Harmony on the Euro

In his Ultimate Gann Course, David Bowden compares this to Elliott Wave breaking the market down into three sections. While Elliott would describe the pattern as “5 Waves”, being three impulse waves and two corrective waves, Gann would call it three equal sections, with the impulse waves and the sections being labelled the same.

There are a few things to note about this chart. Firstly, the second and third sections are very similar in terms of price, with both being larger than the first section. Also, with the second and third sections being almost equal in price, there is also a relationship in terms of time, with the third section taking four times longer to complete than the third section.

As a sidenote, those students who attended Safety in the Market’s Master Forecasting Summit in September 2009 might like to review the homework I set them on the Euro based on the work we did on the last day of the summit. The homework led you to forecast a major top on the Euro on November 27th. The actual high of the year came one trading day earlier, on November 25. Now to wait for the Dollar/Yen forecast!

But for now, back to the Euro! From the November top, we have seen the Euro decline. I am looking for the Euro to start its next bull campaign towards the end of the first quarter of 2009 and then move on to a strong 2010. But first it needs to make a strong low. Chart 2 below shows the important percentage levels of the 2009 bull market range. The most important level, the 50% milestone, is highlighted in red.

The 50% level is worth watching for two reasons (other than the fact that WD Gann said you could make a fortune trading this one rule alone!).

Firstly, it gives us a potential price support target to watch for, and secondly because it allows us to rate whether the move on the Euro is strong or weak. If the Euro can find support and make a bottom – possibly in mid-March – above the 50% level, it will show it is a stronger market. If it can’t hold the 50% milestone, it will show that it is in a weaker position.

The most accurate dollar forecasters –– predict the U.S. dollar will continue to fall in 2010. That prediction is based primarily on the historical relationship between interest rates and the dollar.

Those analysts seem to ignore the strong inverse correlation between the dollar and equities. They’re either assuming equities will continue to rise next year or that correlation will no longer exist.

You see, the scenario of continued dollar decline can only occur if the current environment of ample liquidity and overall positive sentiment continues unabated. The problem is that 2010 presents some serious headwinds for both liquidity and sentiment.

Personally, I’d be surprised if the stock market doesn’t go through a correction next year. I also don’t expect the correlation between dollar and risky assets to fade any time soon.

That correlation will only fade once dollar fundamentals improve and uncertainties about recovery dissipate. At that point, good economic news in the U.S. will be good for the dollar, instead of supporting more risk-taking outside U.S.

Without emergency levels of liquidity, the equity market can only sustain its recent gains if fundamentals are stronger. The problem is that the recovery – if there really is one to speak of – is still weak. Unemployment is still on the rise, foreclosures and delinquencies are reaching record levels, credit is not easily available, and consumers are still deleveraging. So there’s not much reason to be optimistic.

The idea that the dollar will continue to fall assumes that global assets will continue to rise with no correction. And current fundamentals don’t support that brand of optimism in any way.

So are bonds a “Sell” and the dollar a “Buy?”

Judging by historical recoveries after a deep recession, the economy has tended to recover quite forcefully. This was the case in 1992-93 and in 1983-84. Investors are starting to wager that 2010 will result in a big year for GDP and along with that forecast a higher dollar and higher rates.

The market has started to discount a high possibility of a Fed rate hike in June 2010 and traders are dumping Treasury bonds in anticipation of this move. And the dollar is responding. Traders point to the steeping yield-curve or the difference between 2-year and 10-year Treasury bond yields – now at its highest spread in years. Historically, a large spread has resulted in good returns for stock investors.

To be clear; the market, not the Fed, is taking interest rates higher. If it continues, the Fed will be forced to act and raise the Federal Funds rate. Yet I think we’re seeing a replay of the April to July price action in Treasury bonds earlier this year, which ultimately resulted in a rally for bonds.

The great post-1981 bond bull market is not far from the cliff.

We are certainly closer to the edge than at any period since 1980. But I’m still wagering that bond yields will witness another rally over the next several months as a severe global correction unfolds in risk-based assets causing a growth panic and taking government bond yields down sharply as fears of a double-dip recession begin to surface by the second half of 2010.

Until then, T-bond yields above 4% or even 4.5% over the next few months look attractive in an environment of renewed “bubbles,” which might get pricked if long-term rates run too far to the upside

The Canadian labor market is widely expected to improve for the second consecutive month in September, with economists forecasting employment to rise 5.0K from the previous month, and the data is likely to encourage an improved outlook for the world’s eighth largest economy as policy makers see the nation emerging for the first recession in over a decade.

Trading the News: Canada Net Change in Employment

What’s Expected
Time of release:        10/09/2009 11:00 GMT, 07:00 EST
Primary Pair Impact :    USDCAD
Expected:         5.0K
Previous:         27.1K

Impact Canada’s change in employment had over USDCAD for the past 2 months

August 2009 Canada Unemployment Rate Labor demands in Canada improved for the rise time in four months, with the economy unexpectedly adding 27.1K jobs in August, while the unemployment rate rose to 8.7% from 8.6% in July to reach its highest level since January 1998 as discouraged workers returned to the labor force. The breakdown of the report showed part-time employment jumped 30.6K to lead the rise, with the participation rate increasing to 67.3% from 67.2% in July, while full-time jobs slipped 3.5K to mark the fourth consecutive decline, and conditions may continue to improve over the coming months as the government takes unprecedented steps to stimulate the ailing economy. Nevertheless, Bank of Canada Governor Mark Carney continued to hold a cautious outlook for the economy and sees a risk for a slower recovery as a result of the sharp appreciation in the exchange rate, and the BoC is likely to hold a dovish policy stance throughout the year.

July 2009 Canada Unemployment Rate The Canadian labor market weakened more than expected in July, with employment tumbling 44.5K from the previous amid expectations for a 15.0K drop, while the annual rate of unemployment held steady at an 11-year high of 8.6% for the second-month as discouraged workers left the labor force. A deeper look at the report showed full-time positions slipped 29.1K during the month, with part-time jobs falling 15.4K from June, while the participation rate pulled back to 67.2% from 67.5%, and the labor market is likely to remain weak going into the following year as policy makers anticipate unemployment to rise even as the economy emerges from the recession. As a result, Bank of Canada Governor Mark Carney pledge to keep borrowing costs at the record-low throughout the first-half of 2010 in order to foster a sustainable recovery, and is likely to hold a dovish outlook for future policy as job losses intensify.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

How To Trade This Event Risk

The Canadian labor market is widely expected to improve for the second consecutive month in September, with economists forecasting employment to rise 5.0K from the previous month, and the data is likely to encourage an improved outlook for the world’s eighth largest economy as policy makers see the nation emerging for the first recession in over a decade. Business spending in Canada expanded for the fourth consecutive month in September, with the Ivey PMI rising to 61.70, which is the highest reading in a year, while  leading economic indicator jumped 1.1% in August to mark the biggest rise since 2002, and conditions are likely to improve throughout the second-half of the year as the International Monetary Fund raises its economic forecast for the nation and expects the region to grow at an annual rate of 2.1% in 2010 amid an initial forecast for a 1.6% expansion in GDP. However, a report by Statistics Canada showed the economy failed to growth in July after expanding 0.1% in the previous month, while the capacity utilization rate slipped to a record-low during the second quarter, and businesses may continue to scale back on production and employment over the coming months in an effort to weather the downturn in global trade. Nevertheless, Bank of Canada Governor Mark Carney held an enhanced outlook for the region and said “growth has resumed in Canada,” but reiterated that “persistent strength” in the domestic currency poses a threat to the recovery and stated that the board maintains “considerable flexibility” in its conduct of monetary policy even as the central bank pledges to keep borrowing costs at the record-low throughout the first half of 2010. Moreover, Mr. Carney argued that the excessive movements in the exchange rates “is a downside risk to inflation,” and expects the economy to face further headwinds as he sees an “uneven” recovery in the US, Canada’s biggest trading partner, and policy makers are likely to hold cautious outlook for the economy as the labor is expected to weaken further over the coming months. At the same time, Prime Minister Stephen Harper said that the nation is emerging from the economic downturn “only in a technical sense,” and noted that the recovery remains “extremely fragile” as households face a weakening labor market paired with tightening credit conditions, and an unexpected drop in employment is likely to weigh on the outlook for future growth as policy makers continue to see a risk for a protracted recovery.

Trading the given event risk favors a bullish outlook for the Canadian dollar as economists anticipate labor demands to improve for the second-month, and price action following the release could set the stage for a short USD/CAD trade. Therefore, if employment rises 5.0K or greater, we will look for a red, five-minute candle subsequent to the release to confirm a sell-entry on two-lots of the dollar-loonie. Once these conditions are met, we will set our initial stop at the nearby swing high, or a reasonable distance, and this risk will establish our first objective. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.

On the other hand, the slump in global trade paired with fears of a slower recovery may lead businesses to take addition steps to lower their cost structure, and an unexpected drop in employment is likely to drag on the exchange rate as investors weigh the prospects for a sustainable recovery. As a result, if payrolls fall 10.0K or greater from the previous month, we will favor a bearish outlook for the loonie, and will follow the same setup for a long USD/CAD trade as the long position mentioned above, just in reverse.

US Dollar and Dow on the Verge of Opposing Breaks

British Pound Comforted by Bank of England’s Steady Hand
•    Euro Looks like it May End up a Laggard in the Rate Game Given the ECB’s Stance
•    Australian Dollar Sees Another Dramatic Stretch to New Highs on Employment
•    Canadian Dollar has a Busy Day Ahead of it with Employment, Trade and Business Activity Data

US Dollar and Dow on the Verge of Opposing Breaks
The markets are once again toeing the line. Market sentiment is threatening to revive momentum in the steady advance in optimism that began back in March; and the various asset classes are showing the effects. For the maligned US dollar, the revival of confidence over the past week has pulled the currency down (on a trade weighted basis) to tag lows not seen in 14 months before bouncing and setting a ominous double bottom with the September 23rd low. Setting up its own mark-or-break scenario, the Dow Jones Industrial Average has quickly climbed back up to eye the September range of highs around 9,850. Looking ahead, we could very well stall at these highs and build pressure for a breakout in the process (a likely scenario considering the weekend is fast approaching and we are running thin on critical fundamental drivers); but a genuine break will have to develop eventually. The question we should be asking is not when the markets will break; but will we have the momentum to sustain a trend after the decision on direction has been made.

It is easy to simply link the greenback’s future to risk appetite and play the correlation between equities and the majors. However, there are other concerns that will eventually supplant this pure balance between fear and greed. The dollar’s status as the world’s reserve is an issue that is stealing the headlines at a more frequent pace. This morning, the Financial Times reported that Asian central banks (Korea, Thailand, Malaysia, Taiwan and Singapore) were coordinating heavily on the dollar’s behalf. Not only is the low level of world’s most liquid currency stunting exports; but the pace of its descent has brought uncertainty and financial problems of its own. The blatant dependency on Fed policy and the government’s ability to manage its debts is clearly driving global leaders to start planning for a timely diversification. On the other hand, the dollar could take the helm on its own fate. Depending on officials’ ability to handle a recovery, deficits and the currency; they could still manage to maintain the status of reserve (though there seems little chance that the greenback will ever regain the prominence it has maintained over the past generation). Data released this morning suggests the recovery is on track and perhaps ahead many of its counterparts. Initial jobless claims through the end of last week dropped to a ten-month low of 521,000, suggesting the crippling trend in unemployment is improving. Ultimately, growth rides on consumer spending; and on this front, the biggest month-over-month jump in ICSC chain store sales in 13 months through September sets the trend. Along with a near record low in the average 30-year FRM mortgage, the pieces for a recovery are falling into place.

British Pound Comforted by Bank of England’s Steady Hand
Among the two central bank rate decision scheduled for Thursday morning, the Bank of England’s announcement was considered to hold the more potential. Ever since Governor Mervyn King sided with the minority to vote for an expansion of their quantitative easing program and his suggestion that a cut to the deposit rate could be economically “useful,” the market has priced in the possibility that the Monetary Policy Committee (MPC) could take the next expansionary step in its stance. However, the central bank once again deferred such an effort when it announced its benchmark would remain at 0.50 percent and they planned to spend the rest of the 175 billion allotted for their bond purchasing program. Weighing in just after the decision, former MPC member David Blanchflower said in an interview that the bank should both increase its bond purchases and cut the rate at which banks earn on their reserves. His comments bear consideration as we have heard musings from active members that follow the same path and considering the economy has shown signs that its recovery is flagging. With a government spending in the pipeline, there is deadline for officials to do as much as they can to jump start and establish financial stability. We will have to look at the minutes of today’s meeting (due Oct. 21st) do see if there was dissention among the voters and further suggest more dramatic measures can be taken at the next meeting (on Nov. 5th) when officials have new forecasts to work with.

Euro Looks like it May End up a Laggard in the Rate Game Given the ECB’s Stance
The euro is still being treated as one of the strongest currencies amongst the majors; but is this potency really coming from the outlook for growth and interest rates? Today the European Central Bank (ECB) delivered no surprises in its decision to maintain its benchmark lending rate at 1.00 percent. Comments to follow this pass noted that the current level of the region’s target rate was “appropriate,” and the future would likely hold an “uneven” recovery and “subdued” inflation. So, even though loan demand has diminished and the Euro Zone’s largest economies have already returned to growth, there seems little desire to rollback stimulus anytime soon. Overnight index swaps from Credit Suisse are pricing in 85.6 bps of hikes over the next 12 months; but this is likely to be come from firming well into next year. If the central bank continues to rest on its laurels, the euro will likely lose bullishness provided by its yield. If that is the case, the currency will increasingly fill a role as the counterpart of the US dollar – for better or worse. 

Australian Dollar Sees another Dramatic Stretch to New Highs on Employment
All the fundamental lights seem to be turning green for the Australian dollar at the same time. Following the ‘surprise’ rate hike from the RBA Tuesday morning, the economy reported unexpected job growth through September. According to the Australian Bureau of Statistics, 40,600 net jobs were added last month and the unemployment rate ticked down from its than six-year high to 5.7 percent. After this positive round of data, the modest doubt for a follow up rate hike that had developed over the past few days was completely banished. The market is now pricing in a 99 percent probability of a 25bps hike on November 2nd. However, the Aussie currency has covered a lot of ground and quickly these past few weeks considering it has already been deemed the strongest performer among the majors. It is now running the risk of overextending itself.

Canadian Dollar has a Busy Day Ahead of it with Employment, Trade and Business Activity Data
The Canadian dollar will get the chance to top the list for fundamental event risk Friday. A heavy round of releases will be paced by the September employment data. A modest increase in net jobs is expected but the unemployment rate is also expected to tick higher to a fresh 11-year high of 8.8 percent. In the same breach, the 3Q sales from the BoC is expected to step back from its sudden surge last quarter; and the senior loan officer survey for the same time and from the same group is likely to produce equally limited results. Today, BoC member Paul Jenkins tried to say Canada is very different than Australia despite the currencies correlation; but will the market head this bit of wisdom?

USD/SGD Lower On Econ Outlook; 1.4375 Support

USD/SGD lower at 1.4421 vs 1.4436 in Asia late yesterday, with traders saying MAS survey of economists showing GDP expected to contract 3.6% in 2009 (vs 6.5% in previous forecast) providing support to local currency, although risks remain. “The outlook for Singapore seems brighter, but of course the health of the U.S. economy will have an impact on the pair. With some data overnight showing job losses aren’t stabilizing, it is likely the SGD won’t rise much today.” Support tipped at 1.4375, resistance 1.4460

Why Stocks May Not Move
Higher Following Earnings Season

Everywhere we look there seems to be a property connection, even the US GDP numbers are said to have been negatively influenced by slowing investment in US residential property.

This morning we’ve been feverishly finishing off the August edition of Australian Small Cap Investigator. In fact, if you’re a subscriber, there’s a chance you’ll get it even before this newsletter gets to you.

In some ways, the current market conditions make it harder to pick stocks than when the market was hitting lows in November last year and then in March.

Even though we didn’t know for a fact that it was a low point, picking stocks was a lot easier. Especially small caps.

When you’re investing in a market as high risk and volatile as the exchange’s little tiddlers, the extra volatility suffered by the rest of the market was nothing new. It’s what we’re used to at this end of the market.

That means, when you’ve got small cap stocks getting beaten down to bargain basement prices, you know they can’t go much further - or you hope they can’t anyway.

Then it’s just a case of picking out the good ones. Of course, it’s not quite as simple as that, you’ve still got to know what to look for.

As you know, the market is always looking ahead. Back then it was looking ahead and seeing the worst. When that’s priced into a stock it makes the stock even cheaper than it should be.

Now, the market is looking ahead and it’s seeing nothing but happiness.

It’s why the main index is up over 30% from the low. So now, when you’re picking stocks you’ve got to work out rather the move is justified and whether there is still room to move higher.

That’s the case with all stocks, not just the small caps. You can see by looking at the chart below that after the big run from July, the market appears to be settling into another consolidation phase:

It would be easy to think the move from early March to today has been smooth. But another look at the chart tells a different story. In fact between the beginning of April and the beginning of July the market just about broke even. Then it took off again.

But that’s all part of the game. There’s nothing particularly scientific about it. It purely means that between April and July investors as a whole considered the rally to have run its course, and perhaps there was some caution as earnings season approached.

As can happen, when company earnings started coming out better than expected it gave the market a reason to buy stocks again. That’s pushed the market higher.

Now earnings season is mostly over, the market will need to look for other reasons to move higher. If none are found that’s when you’ll see a sideways consolidation.

Still, the market has put on about 200 points since it dipped last week. And this morning it’s edging higher again.

But whatever happens, trying to make specific long term predictions about a level for the major indices is doomed to end in embarrassment for those that try. So we won’t be tempted.

The S&P/ASX200 fell 0.08% yesterday, while on Wall Street the Dow Jones Industrial Average added 37 points. In Europe the FTSE100 slipped 0.43% and the CAC40 dropped 0.54%.

The price of gold in Australian dollars is trading at $1,133.24, while in US Dollars it is trading at $950.79.

The Aussie dollar strengthened slightly versus the US dollar and Japanese Yen, trading at USD$0.8394, and JPY78.57.

Crude oil traded this morning at USD$72.74

The first currency offers some of the most compelling long-term buying opportunities in the world right now with healthy balance sheets, wealthy benefactors, and a positive long-term growth story.

The second…well, let’s just say it’s a great shorting opportunity if nothing else.

In fact, the only thing these two currencies have in common is they’re both considered commodity plays.

Let’s start with the buying opportunity. To go there, let’s head to the land of Samba and Feijoada first. Yes we are in Brazil.

The Australian dollar has leapt 15% since the beginning of the year (indeed, that’s one reason why the Aussie is my favorite currency over the next six months). But while the Aussie has climbed 15%, the Brazilian real has shot up 22.5% year to date. It is running hotter than all currencies against the U.S. dollar.

You can attribute a lot of this to the world’s insatiable demand for Brazilian commodities – especially the ones China and India are gobbling up. China’s influence in Brazil has reached such an extent that you could be buying a Brazilian stock as a China play these days.

In fact, a Chinese company recently granted a $10 Billion loan to Petrobas (Brazil’s largest oil company) in exchange for first rights to the oil that Brazil will drill at its newfound reserves.

The Australian theme, (China buying up the world’s commodity reserves strategically) is alive and kicking in Brazil too. As I have said before, as China continues its strategic grab for world power, Brazil will remain relevant in the global economy.

The Currency to Forget (Or Short)

I’ve heard traders say they wouldn’t touch the South African rand with a 10-foot pole. The reason?

For starters, South Africa does not have one of the more efficient economies in the world. There is far too much influence on economic policies by outside vested interests, which interfere in their ability to carry out true reforms. This is a major problem for South Africa.

The Central Bank policy and decision making is heavily influenced by vested interests that do not want decisions being made that hurt their business interests. This creates ambiguous messages from the economy.

Recession has taken a strong hold in the South African economy and is creating a major slowdown spiral, which will really hurt the future prospects of South Africa.

While the currency has not yet shown the effects of the slowdown of the economy, I expect that this will happen soon and the world cannot continue to sweep the problems under the rug forever.

I think it goes without saying that I would be very reluctant to invest in South Africa or in the South African rand for now. There is too much bad economic news that has not been factored in, which will create huge uncertainty in these markets.

We can effectively utilize our capital allocation around the globe without having to invest in South Africa and I would give it a pass for now.

FOREX-Yen gains on profit taking, dollar losses pause

forex markets news,forex markets ,forex trading

Yen gains broadly on profit taking after risk rally

Euro little changed, hovers hear year’s high vs dollar

* European July services PMI show economies nearing recovery

By Naomi Tajitsu

LONDON, Aug 5 - The yen gained broadly on Wednesday as traders locked in profits from a rally in currencies perceived to be higher risk, while the euro consolidated just under its highest level of 2009 hit against the dollar earlier in the week.

The dollar was little changed against a currency basket as the safe-haven U.S. currency found its footing after plumbing its weakest level of 2009 early this week due to escalating risk demand, but risks were seen tilted in favour of more selling.

Analysts said the market was taking a breather following the rally in currencies perceived to be higher-risk, while investors awaited policy announcements by the European Central Bank and the Bank of England on Thursday for more clues into their outlook for interest rates and quantitative easing.

“A lot of objectives in cross/yen have been reached,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank in London, noting that the Australian dollar had breached 80 yen, while sterling/yen has rallied above 160 yen.

“As a result we’re seeing some profit taking,” he said, adding that much of the flows seen on Wednesday were being driven by speculators.

At 0800 GMT, the euro <EUR=> was unchanged around $1.4400, recovering slightly from early losses after purchasing managers’ indices for services sectors in the euro zone generally showed improvement in July. [ID:nLAG003648] The pair hovered below $1.4445 hit on Monday, its strongest since mid-December.

IFR reported that around 250 million euros’ worth of options at $1.44 were due to expire later in the day, which analysts said may result in whippy trade.

Against the yen, the common currency <EURJPY=R> fell 0.3 percent to 136.73 yen, retreating from around 137.70 yen touched on Tuesday, its highest in nearly two months.

The yen rose broadly, pushing the dollar <JPY=> down 0.3 percent to 94.95 yen. Options worth around $450 million parked at 95.00 yen were also due to expire during New York trade, IFR reported, which market participants said may likewise cause some volatility around that level.

The higher-risk Australian and New Zealand currencies each fell roughly 0.7 percent against their Japanese counterpart.

The New Zealand dollar retreated from 64.35 yen <NZDJPY=R> hit earlier in the day, its highest level of the year.

Sterling <GBPJPY=R> fell 0.4 percent to 160.62 yen, after rallying to a two-month high above 162 yen on Tuesday.

Despite the pullback in riskier currencies, analysts said the trend for higher stocks and oil prices would keep risk appetite buoyant on the view the global economy is improving. This would keep the dollar vulnerable to more losses, they said.

“It’s still so much about risk appetite,” said Carl Hammer, currency strategist at SEB Bank in Stockholm. “In the coming week or two we may see another bout of dollar weakness.”

Technical analysts at the bank said euro/dollar was finding support in the lower $1.43 region, and that the next target for the pair was around $1.47, roughly around a record high hit in December

The Aussie Dollar (AUD/USD) just reached a 10-month high as the currency pair climbed above 0.8450. It has retraced a large part of the plunge occurred last year, when it fell by 39% in just 3 months, which is absolutely huge on the FX markets.

The extreme points of this large decline are points A and B on the weekly chart…

Click to enlarge

Several technical indications argue for a completion of the current trend just ahead, around 0.85. The current bullish move has been valid since early November last year. The Aussie bounced back from 0.60 (point B) to 0.8450 which is a 40% rise. Actually, if we look in more details, the real start of the current trend has been posted at mid-March this year (point C).

This confirms the timing of the correlation that has been in place for 2 years now between the US Dollar, the commodities markets and the stock markets. When the risk appetite rises, investors sell the US Dollar (therefore buy other currencies like the Aussie) and buy commodities and stocks. Oppositely, they buy back the Greenback and sell the commodities and stocks when uncertainty and risk aversion appear.

Technically, the weekly indicators are really high now and don’t have so much more potential upside. This suggests a peak and eventually a consolidation or a correction. The MACD is well above its level when the price was at 0.9850 last year. The RSI is currently just below the overbought area.

On the daily chart, there is something more…

Click to enlarge

A bearish divergence clearly appears through several oscillators. You may know that a bearish divergence is created when an oscillator does not confirm a new high posted by the price action. Typically it means you’re in the very last part if the rally. The trend completion is usually close. Here the Chande Momentum Oscillator illustrates this chartist configuration.

There is a resistance line at 0.85. This level corresponds to a previous low (point D posted in late august last year) that become a new high (point E posted in last September). This is clearly the target before a probable correction towards 0.81 in a first time.

(Gold is the December contract on the NY Mercantile Exchange. Silver, copper and oil are the September contracts.)

NEW YORK - The Standard & Poor’s 500 index is four digits again. The widely used stock market measure broke above 1000 on Monday for the first time in nine months as reports on manufacturing, housing and banking sent investors more signals that the economy is gathering strength.
The index is used as a benchmark for many mutual funds.
Indices all rose more than one per cent, including the Dow Jones industrial average, which climbed 115 points.
The market’s July rally blew into August on the type of news that might have seemed unthinkable when stocks cratered to 12-year lows in early March.
A report predicted US manufacturing activity will grow next month, the government said construction spending rose in June, and Ford Motor Co said its sales rose last month for the first time in nearly two years.
The day’s reports were the latest indications that the recession that began in December 2007 could be retreating.
Hope of a recovery, based on better corporate earnings reports and economic data, propelled the Dow Jones industrial average 725 points in July to its best month in nearly seven years, restarting a spring rally that had stalled in June.
The Dow rose 114.95, or 1.25 per cent, to 9286.56. The S&P 500 index rose 15.15, or 1.53 per cent, to 1002.63. It was the first finish above 1000 since early November.
The Nasdaq composite index rose 30.11, or 1.52 per cent, to 2008.61, its first close above 2,000 since October.

LONDON - European stock markets rallied after upbeat data from the United States and the 16-nation eurozone raised hopes about the prospects for a recovery.
London’s FTSE 100 index ended the day up 74.1 points, 1.61 per cent, at 4682.46 points, after hitting its highest point so far this year.

FRANKFURT - The Dax rose 94.71 points, or 1.78 per cent to end at 5426.85.

PARIS - The CAC 40 gained 51.53 points, or 1.5 per cent, to 3477.8.

TOKYO - Japanese share prices ended mixed as investors took a breather after the market ended last week at a near 10-month high on growing optimism about the global economy.
The benchmark Nikkei-225 index slipped 4.36 points, or 0.04 per cent, to 10,352.47.

HONG KONG - Hong Kong stocks rose 1.14 per cent to a near 11-month high, boosted by another surge on the mainland despite some dealers staying on the sidelines ahead of first-half corporate results.
The Hang Seng Index rose 233.93 points to 20,807.26, its third consecutive gain.

WELLINGTON - The New Zealand sharemarket made moderate gains on sustained confidence even though eftpos company ProvencoCadmus was placed in receivership.
The benchmark NZSX-50 index closed up 31.6 points, or one per cent, at 3047.85. Turnover was worth $NZ78.45 million ($A62.12 million).

SYDNEY - The Australian sharemarket is expected to open higher on Monday, after US markets rose to a nine-month high overnight as manufacturing, housing and banking reports suggesting that the economy is gaining strength.
At 0716 AEST on the Sydney Futures Exchange, the September share price index contract was 56 points higher at 4266.
In economic news, the Commonwealth Bank and the Australian Chamber of Commerce and Industry release their business expectations survey covering the June quarter.
The Australian Bureau of Statistics releases retail trade data for June and the June quarter, and the house price index data for the June quarter.
The Reserve Bank of Australia holds its August board meeting to consider interest rates, inter alia.
The second day of the 2009 Diggers and Dealers mining forum will be held in Kalgoorlie, Western Australia.
The Australian share market closed moderately stronger on Monday, led by the banks amid quiet trading on a bank holiday in NSW and the ACT.
The S&P/ASX 200 index was 19.4 points higher, or by 0.46 per cent, at 4263.4 while the broader All Ordinaries index rose 21 points, or 0.49 per cent, to 4270.5.

NYMEX

Oil and natural gas prices rose sharply on the weakening dollar and on new signs of life from manufacturers that suggest the recession may be loosening its grip.
Benchmark crude for September delivery rose three per cent, or $US2.13 to settle at $US71.58 a barrel on the New York Mercantile Exchange. It was the third straight day of substantial increases on the energy futures markets and the first time in a month that crude traded above $US70.
Natural gas, a major source of power generation, spiked by more than nine per cent on a day when both China and the United States reported stronger manufacturing activity.
Production from US manufacturers jumped to its highest level in more than two years last month with new orders to restock businesses that had cleared inventories as the economy slumped.
The decline in manufacturing has been slowing since December and officials with the Institute for Supply Management, a trade group of purchasing executives, said Monday that signs of growth in the sector could emerge as early as next month.
Manufacturing in China expanded at its fastest clip in a year, according to a survey by Hong Kong brokerage CLSA Asia-Pacific Markets.
In other Nymex trading, gasoline for August delivery rose 5.67 cents to settle at $US2.0693 a gallon and heating oil gained 3.88 cents to settle at $US1.8713.
Natural gas for August delivery jumped 37.8 cents to settle at $US4.031 per 1,000 cubic feet.
In London, Brent crude prices rose $US1.85 to settle at $US73.55 a barrel on the ICE Futures exchange.

COMEX

Commodities traders placed more bets on an economic recovery on Monday, adding copper and aluminium to their portfolios as the dollar sank to fresh lows.
Upbeat reports on manufacturing activity around the world moved investors to dump traditionally safe-haven assets like the dollar and government bonds in favor of riskier assets that stand to benefit more as the economy improves.
Copper was the standout among metals, soaring 4.4 per cent to close at a 10-month high after the Institute for Supply Management said US manufacturing activity declined during July at the slowest pace in nearly a year. The private trade group said its manufacturing index rose more than expected in June.
Reports showing similar improvements in the manufacturing sectors in China, Britain and the euro zone added to the market’s optimism. Particularly encouraging was a survey of China’s manufacturing sector, which hit a 12-month high.
Copper prices have nearly doubled this year due mainly to solid demand from China. On Monday, prices rose 11.5 cents to settle at $US2.7385 a pound on the New York Mercantile Exchange. Aluminum prices jumped 4.2 per cent.
Among precious metals, September silver rose 31.2 cents, or 2.2 per cent, to $US14.2520 an ounce, while October platinum gained $US25.50, or 2.1 percent, to $US1239.70 an ounce.
Gold for December delivery added $US3 to $US958.80 an ounce.

US Dollar Preparing to Fight Back

What’s new on the FX markets? What is the current US Dollar direction? The US Dollar index is a good synthesis and gives a pretty good snapshot of the current trends.

Let’s take the daily chart. The index has just reached a key level. This level is a support line around 78.5 and is the last Fibonacci retracement ratio (the 61.8%) of the rise occurred between points A and B on the chart. Point A is the inflection point where the Greenback started bouncing firmly last year at mid-July. From this low of 72.11, the index rebounded to a high of 89.71, posted in last March (point B). This 24% uptrend was backed by an ascending support line (green line) that was eventually cleared in late April this year.

Click to enlarge

This triggered a bearish signal that drove the price lower very quickly. As a result, the index fell to a low of 78.37 in early June (point C), the 61.8% Fibonacci retracement level. The index found some support there and bounced to 81.8 two weeks later, before it eventually fell back to the Fibonacci support (point D).

Points C and D may create then a “double bottom” chartist pattern. As this pattern appears on a support line, it is likely to strengthen its accuracy. That’s why a new rebound from the current level is probable. However there is an immediate resistance line that could prevent the price to move higher on the near-term: it’s the descending line that comes from point B and goes through lower highs (points E and F).

The MACD has indicated a bullish divergence. It did not confirm the new low posted by the price action on point D. The current price is 79.31 and the resistance is just above, around 79.50. A cross above this resistance line would turn the technical indicators bullish. The next target would probably become the level of 83, which is the 38.2% retracement ratio.

Of course, on the downside, a break below the support of 78.30 would be a clear new bearish signal, with probably no important new support before 74.75 (a previous high posted in June 2008).

Tomorrow at 1400EDT/1800GMT, the Fed will release its Beige Book summary of US economic developments ahead of the August 12 FOMC meeting. We think the overall tone of the report is likely to further undermine short-term sentiment, given the rather meager improvements in recent data and the overhang of weak longer-term components, such as unemployment and consumer spending (see Research Analysis below). We think the Beige Book will lead to further selling of so-called risky assets (e.g. stocks, commodities, and the JPY-crosses, such as EUR/JPY, AUD/JPY, etc.). However, weaker than expected US July consumer confidence released on Tuesday has already seen a significant unwinding of long risk trades, especially in the JPY-crosses. The drop in the JPY-crosses comes against the backdrop of overweight ‘long-risk’ positioning (i.e. long JPY-crosses), so we think the downside shake-out has more room to run. On the technical front, EUR/JPY and GBP/JPY have fallen back inside their Ichimoku clouds, suggesting a failure from above the cloud and a rejection lower. They have also broken below trendline support for the move up since July 13.

Trading Strategy: Rather than chase the JPY-crosses lower after Tuesday’s sell-off, we will look to use remaining strength to establish short positions prior to the Beige Book, focusing on EUR/JPY and GBP/JPY.

EUR/JPY: We look to sell between 134.30/80; stop loss above 135.20; take profit between 132.00/50.

GBP/JPY: We look to sell between 155.80/156.50; stop loss above 157.00; take profit between 153.50/154.00

Research Analysis: The current Beige Book will cover economic activity from early June through late July and here is how we expect some of the more important components to have evolved.

US consumer spending remains depressed. The June retail sales report showed a -0.1% monthly decline in “control” retail sales. This number strips out the volatile gasoline, building materials and auto dealer components and offers a clearer picture of the underlying trend. The three-month annual rate plunged to a dismal -2.7% from -0.3% and was the worst since February. More recent data suggest no change in the downward trend. Chain-store sales were running at a dreadful -5.6% annual rate as of July 25 and this is down from a -4.4% pace at the end of June. Furthermore, the recent decline in consumer confidence - to 46.6 from 49.3 last month - points to continued weakness in the months ahead.

The employment situation is showing little signs of improvement. While initial jobless claims have corrected sharply lower in the first few weeks of July, the reports were riddled with statistical adjustment problems. The earlier than usual auto layoffs in June meant that July witnessed much smaller seasonal declines in that space. This threw a wrench in the government’s adjustment process and thus the better numbers are merely a mirage. The potential for a rebound back above the 600K level is extremely likely in the weeks ahead. More evidence of continued deterioration came from the Conference Board’s consumer survey. The labor differential–which measures jobs plentiful minus jobs hard to get– slipped to -44.5 in July from -40.3 the prior month and is the lowest now in 17 years. Indeed, the evidence continues to point to an unemployment rate above 10% sooner rather than later.

Credit markets are still on the mend and the improvement will be duly noted. Interbank lending is well back to normal and the TED spread (3-month Treasury/3-month Libor spread) has collapsed down to just 31 basis points. This is well below the two-decade average of 49 basis points and miles away from the 464 crisis highs. Corporate lending is still troubled and the spread between Baa corporate paper and Treasuries remains high at 351 basis points, well above a normal 220 - thus it is still expensive for businesses to borrow. In an environment where revenues are underperforming this is not a welcome development. Consumer lending likely remained subdued both from tight lending standards and an overall lack of borrowing demand as households repair balance sheets.

Fundamental Forecast for Japanese Yen: Neutral

Direction from the Japanese yen is often the product of risk appetite; and the fundamental outlook for next week doesn’t suggest this essential correlation will break any time soon. However, this connection may actually complicate the future for speculators rather than make it more straightforward. The primary source of what has essentially been a market-wide advance in risk appetite these past two weeks seems to have petered out. Earnings releases are in decline and there are very few individual releases on the docket that can initiate a global shift in sentiment on its own. Among other potential catalysts – like growth speculation – there are many contingencies and shades of gray that could make the yen a very difficult currency to trade going forward.

About the DFX Trend Index

The DFX Trend Index ranges from -100 to +100 and is updated everyday at 5 pm eastern US time.  The numbers correspond to specific trend conditions.

50 to 100: uptrend / potential for a top increases the closer the index is to 100 (high readings during trends)
25 to 50: in a range / bullish potential
-25 to 25: price has reversed to the mean
-50 to -25: in a range / bearish potential
-100 to -50: downtrend / potential for a bottom increases the closer the index is to -100 (high readings during trends)