest rate differentials look like testing parity in Sterling Euro before too long.

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GBP/JPY Bulls Look Well Set

2011-04-21T23:49:00.000+01:00

Price swings in the GBP/JPY cross in 2010 continued into 2011. Following a deep shake-out in March the subsequent recovery has been decisive, providing a good bull signal.

WEEKLY CHART The latest recovery here has now tested /eroded the 138.55 38.2% level of prior downleg from the 2009 high. Beyond here our focus would be on the 143.22 50% level, sometimes an effective one in GBP-and JPY-related markets.
DAILY CHART The recent break through the 135.48 Feb high provided a bull signal. S/term the surge has faltered at the 138.55/139.36 resistance area (38.2% from Weekly chart & Apr-10 high), with subsequent pullback presumed short-lived. Support from the 132.98 22-Mar high has now been tested –ideally the lower 130.18 28-Mar low will hold at this stage.

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What Resistance Lies Ahead For Gold?

2011-04-21T23:47:00.001+01:00

The Commodity Specialist view - After the late Dec high Gold turned consolidative, but subsequent correction proved short-lived. The current upleg from a late Jan low shows no immediate signs of tiring, but there are some interesting resistance levels not far overhead.

WEEKLY CONTINUATION CHART: The current upleg, off support from the old wedge top, looks to be heading for the 1550/55 area, the bull channel top projection and 2.618 swing target off prior 2008 downmove. We’ll be on the lookout for resistance here.
DAILY CHART JUN-11: After a pause at the Dec high the bull move has resumed, now closing in on the 1.618 swing projection off prior Dec/Jan pullback, at 1515. This plus levels on the Weekly chart warns against chasing the market here. The 1436.70 Dec high offers first support, ahead of the 1382.40 15-Mar low.

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Cotton Challenging Key Support Now

2011-04-21T23:45:00.000+01:00

The Commodity Specialist view - The powerful upmove in Cotton #2 hit a temporary high in March, coinciding with Fibonacci projections. After a period of consolidation attention is on a key support area, below which a pullback phase should be initiated.

COTTON #2 - MONTHLY CONTINUATION CHART: In the Commodity Specialist Guide we have marked in two higher projections at 261.00/268.00. Developments on the Daily chart could at least postpone any test of these.
COTTON #2 - DAILY CHART JUL-11: The strong upmove halted at two Fibo projections (including the 2.618 swing off prior Nov-10 pullback, at 209.60). Bull channel base support near 180.00 is now under test – this, and the lower 38.2% retracement at 168.72, offers key support. Breaks of these would invite a more prolonged pullback phase.

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The Euro is looking good

2011-04-15T13:18:00.002+01:00

The price action in Dollar/Euro over the last several weeks has been quite dramatic as the Dollar struggles under the weight of the yet-to-be-tamed budget deficit and the Euro finds support from the increasingly hawkish rhetoric coming from the ECB.

TECHNICALS

MONTHLY CHART

The unmistakable completion of a large bull falling wedge is what is exciting the bulls for the Euro.

DAILY CHART

The detail of the market’s reaction to completing the falling wedge further encourages the bulls – note the pause beneath the Prior High Pivot at 1.4281 , then the drive up through.

The two prior highs beneath the market are now good support on any pull-backs.

The rising bull trendline support (well-established in three place) is important too.

THE MARKET IS WELL-SET.

FUNDAMENTALS:

In the US, President Obama has staked his claim for re-election in 2012, and the battle ground as ever is the economy. This time round it is the nation’s finances that dominate the argument.

Aware that the American public are broadly unhappy with the spiralling debt under his administration, Obama has published his own deficit reduction plan, which aims to cut US$4.0T from the budget over time.

The problem is that his proposal relies more on tax increases for the rich and less on spending cuts, where as the Republican-led House of Representatives sees spending cuts as the way to reduce the deficit and tame the national debt.

At the heart of the debate lies Obama’s essentially liberal leanings which foresee the state playing a greater role in the nation’s life. The Republicans and the broader electorate do not want to see a European nanny state model imposed in the US. So the US fiscal policy is set to dominate the Presidential election campaign and undermine the Dollar.

Cross the Atlantic and focus on the Euro zone. Here a Sovereign debt crisis has been in full swing for over a year. Three countries have had to apply for a financial bailout. It is far from clear whether others will need to follow, with Spain still seen at risk.

The bailout/rescue doesn’t actually reduce the pool of debt, it merely shifts it from one place to another with less-troubled Euro zone member states and the IMF underwriting a fund which is used as a rescue vehicle.

However, the Euro has somehow freed itself from this burden, as the ECB has shifted the debate to inflation. The Eurozone economy, flattered by very strong German growth and supported by French growth is enjoying a strong recovery. Dig deeper and the long peripheral tail is either struggling to grow or still mired in recession as individual economies deal with the impact of the strict fiscal consolidation imposed earlier in the Sovereign debt crisis.

But since Germany and France account for approximately 40% of Euro zone growth and inflation in the Euro zone stands at 2.6% compared to the ECB’s 2.0% target, policy makers are now embarked on a tightening cycle.

As the interest rate differential between the US and Euro zone looks set to grow, the Euro looks a strong buy against the Dollar. Although the Fed is set to let their QE2 policy expire as planned, they still sense the economy isn’t yet strong enough to handle tighter monetary policy, even though Fed officials are noticing an upward creep in headline inflation.

In short, the US and Euro zone both have a debt problem. The US seems unable to agree a means of dealing with hers where as the Euro zone has, albeit imperfectly. Add to this the now divergent monetary policies of the US and Euro zone and the current trend in Dollar/Euro shouldn’t surprise anyone.

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2011-04-08T08:45:00.000+01:00

The long bull market in Gold looks set to continue, as the market makes new highs driven by a combination of dynamics that include some new and some of longer-standing

TECHNICALS

MONTHLY CHART

The market has been recently driven by a series of powerful bull structures:

1.H&S continuation pattern ( whose target - a minimum -was achieved at 1250 or so)

2. A continuation Triangle whose minimum target remains above the market at 1480 or so.

DAILY CHART

But this chart in the Jun 11 contract adds further excitement to the bulls case: note that the market has overcome the succession of Prior Highs Pivots at 1430, 1436.70, 1447.20 – which move has now established a powerful band of support beneath the market.

Better still, a continuation Triangle has been completed, whose minimum target lies up as far as 1520 or so. The bulls are in charge.

FUNDAMENTALS:

The long bull market in Gold looks set to continue, as the market makes new highs driven by a combination of dynamics that include some new and some longer standing.

A key feature of this market over the last few years has been the weakness of the Dollar, and although there have been periods of Dollar strength, these now stand out as periods of correction.

Why does a weak Dollar matter for Gold?

The Dollar is the World’s sole reserve currency, therefore prolonged periods of Dollar weakness, especially when driven by inappropriate policy, erodes the wealth of those using it as a reserve and forces them to seek an alternative currency. Since none exists there is only one alternative and that is the ancient store of wealth: gold.

The other dynamic which has been less constant, but has re-emerged, is inflation and the fear that rising energy prices and commodity prices will drive up further the level of inflation globally.

The ECB raised rates today for that very reason and the Central Bank of China hiked rates earlier in the week, the forth in the current series, due to similar fears.

These inflationary fears are adding to Gold’s attraction, as it erodes wealth held in paper money over time, but acts to drive up the value of Gold since it is independent from any national policy and is fully convertible against any other currency.

But as the Global economy is still only in the early stages of recovery, with the US economy just beginning to gain traction after the Fed has resorted to several episodes of Quantum Easing after what was a deep and damaging recession, why is inflation presenting as a risk so soon?

The main reason for most economies is the rise in commodity and energy inflation. Unlike previous periods of economic recovery, the traditional developed nations of the west no longer have the monopoly on economic power.

Over recent years they have been joined by the large emerging economies of China, India and Brazil.

The first two are building their economic strength on manufacturing - especially China and they are voracious consumers of natural resources and energy, in particular oil. The Chinese economy faired much better than those of the US, UK, EU and Japan during the recession and kept expanding. So, now the established developed economies are starting to grow, demand for raw materials and energy is increasing from an already elevated level.

With fears that peak oil production may have already passed, the price is being pushed up and the recent uprising in the Arab world has raised the risk premium on this essential commodity.

So as the western economies struggle to respond, while at the same time deploying exceptionally lose monetary and fiscal policy designed to help growth, investors fear inflation will cause a general devaluation of national currencies, especially the US Dollar and seek a neutral hedge in Gold.

Until these inflationary pressures are contained through tighter fiscal and monetary policy, Gold looks set to rally further.

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Sterling Euro suggests further Sterling weakness

2011-04-01T10:25:00.001+01:00

The outlook for Sterling against the other major currencies seems more or less unchanged - except against the Euro. Surprisingly, the Euro has emerged as the strongest of the leading currencies. Although the Sovereign debt crisis continues, with Portugal downgraded recently and at risk of being downgraded again and the Irish Bank crisis still rumbling on, foreign exchange traders are looking beyond these concerns...

The Technical Trader’s view:

WEEKLY CHART

The big picture is of the completion of a bull falling wedge that has formed since the beginning of 2009.

But fascinatingly, and coincidentally, note the completion of a small Head and Shoulders Reversal – adding greatly to the bull impetus.

Look more closely.

DAILY CHART

The simultaneity of the completion of the H&S Reversal is clear.

Note too, the importance of the band 0.8654-8672. Initially, this was resistance overcome and then good support. Indeed, the catalyst for the completion moves.

Expect the Neckline currently at 0.876 to be good support on any pull-back

The Macro Trader’s view:

The outlook for Sterling against the other major currencies seems more or less unchanged - except against the Euro.

Against both the Dollar and the Yen, Sterling appears to be holding up reasonably well:

- In the US the fiscal position weighs on the Dollar

- In Japan the combination of the threat of further G7 currency intervention and the possibility that, away from Japan, the monetary policy cycle is close to turning. The ECB is talking up the need for higher rates and the US QE2 policy is close to completion so the Yen currently looks depressed.

Surprisingly, the Euro has emerged as the strongest of the leading currencies. Although the Sovereign debt crisis continues, with Portugal downgraded recently and at risk of being downgraded again and the Irish Bank crisis still rumbling on, foreign exchange traders are looking beyond these concerns.

They see:

- The Euro zone economic recovery being powered by a strong Germany.

- Germany taking the lead in how the Euro zone rescue fund should operate and dictating terms about how debt laden states can access those funds.

- The ECB becoming increasingly restive about inflation,

- The chance that Euro zone interest rates will rise as early as April (next week).

In the UK, the Government has taken bold steps to reign in runaway public debt, but risks a serious economic slowdown if the private sector is unable to fill the void created by drastic spending cuts and labour shedding.

But what really undermines Sterling, especially against the Euro, is the poor inflation comparison and the Central Bank response to it.

In the UK inflation never collapsed as frequently forecast by the Bank of England, even though in the Euro zone and US it fell so far deflation wasn’t just a risk but almost a reality. Now UK inflation stands above 4% and policy makers openly suggest it could rise to 5% this year. Compared to the CPI target of 2%, interest rates should already be increasing, but the Bank is nervous.

The majority of policy makers fear that if they tighten policy at the same time the government is implementing draconian spending cuts, the economy could be tipped back into a deep recession. Underpinning their decision to wait and see, is the belief that current inflation is a result of one-off shocks:

- The VAT increase introduced this year,

- The depreciation of Sterling during the financial crisis/recession, and

- The spike in energy and commodity prices.

If they are right, then statistically inflation is set for a sharp fall, but are they blind to current events?

The oil price is still rising and could rise very much further given unrest in the Arab world and new fears about the safety of nuclear power. This is feeding into food costs. Additionally, because of the policy stance in the UK and its great leap into the unknown, Sterling could depreciate further.

In short, the Pound is undermined against the Euro by uncertainty and until it becomes clear, whether or not the current policy mix is working, the Pound looks set to weaken further against a Euro supported by expectations of higher interest rates.

Mark Sturdy

John Lewis

Seven Days Ahead

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Bulls in EUR/JPY Remain a Driving Force

2011-03-31T17:58:00.000+01:00

The FX Specialist view - Long term support in EUR/JPY remains around a 76.4% pullback level (recently retested), and a better recovery is still a prospect following the recent brief sell-off.

MONTHLY CHART The 76.4% pullback level is still providing good support. The first recovery level of note here is the 118.32 38.2% retracement of the drop from 139.21 Jun-09 high.
DAILY CHART: In the FX Specialist Guide we have already said that following the recent sharp sell-off and rapid recovery (which represented clear low price rejection) the chart remains well-placed to continue its recovery. Recent breach of the 115.98 04-Mar high provides useful confirmation of this. Already, potential resistance from a bull channel top projection at 117.50 has been eroded today. The next, near upside focus is that 38.2% level from the Weekly chart, but also keep in mind potential resistance from the 119.32/119.63 area, 61.8% of the Apr/Aug-10 drop and the Feb-10 low. Resistance looks likely here and warns against chasing the market up there.

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Sidelined Natural Gas Bulls Await Clear Signals

2011-03-31T11:24:00.000+01:00

The Commodity Specialist view - A correction in Natural Gas prices earlier this year has kept bulls’ hopes in check. We currently wait to see if nearby key resistance levels can be breached, which would provide an initial green light.

NATURAL GAS – WEEKLY CONTINUATION CHART: Note that this year’s correction on the continuation chart held above the 2010 low. If the recovery gets going again then note possible resistance from the 76.4% 5.425 retracement. Further out we would target the 38.2% recovery level at 6.720 plus equality target just above at 6.910.
NATURAL GAS - DAILY CHART MAY-11: After brief violation of the Oct-10 low a Mar recovery has found initial resistance from the 76.4% bounce level. This marks the beginning of a key resistance area, which also comprises the falling resistance line at 4.640 and channel top projection at 4.780. A break through these would be a clear bull sign for us. First support is offered by the 4.171 28-Feb high now.

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The S&P is showing great resilience but has it true bull legs?

2011-03-25T11:03:00.001Z

The recent sell-off in the S&P and other leading equity markets in reaction to the earthquake/natural disaster in Japan and fighting in Libya, appears to have run its course, since the S&P has rejected the recent lows. Why is that, and can the rally be sustained?

The Technical Trader’s view:

WEEKLY CHART

The big picture is interesting: the impetus from the Head and Shoulders Reversal has been exhausted.

Though the market has pulled back from the Fib resistance at 1347, it has yet been (so far) lacking in bear energy to retrace as far as the Prior High at 1216.70.

(NB the coincident cluster of Fibonacci supports at that level)..

Look closer.

DAILY CHART

The market’s resilience has been impressive given the background of events.

The rally from the middle of last week has overcome the first test of the resistance a the Prior Low resistance at 1290.

The next test (a lesser one) is the falling bear trendline resistance above the market (1304 today).

Cautious bulls will note the steeply falling volumes on the rally, and want to wait for a move back the 1337.50 Prior High before becoming convinced.

The Macro Trader’s view:

The feared nuclear catastrophe in Japan hasn’t yet materialised. That is despite

· the struggle to bring the badly damaged nuclear generating plant at Fukushima under control.

· drinking water in Tokyo being declared unsafe for infants to drink due to radiation contamination

· the logistical nightmare of keeping a city the size of Tokyo supplied with bottled drinking water

· and the continuing disruption to Japan’s economy.

Equity traders are, it seems, relieved a much worse event hasn’t occurred such as the core of one or more of the 6 reactors at the Fukushima plant melting down.

In Libya, traders seem relieved the UN authorised no fly zone has stopped Gaddhafi from attacking his own people, but it has done nothing to restore Libya’s oil exports.

So what has changed sentiment in the S&P over the last few days? Traders have refocused back onto US fundamentals. The US economy continues to improve as the Fed itself noted as much in last week’s FOMC policy statement.

But they also said policy needs to remain loose until the recovery becomes self-sustaining. Additionally, fiscal policy in the US remains expansionary. So while bond and currency traders fret that the US public finances are on an unsustainable path, leading to a massive build-up of the National debt, equity traders take the view, the slack fiscal policy will fuel the economic recovery.

What is clear is that the world economy has experienced a recession different to other post WW11 recessions, and the policy responses needed to turn activity around and restore growth, has also needed to be different.

At the same time the world has changed, and indeed is still changing. The US is no longer the unrivalled global economic power house; others are competing for that title. The main contender is China, but India and Brazil aren’t far behind.

This impacts the world economy in two main ways:

- The opportunities for trade are greatly expanded meaning greater opportunity for prosperity for more of the world’s people, but

- There is greater competition for natural resources, especially energy, namely oil and this threatens to cause inflationary problems as global activity increases.

The other area where the world is changing is in the Arab world. Here a people, for so long dominated by powerful rulers, are seeking democracy and a greater say in how their affairs are managed. While this is great news from a humanist standpoint, there is also a worry that significant amounts of the world’s oil exports could be interrupted if the protests develop along the lines of events in Libya.

So while the S&P is supported by domestic US policy, there remains a real threat of volatility from important external influences. This market looks bullish, but it is likely to suffer from repeated episodes of risk aversion.

Mark Sturdy

John Lewis

Seven Days Ahead

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Recent Blow-off Move in USD/JPY?

2011-03-24T19:58:00.000Z

The FX Specialist view - After some of the dust has settled since last week’s sharp, brief sell-off some initial ideas have formulated. These might begin to excite the bulls, but it is too early to draw conclusions yet.

WEEKLY CHART The recent sharp sell-off saw a test of the projected bear channel base before recovery was seen. First main resistance here comes from the late 2009 84.81 low, and a push through this would be a bull sign.
DAILY CHART: In the FX Specialist Guide we have wondered whether or not the sell-off amounted to a blow-off move, paving the way for a better recovery on this chart. In these situations such sell-offs seem to begin near the future 38.2% retracement level... S/term note initial resistance emerging from the area of the old rising support/return line and 23.6% level – the first positive sign would be a clear close through this, followed by further recovery through that 38.2% level.

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Cocoa Nearing Interesting Short Term Support

2011-03-24T19:56:00.001Z

The Commodity Specialist view - The recent bull move in Cocoa (ICE) achieved a new multi-year high, but so far the higher levels have not been sustained. The subsequent pullback has now neared technical support which could at least prompt a s/term recovery.

WEEKLY CONTINUATION CHART: Price has pulled smartly back after the recent push through the late 2009 high. This leaves higher resistance from the bull channel top projection out of reach for now. On this chart temporary support has come from the last Dec’s 3100 high.
DAILY CHART - MAY-11: After a brief move through our Fibo projections the trend reversal quickly violated initial supports, but now note dual support offered by a 76.4% 3062 pullback level and falling return line just above. The RSI momentum indicator has moved into notably oversold territory, making at least a s/term recovery likely soon. Initial potential resistance is offered by the prior May-10 high area around 3300 and then the 3400 area.

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Oil underpinned despite weakness

2011-03-18T09:59:00.002Z

So, while the immediate outlook for Japan's economic prospects is negative, traders will soon look beyond that if popular opinion forces governments around the world to drop nuclear power as a mainstream energy generating source.

The Technical Trader’s view:

MONTHLY CHART

The market has tried to break the 61.8% Fibonacci resistance, but so far has failed.

Look closer.

WEEKLY CHART

The fall back through the Fibonacci has been brutally fast.

Note well though the succession of support beneath the market 93.98- 94.89.

Look closer still.

DAILY CHART

The market has not yet managed to test the important support – held up as it has been by the Fibonacci support at 97.

The market looks well-support at these levels and just beneath them.

The Macro Trader’s view:

The recent rally in oil markets, driven by unrest in the Arab world, has paused in the aftermath of the Japanese natural disaster and possible and impending nuclear disaster. Traders are trying to assess the implications for energy demand as the world’s 3rd largest economy looks set to endure a recession.

An initial reaction might have been that oil prices would continue to push higher. The unrest in Libya has turned to virtual civil war, meaning that her exports of oil have dried up, and although OPEC has pledged to make good the shortfall, it is by no means clear that the unrest will not spread to other Arab oil exporting states.

Bahrain a regional financial hub and base for US forces, has had to invite in troops from neighbouring states to help suppress a popular uprising in a country that many considered more tolerant than most of her neighbours.

Moreover, as Countries around the world review their nuclear energy policies following the still evolving drama in Japan with:

- China halting further construction of nuclear plant,

- Germany closing down seven older nuclear power stations, and

- an EU energy official saying the EU should consider a nuclear free energy policy,

the longer-term outlook for oil prices must surely be higher. Although governments are looking at other “green” alternatives, nuclear energy is the only viable alternative deployable on a large scale, to oil-fired electricity generation.

So, while the immediate outlook for Japan’s economic prospects is negative, traders will soon look beyond that stage if popular opinion forces governments around the world to drop nuclear power as a main stream energy generating source.

And while the oil price currently marks time on growth fears, the longer term issue is what other means of energy generation is available to allow western governments to move away from their dependence on oil, which many believe won’t be able to match demand as emerging economies rush to join the developed world.

We judge the oil price is in a long-term bull market and new all-time highs are likely. This was our view before the crisis in Japan struck, since China and India are still growing and so too is their demand for energy, now as the world holds its breath and prays for a miracle at Japan’s stricken nuclear facilities, the current oil price may soon look cheap.

Mark Sturdy

John Lewis

Seven Days Ahead

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Gains in EUR/GBP Nearing Key Resistance

2011-03-17T18:32:00.000Z

The FX Specialist view - Following an earlier medium term bear signal in the EUR/GBP cross the next stage in downward development has been reluctant to get underway. While bears’ hopes are not yet threatened, shorter term focus has turned to certain overhead resistance levels.

WEEKLY CHART We have been bearish of this chart, since prior break of support, but so far the cross has been reluctant to push lower and, initially, challenge the 76.4% support area again. An initial bull sign would come from a breach of falling resistance around 0.8770 currently. But also keep in mind a higher bear channel top projection which is a potential barrier on the upside.
DAILY CHART: Resistance around the 0.8650 area has now been overcome, with earlier bears now sidelined. Beyond the 61.8% retracement area is the more key 76.4% 0.8785, which lies close to resistance from the Weekly chart. The bull argument would strengthen on a clear break of this. Meanwhile, bears’ confidence will not be restored until a drop back, below the 0.8353 15-Feb low, can be seen.

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Sugar Turns More Negative After 76.4% Test

2011-03-17T18:30:00.001Z

The Commodity Specialist view - In our last Sugar Update we were looking at potential resistance from a long term Fibonacci level. So far the reaction around this has been negative and now there are further reasons to expect continued weakness.

SUGAR 11 - MONTHLY CONTINUATION CHART: The bull leg that started from a 13.00 2010 low recently saw a test/erosion of the long term 76.4% recovery level. In the Commodity Specialist Guide we have been awaiting a clear reaction to this, and it has proved negative.
SUGAR 11 - DAILY CHART MAY-11: After s/term resistance was found around an old high from Dec a fresh slip has now tested/eroded key, dual, support from the bull channel base and 38.2% 26.00 level. In the process the neckline of a Head and Shoulders has also been breached, providing an initial bear signal. Bears may be cautious about chasing the market here, noting a minor Fibo projection at 24.40, but any s/term rally should be temporary at this stage (and probably not deep), ahead of further weakness. The power should be there to extend to the 61.8% 21.60 area.

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EUR/USD Up Against Key Resistance

2011-03-11T11:52:00.001Z

The FX Specialist view - Late last year a negative signal in EUR/USD was given, but the 2011 recovery has unsettled the bears. However, key resistance has now been tested, with an initial negative reaction. Could this be the turning point?

WEEKLY CHART After last year’s 3-wave, corrective structure on the upside we have been viewing subsequent rallies as corrective/temporary too. This view would however be negated on a recovery through the 1.4281 Nov-10 high, falling resistance line and 1.4373 76.4% recovery level.
DAILY CHART: Recent recovery here has seen a test/erosion of a 76.4% retracement, with the old rising support/return line also offering resistance. Initial reaction has been negative, and also note the negative RSI divergence now, indicating current bull fatigue. The first confirmation of momentum loss would come from a break of the s/term channel base around 1.3600. The next bear signal would be a breach of earlier support from around the 1.3433 04-Jan high.

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Carbon Emission Bulls Nearing Key Resistance

2011-03-10T17:22:00.000Z

The Commodity Specialist view - EUA Carbon Emissions have been pushing upwards since a late Dec-10 low, with bulls showing little sign of tiring. However, the uptrend is closing in on a key resistance area which should hinder progress.

WEEKLY CONTINUATION CHART: On this chart the 16.32 38.2% recovery level is the start of key resistance, which also includes the 16.73 May-10 high. A break through these would open the way to the 18.87 50% level next.
DAILY CHART DEC-11: The structure of the current bull leg, inspired by the earlier breach of a s/term bear channel, does not yet imply fatigue, and is now closing in on the 76.4% recovery level, which previously provided resistance in Sep last year. This lies close to the long term 38.2% retracement. Also note a channel top projection around 16.60 where s/term resistance would not be a surprise. The final hurdle on the Dec-11 chart is the 17.05 May-10 high. First support comes from the 15.14 03-Feb high now and buyers on dips will likely position ahead of this.

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USD/CAD Bears Continue To Forage Deeper

2011-03-04T13:25:00.000Z

The FX Specialist view - Since May last year the USD/CAD chart has been drifting lower, retesting, and initially finding, support from a 76.4% level. This failed earlier this year and the market remains on course for the next downside Fibo projection.

WEEKLY CHART The 76.4% support level, already effective earlier in 2010, again held later that year, but has since failed. Ahead of the major 0.9056 Nov-07 low we have drawn in a Fibo projection at 0.9485, which is the next target now.
DAILY CHART: The consolidation earlier in 2011 recently gave way to a further bear move. This has now closed in on potential support from the bear channel base projection at 0.9660 currently. Failure here would open up the lower projection on the Weekly chart. At this stage a rally/close above the 0.9958 23-Feb high would be a shorter term positive sign.

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Soybean Upmove Halted By 76.4% Resistance

2011-03-04T13:23:00.000Z

The Commodity Specialist view - In our last Soybean Update we noted key resistance on the longer term chart which has since been tested. As expected, a pullback has been prompted and initial support has been found – bears need further evidence before gaining in confidence.

SOYBEANS - WEEKLY CONTINUATION CHART: See how the recent upmove has tested dual resistance from a bull channel top projection and 76.4% retracement level at 1453.75. Reaction here has, not surprisingly, been negative. The 1291.25 2009 high has provided s/term support, but will it hold?
SOYBEANS - DAILY CHART MAY-11: The pullback from resistance around the 1.618 swing projection off the prior Nov setback, at 1463, has breached s/term support from the 1356.00 09-Nov high, but so far been held by the projected channel base. With important resistance seen on the Weekly continuation chart above there is a good chance that s/term strength will be temporary, ahead of further bear pressure. A subsequent break of the channel base would signal loss of momentum, inviting a challenge to the 1254.00 38.2% pullback level before focus can shift to lower targets.

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How strong is the Bund rally?

2011-02-25T11:07:00.001Z

If the recent rally is to enthuse the bulls, there needs to be a great deal more price action with which the market can build a bottom from which it can convincingly attack the resistances above.

The Technical Trader’s view:

MONTHLY CHART

The long-term bund chart remains extremely bearish.

The succession (five pinpointed here) of breakdowns through the support from Prior Highs – both diagonal and horizontal remains a blight on the market.

Anyone of those supports might have formed a bottom to the market – but none did.

DAILY CHART

So the rally of the last week or so has to be seen in the context of the longer term chart.

Just two of the broken supports are superimposed on this short-term chart – and will act as a medium-term band of resistance.

Certainly the rally has penetrated the first short-term band of resistance 123.76 -124.27, and the near-term down trend resistance (coincident with the horizontal band) but drifting open interest suggests the covering of shorts rather than new longs.

If the rally is to enthuse the bulls, there needs to be a great deal more price action with which the market can build a bottom from which it can convincingly attack the resistances above.

Mark Sturdy

John Lewis

Seven Days Ahead

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NZD/USD Bears Begin to Stir

2011-02-24T19:12:00.000Z

The FX Specialist view - After a good recovery last year, which still fell short of the major 2008 peak, the chart turned indecisive. One or two clues are appearing that suggest a period of weakness could now be seen.

WEEKLY CHART In the FX Specialist Guide we have been noting the rising support line that was running through the 0.7500 area. A weak close on the week would see an initial break of this, when downside focus would turn to the 23.6% 0.7248 pullback level for potential support (but also see Daily chart).
DAILY CHART: Good resistance had previously emerged from around the 0.7835 22-Nov high (near to a 76.4% bounce level, not shown). The drop back from this has now seen a violation of the 0.7521 21-Jan low which provides a s/term negative sign. The 0.7329 16-Dec low could provide support, but more interesting could be the bear channel base projection just above 0.7200 now. Currently, s/term rallies should prove temporary.

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Booster Rocket Ignites in Crude Oil

2011-02-24T15:32:00.000Z

The Commodity Specialist view - Following Brent Crude’s earlier break above the May-10 high we had been focusing on certain Fibo targets and more recently looking for signs of bull fatigue as these were approached. But bulls have got a second wind, calling for higher projections/targets now.

BRENT CRUDE - WEEKLY CONTINUATION CHART: We had recently been targeting the 61.8% recovery area around 105.00, looking for possible resistance - but renewed strength now turns focus towards the higher 121.25 76.4% level.
BRENT CRUDE - DAILY CHART APR-11: In the Commodity Specialist Guide we have, for some while, been keeping in mind the 1.618 swing target off prior May-10 drop, at 106.20 on the Apr-11 contract. Now violated, the next two higher target/resistance levels became a traditional swing target at 113.60 (already breached intraday), and the 2.618 swing projection at 125.60. The latter lies somewhat higher that the 121.25 76.4% from the Weekly continuation chart, but quite close to the equivalent 2.618 swing level on that chart, at 124.25. The chart structure remains very bullish at present.

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Cable poised to go higher

2011-02-18T10:14:00.001Z

Despite King's laboured attempt at yesterday's press conference to quell expectations of tighter policy, it is clear there are many conflicting views among policy makers. In fairness, King did admit this. And although Short Sterling interest rate futures traders reacted by reducing their bets on the likelihood of a near term rate hike, foreign exchange traders seem to take a different view...

The Technical Trader’s view:

WEEKLY CHART

Triangles can be bottoms as well as Tops.

This is all the more likely in this case since the market is bouncing from an already established low from 2001.

Bulls need to watch the price action at the Upper diagonal carefully

DAILY CHART

The rally so far from the lows has been characterized by the importance of Fibonacci levels and Prior Highs.

The hesitation at the 1.6298 Prior High Pivot as well as at the gently falling Triangle diagonal.

But note too the support from the relatively minor Prior High at 1.6059 – preventing the market from falling back further.

The cluster of Fibonacci extensions above 1.6298 may be a problem, but on balance we are cautious Sterling bulls - waiting for confirmation of a break through 1.64.

The Macro Trader’s view:

The Bank of England quarterly inflation report released yesterday had been anticipated by market players as the starting signal for the Bank to begin hiking interest rates sometime in the next few months.

The inflation outlook short term showed a higher peak than the November forecast before dropping back, based on the Short Sterling futures strip’s forecast of rising interest rates. But Bank Governor King seemed to do his best at the press conference to dampen expectations of higher interest rates in the immediate future.

His defence of the Bank’s record and policy stance rests on the impact external shocks have had on inflation. In a nut shell he argued that domestic price and wage pressures are subdued, but it was rising world energy, commodity and food costs that were responsible for pushing up inflation and were exaggerated by the Pound’s 20% devaluation during the financial crisis/recession.

He further argued that to react now to current inflation by hiking interest rates would be wrong, since once these “one off” shocks had worked through the statistics, inflation would fall to target, so a series of hikes now would likely cause an inflation undershoot relative to the 2.0% target.

But just how many on the MPC share his view?

Only today MPC member Andrew Sentence argued that the window for gradual policy adjustment might be closing, meaning a more aggressive series of rate hikes might be needed eventually. So despite King’s laboured attempt at yesterday’s press conference to quell expectations of tighter policy, it is clear there are many conflicting views among policy makers. In fairness, King did admit this.

Although Short Sterling interest rate futures traders reacted by reducing their bets on the likelihood of a near term rate hike, foreign exchange traders seem to take a different view. After a brief period of weakness yesterday, the Pound has recovered against the Dollar and to a lesser degree the Euro, which suggests Cable traders still expect interest rates to rise sooner rather than later.

Are they right?

King based his argument on the recent external price increases representing one-off shocks. But looking at commodity markets, those price rises could extend further. The demand created for raw materials, energy and food by the economies of China and India, together with other larger emerging economies, could conceivably drive those prices higher yet.

Indeed, if the US economy is truly recovering towards something like its own growth potential, demand for key raw materials and energy will increase, further driving up costs. Will the Bank simply stand idly by and say there is nothing we can do as inflation pushes ever higher?

King argued yesterday that to have kept inflation at target, the recession would have been deeper. So what policy makers have done is spread the pain of reduced living standards across the economy, through rising inflation, rather than concentrate it in a smaller group by pushing up unemployment through higher interest rates.

But they may need to do that anyway if external inflation continues to rise. Paradoxically, foreign exchange traders are betting on that outcome as they push the Pound higher against the Dollar. Ironically, if the Pound goes far enough, it might just help choke off imported inflation and the need for rate rises! But that is a long way off.

In the meantime, can the Pound rally further on expectations of rates rising sooner rather than later? We think it can, but the move is likely to be volatile.

Mark Sturdy

John Lewis

Seven Days Ahead

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AUD/USD Uptrend Looking Tired

2011-02-17T19:07:00.000Z

The FX Specialist view - The upmove in AUD/USD from the May-10 low exceeded the major 2008 peak, but started to lose momentum in November. Bulls are now cautious and we here look at what the danger signs could be.

MONTHLY CHART The break through the 0.9849 2008 peak has met with resistance from the long term bull channel top, around 1.0300. Thoughts have also crept in about a possible change in chart structure which would imply bull fatigue – see below.
DAILY CHART: Resistance had previously been suggested in the FX Specialist Guide around a Fibo projection close to 1.0200. After the Nov-10 test of this the chart structure has changed, now suggesting that bulls have tired. This resistance area, including prior recent highs, has again been a barrier in Feb. The rising support line (at 0.9965 now) offers first support, and a break below this followed by breach of the 0.9800 12-Jan low would provide the initial bear signal A later drop below the s/term channel base projection around 0.9640 currently, would provide bear confirmation, with temporary support then looking likely around the 0.9405 Nov-09 high (near to the current 38.2% pullback level).

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Copper Pushing Against Long Term Channel Resistance

2011-02-16T18:18:00.000Z

The Commodity Specialist view - New uptrend highs in Copper have been seen in 2011 and the next interesting long term resistance has now been reached. We await reaction around here, looking for bull fatigue clues on the Daily chart.

COPPER HIGH GRADE - WEEKLY CONTINUATION CHART: The uptrend is currently pushing against resistance from the bull channel top projection around 4.6500. We stay on the lookout for resistance here, but a successful break through would turn attention to higher targets such as the 5.0930/5.1070 area, a Fibo projection and equality target (2009/2010 upmove extended from the 2.7250 Jun-10 low).
COPPER HIGH GRADE - DAILY CHART MAR-11: The bull channel top at 4.8500 offers current resistance as initial speculation creeps in that the current chart structure could be hinting at possible bull fatigue. In this regard note a negative divergence beginning to appear on the daily RSI momentum indicator. That said a break below the channel base at 4.3400 is needed to provide an early bear sign, with a break/close below the 4.2080 25-Jan low to back this up. A better pullback phase may well get underway then.

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USD/CHF Bears Resting – Do Bulls Lie in Ambush?

2011-02-10T16:46:00.001Z

The FX Specialist view - The downtrend in USD/CHF has slowed over the last few months, support emerging on the longer term chart. Our stance in the Commodity Specialist Guide has remained bearish, but a clear break of a key resistance area would change this.

WEEKLY CHART Following erosion of the long term bear channel base support has emerged from the equality target at 0.9345 (Nov-08/Nov-09 downmove measured off the 1.1730 Jun-10 high). Note resistance on this chart offered by the old support/return line.
DAILY CHART: The initial bounce off the 0.9298 31-Dec low found was repelled by the rising old support/return line. This low has stayed intact, keeping the next Fibo projection at 0.9040 out of reach for now. At this stage a recovery needs to overcome key resistance that centres on the 0.9914 Nov-09 low and includes that old return line and a bear channel top. A clear break/close above this resistance would provide us with a clear bull signal, and justify calculating higher retracement levels. We await developments.

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Sugar Bulls Faltering at Long Term 76.4% Level

2011-02-10T15:23:00.001Z

The Commodity Specialist view - Following the sharp 2010 drop back in Sugar the subsequent recovery has seen new highs which have tested a long term Fibonacci level. We currently await a better reaction around here but, so far, the market is finding resistance.

SUGAR 11 - MONTHLY CONTINUATION CHART: The bull move has reached the long term 34.75 76.4% recovery level where we await better reaction –s/term resistance is currently apparent here.
SUGAR 11 - DAILY CHART MAR-11: This year’s brief new high followed by fresh weakness keeps the technical picture uncertain, with the long term 76.4% resistance (above) still having an effect. The first negative sign here would be a drop through the 29.50 30-Dec low. But more key is dual support from the channel base projection and current 38.2% pullback at 27.85. A break of this support area would herald a more prolonged pullback phase.

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