Thursday, February 28, 2008

Currency update 28 February 2008

Currency update from strongest to weakest (click on all charts to enlarge).


Australian dollar daily and weekly charts:



Daily chart is very strong. Since the bottom in mid-Jan @ 85.76 this one has been on a tear. It closed yesterday @ 93.90; right near it's previous high of 93.92. A closing price above 93.92 would put in play Fib projection targets of:

-99.10
-102.32
-107.40

Note that this bullish breakout has yet to be achieved (unlike the Euro; see next). Will watch this one closely. Short term bullish.



Weekly chart is also very stong. May 2006 was the bullish long term buy signal and it will remain so until the MACD again crosses below zero. There is a well defined uptrending channel and a steeper trendline (black) which should act as support on any pullbacks.

Long term bullish.


Euro daily and weekly charts:



Daily chart is very bullish. New all time highs on break above 149.12. Fib targets for this move now:

-152.83
-155.07
-158.78

Support on any pullback should now be the previous resistance level @ 148.97-149.12. This level was tested 3 times before the breakout so it is a strong level of support on any pullback.



Weekly chart very bullish. Well defined uptrend from 2001 bottom.

Interesting to note my Fib projections done many months ago (these were put on the chart in mid-2007 when the price broke above it's previous all time high @ 135.62). The initial target of 146.98 has already been surpassed. Next levels are:

-154.29
-165.62

As the 154.29 projection is very close to the newly calculated Fib targets on the daily chart, it is reasonable to assume the next target for the Euro is the 154.29-155.07 level.

Nice rising trendline should act as support on any pullbacks.


British Pound daily and weekly charts:



Daily chart neutral. While there is a short term buy signal on the chart, it has yet to move above resistance @ 199.43.

If this level clears it would need to get above the confluence of moving averages (100 day moving average @ 201.42, 200 day moving average @ 201.16) to turn bullish. Still needs to prove itself at this point.



Weekly chart is bearish. The MACD cross below zero in Dec 2007 marked the bearish turnaround.

Projected Fib levels of support are noted on the chart. It broke through the first Fib support level of 195.66 which closely matches a previous price support of 195.47. This price level has to be watched closely; a break below will take it down to the 50% Fib @ 190.88

USD Update 28 February 2008

It was another historic day for the USD yesterday as it broke below it's previous support and is now probing newer lows.

The synopsis of what happened has been pasted below from Daily FX with my charts following:

Fed Report Points to Further Rate Cuts, Dollar Accelerates Its Record Breaking Declines




• Fed Report Points to Further Rate Cuts, Dollar Accelerates Its Record Breaking Declines



• Euro, Backed By Strong Data, Blows Through 1.50 Against The Dollar



• Australian Dollar Joins Its New Zealand Counterpart At Multi-Decade Highs



Written By: John Kicklighter, Currency Analyst



Fed Report Points to Further Rate Cuts, Dollar Accelerates Its Record Breaking Declines

Since the dollar marked its unfavorable milestones late in the US session yesterday, traders around the world have jumped in to sell the battered currency. Now at record lows, bulls have quickly lost hope in a possible rebound from an overextended greenback. In fact, looking across the market, we have seen the influences of an unwanted dollar on otherwise sound technical formations among the majors. Momentum in EUR/USD pushed the pair through the closely watched 1.50 level and quickly surpassed 1.51 in the same session. Those currencies with high yields and hawkish central banks proved especially attractive to those wanting to short the dollar. NZD/USD rallied to a new multi-decade high of 0.82 while the Australian dollar broke to a new 23 year high. This follow through momentum wasn’t found on sentiment alone, however; Fed Chairman Ben Bernanke’s semiannual testimony before the House Financial Services Committee certainly played its part. Few major changes were made in the central banker’s outlook for economic activity and Fed policy from last week’s minutes from the January 29-30 FOMC meeting; though his commentary did confirm the outlook for further policy easing. In his testimony, Bernanke said the policy group would be “carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.” In addition to his concern for growth, Bernanke had also recounted concern over inflation trends. While these worries have been present in the Fed’s commentary for some time, more media outlets and analysts have connected the dots and taken these forecasts to mean the economy will fall into a period of stagflation. Besides the Fed Chairman’s dour commentary, the market had further reason to sell dollars from two disappointing indicators. The Commerce Department reported a 5.2 percent drop in durable goods orders – the biggest such contraction in a year – predominately due to the drop in consumer sentiment and its expected effect on American’s spending habits. And, keeping the pressure on the housing market’s recession, new home sales dropped a greater-than-expected 2.8 percent to a 588,000-annual pace, now the weakest since 1995.



Euro, Backed By Strong Data, Blows Through 1.50 Against The Dollar



While the euro’s advance against the US dollar was generating a broad demand for the currency in most of its liquid pairings, the move also had its fundamental roots as well. Tuesday morning saw the release of a few indicators of economic import and fundamental influence. The January reading of M3 money supply growth cooled less than expected. An 11.5 percent pace of annual growth in the money supply is the second consecutive deceleration; yet this objective inflation reading is still near the 28-year high set back in November. More hawkish in its inflation support was the German import price index through the same month. Despite the deflationary influence of a record high euro, the inflation report hit a 16-month high 5.2 percent clip attributed largely to a sharp rise in energy prices. Elsewhere on the German docket, the GfK consumer sentiment survey followed the lead of the IFO business and ZEW investor confidence reports. Though still near a two-year low, the indicator fended off an expected downtick to hold at 4.5 for the third consecutive month. All of the hard data aside, the true market moving news for the day was actually commentary. ECB Member Axel Weber remarked in a speech that the market’s consensus expectation for a rate cut from the ECB was underestimating inflation trends. These comments were a clear signal for euro traders, which were holding back from bidding the euro on the forecast that the ECB will have to follow the Fed’s lead, to join the now aggressive rally.



Australian Dollar Joins Its New Zealand Counterpart At Multi-Decade Highs



The commodity bloc leveraged the day’s anti-dollar sentiment. Leveraging speculation of a follow up rate hike from the RBA at their next week, the Conference Board’s December leading economic index rose for a fifth consecutive month. The Canadian dollar added little distance to its 300 point rally against the greenback over the past two days as Fin Min Jim Flaherty projected the nation’s budget surplus would drop 77 percent in 2008 and shrink to decade low in 2009. Finally, the New Zealand dollar would perform actually drop against the US currency. Business confidence plunged to a 9-month low according to NBNZ with profit forecasts and hiring plans fading.



British Pound’s Rally Fades As Anti-Dollar Sentiment Takes Over



The tether between the UK and US economies seems to have kept the British pound from participating in a market-wide, anti-dollar rally. Indeed, while EURUSD shot another 150 points above yesterday’s close to new record highs, the pound-backed major produced an ugly reversal candle on a failed run to 2.00. Mirroring the sentiment in Fed Chairman Ben Bernanke’s discouraging speech on monetary policy across the pond, the first revision in the British fourth quarter GDP numbers printed a number of disappointing modifications. Though annual growth held a 2.9 percent pace, fixed capital investment dropped 0.5 percent, imports 1.2 percent and exports 0.5 percent.



Carry Trades Plunge As Risk Aversion Reigns



The economic docket was light for the low yielding Japanese yen and Swiss franc, through their aggressive advances would not have suggested a shortage of scheduled fundamentals. Instead of economic indicators, traders’ interest in these carry trade favorites came along with a broad pull back in risk appetite. Growing fears of an economic recession (or worse, stagflation) was a particularly ominous sign for the global economy. A similar sentiment was measured in equities and the increasingly speculative energy market.





When I scaled out of equites and into cash starting in August 2007, I allocated 25% to USD cash for the following reasons:

1) from a fundamental point of view the belief that the market was so totally one sided towards short USD/long Euro, Aussie, Pound, etc that from a contrarian point of view buying the USD looked reasonable, and

2) fr0m a technical point of view it looked like the print low in mid-November @ 74.48 would offer a strong level of support.

As of yesterdays close, the support level has been broken so it is time to look again


First chart is the 2 year daily line chart (click on all charts to enlarge



The descending channel that extends back over 3 years is well defined. Note a smaller range descending channel has been established as well so any upward price movement should be contained by the smaller channel.

The price has broken below support @ 74.48. This is a reconfirmed bearish signal and allows for a recalculation of projected Fib targets based upon the anchors of 77.85 and 74.48. The new short term price targets for the USD based upon yesterdays breakdown are:

72.41
71.12
68.98

Note that the RSI is now re-entering oversold territory so a bounce could be expected; however there is no technical evidence now that the USD has found a bottom.


Next chart is the USD 3 year candlestick chart:

>

Here the well defined downtrend channel that formed all the way back in January 2002 (shown on the next chart) can be seen clearly. The MACD issued a long term bearish signal in April 2006 and that has yet to reverse. Until the MACD were able to recover above zero the long term downtrend remains intact.


Next chart is the USD 10 year weekly line chart:



The downtrend line is clear. What is interesting to note on this chart is the Fib projections I made when the USD broke it's previous "bottom" @ 80.81 back in mid-2007. Those targets have been in place since then.

Note that the first projected target was 73.88 (based upon the anchors of 92.04 & 80.81) so we are getting close to my first target. As we approach this point it will be interesting to see the price action. Also interesting to note the 2nd price projection on this chart is 69.54........a reminder the latest break Fib target based upon totally different anchors (discussed above) has a 3rd target of 69.07. So it is reasonable to assume the bottom of this decline could come in at the 69.07-69.54 price level.....a further decline of approx 6-7% from current levels.


Last chart is the USD 20 year montly chart:



This chart is very interesting. I posted it some months ago but thought it was time to revisit it.

Here are the key points to note:

1) the USD has been in a decline since Feb 1985 where it topped @ 160.41.

2) the first wave of the decline ended in September 1992 @ 79.12. This was a 7 1/2 year decline (90 months).

3) the countertrend rally from Sept/1992 to Jan/2002 retraced almost exactly 50% of the down move (to be exact, 50.67%). It can be seen the 50% Fib retracement from the high to the low acted as the next level of resistance before the downtrend resumed.

History does not repeat itself but many times it does rhyme. As such, it is simple to project the following based upon previous market action:

-since the top of the current downtrend was Jan/2002; a 90 month decline would put the next USD bottom occuring in July 2009.

-the amount of the previous correction was 50.67%. Should the same occur the USD is calculated to bottom at 60.92 before the next upleg.

Note this is very close to the 3rd projection on the 10 year weekly line chart @ 62.58. Makes one go "Hmmmmmm". If so, that is a further 15% decline from current levels.


Bottom Line:

I will be switching my 25% position out of the USD tomorrow and into the Aussie dollar. Both the Euro and the Aussie dollar have been stellar performers (charts to come soon) but I already have a 25% weighing in the Euro so diversification makes sense at the present time. The British Pound is not nearly so strong; I will avoid it at this stage as it seems to be caught in the downdraft of the USD.

I hate "going with the crowd" on this trade but there is no doubt the US government is devaluing the USD on an unprecedented level and you cannot "fight the tape". The ultimate technical indicator is price and price is in the toilet for the USD. It is what it is.

Charts will follow today or tomorrow for the other currencies plus stocks plus bonds. It has been a very turbulent week technically so changes need to be made in my account. I will post them with the updated charts.

Sunday, February 17, 2008

Stock Market Update 18 February 2008

Routine update as of the market close 15 February 2008.

There has been no significant change in the charts since my sell signals and my positions have remained unchanged.

First chart is the DJW daily line chart (click on charts to enlarge):



Since the sell signal was issued in early November, nothing has changed on this chart.

The market tried to attempt a rally from its bottom at 262.38 but to this point has not had enough strength to even challenge the 38.2% Fibonacci retracement level at 284.52. The 50 day moving average is currently at 286.70 so this area (284-286) is the first level of resistance the markets must overcome in order to start some sort of bullish reversal.

Should it hold above 262.38 and set a new high above 281.29, this would be the first bullish indication as a "higher low/higher high" would have been put in place.


Next chart is the 1 box Point and Figure chart:



Once again, the sell signal on this chart was initiated on a price break through 294.

Price has been gyrating between 263 and 281 but the short term sell signal is still in place. Target price on this chart is 223.

Of interest to note on this short term chart is if the markets were to continue to rally from this point, a price break through 282 would change the chart to bullish. This price level corresponds closely with our targets on the line chart discussed previous.


Next chart is the DJW traditional Point and Figure chart:



This longer term chart went bearish on a price print of 292 and still shows a target of 216.

Note there is some chart support on the left of the chart around the 256 area (from early 2000) and 264 (from mid 2006) so it is reasonable to expect this area (256-264) will act as a strong support level. A break below this area would be very bearish


Next chart is the DJW long term weekly chart



Again it can be seen that the 13 week moving average crossing the 34 week moving average signaled the start of a new bear market (the first since 2003).

I have added a Fibonacci retracement of the entire up move from 2003 to give some idea of possible support levels. The 38.2% retracement level comes in at 245.68.

There is nothing on this chart that indicates a bottom has been made yet and it continues to be bearish


Next chart is the DJW monthly chart:



Price is now well below the 12 month moving average at 297.21. The bear market will not be over until it can get back above.


Bottom Line:

The markets are still in a bear market pattern on the short term, medium term and long term charts. There are currently no technical indications of a recovery. I continue to hold the following positions:

-50% International bond fund
-25% USD cash
-25% Euro cash

A number of breadth charts I monitor (not shown) are showing some signs of stability and it would be not out of the question to have some sort of rally upwards from here. Until that firming of support translates into price action as shown on the charts I will continue to hold my current positions.

I am still looking for a bottom to occur followed by a strong run into the end of the year. As such, I will look to scale in long positions when the charts indicate a bottom has occurred. For now, still sitting and watching.

As always, when a change occurs I will blog my charts and changes in my portfolio.

Monday, February 04, 2008

Stock Market Update 04 February 2008

Since my last update the markets have functioned in exactly the manner I anticipated (sorry for any spelling mistakes as the blog site will not spell check due to the slow internet in DXB associated with the cable cuts over the past few days).

The steep sell off was followed by a "dead cat bounce" retracement due to the exteme oversold condition. While I was able to profit from this in my personal trading account, the Provident Fund does not allow the sort of in-and-out trading needed to take advantage of these short term opportunities. As such, my comments here will continue to be associated with the more medium to long term perspective.

The question is where do we go from here?

First chart is the DJW daily line chart (click charts to enlarge):



Firstly, I want to reiterate the sell signal on this chart was initiated in early November based upon the following:

1) the price dropped below the 50 day moving average (blue line)
2) the ADX (14) red line crossing above 60, and
3) the MACD crossed below zero

Since then nothing has changed. We are still on a short term sell signal and we are in a downtrending market.


As can be seen, the market has clearly set an interim low at 262.38. Using the high and the current interim low, I have drawn a Fibonacci retracement.

In a "normal" market, it is common to retrace price movements by 38.2%, 50%, or 61.8% of the initial price movement; these are know as Fibonacci retracements levels (the concept of Fibonacci numbers is commonly used in Elliot Wave Analysis; for those that are interested here is probably more than you would ever want to know about Fibonacci numbers):


http://www.mcs.surrey.ac.uk/Personal/R.Knott/Fibonacci/fibnat.html


http://www.weboma.com/how-to-use-fibonacci-numbers-in-forex-and-stock-trading/


It is important to reiterate there is no one "magic answer" when it comes to technical analysis. No single indicator will ever provide the entire answer to what is potentially the most complex enigma there is; the world's stock market. As such, technical analysis is as much an art as it is a science.


I have learned this lesson over the years and that is why the charts I provide are designed to give you the "general view" from the most short term to the most long term. When they are all in alignment "up"......I am bullish. When they are all in alignment "down"..........I am bearish. When they are "mixed"........I am neutral. Currently all of them are down.


Unto themselves, Fibonacci numbers provide some idea as to possible support or resistance levels but should not be relied upon to provide the complete picture. But like any other technical indicator, when combined with other technical indicators they tend to be much more powerful.


Note this market has yet to even surpass the 38.2% retracement level (284.52)......this would be the first level that we might expect a turn back down. If this happens at such a low Fib level, it signifies a very weak market as a much more common retracement would occur at the 50% level (291.35). Note this level is also very close to the declining 50 day moving average (currently at 292.03) so we could assume the "ceiling" of this countertrend up move will occur somewhere near this level (around 291-292). A break upward through there would be bullish and would tell us the market may have put in at least a mid term low.


Next chart is the 1 box PNF:


The sell signal on this chart occured on a price print of 293. It is still bearish and projects a price target of 223 (note to new subscribers; please read previous blogs on how to interpret these projections).


Next chart is the Traditional PNF:


Again, the sell signal occured on a price print of 292. This chart projects a target of 216.


Next chart is the weekly DJW line chart:


The trend has clearly broken the uptrend from 2003. The 13 week moving average crossed below the 34 week moving average. The MACD has clearly broken below zero. This chart could not be any more clear.........BEARISH.


Next chart is the monthly DJW candlestick chart:


Once again, it is very clear. We had 6 attempts at closing below the 12 month moving average since 2003. All of them failed and we went on to new highs. January/2007 is the first close below the moving average. It cannot be more clear............BEARISH.


BOTTOM LINE:

As indicate in previous posts, I am now positioned as follows:

50% Fidelity International Bonds
25% U.S. Cash
25% Euro Cash

I am still looking for the opportunity to move back into equites when the time is right but this is not the time. In my opinion, this current rally will fail and we will come down to at least test the recent lows.


For those that are positioned in line with my holdings...........keep your powder dry and wait for what will be great buying opportunity sometime soon.


For those that are still long the markets (this is probably those who have recently subscribed to this site).....the market is providing you with what I believe is a second chance to get out. You may want to seriously consider it's very generous offer.


As always; I am not providing any individual advice as I am not under retainer to do so. Please undertake any postions at your own risk.

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