Strategic Technical Themes: Weekly Outlook and Technical Highlights

Strategic Technical Themes
Weekly Outlook and Technical Highlights
Karen Jones & Axel Rudolph | Technical Analysis Research | Monday, 27 June 2011
Summary
Foreign Exchange
The US dollar is base building and has started to erode 75.60, the 2010-2011 downtrend. We need a close above here to confirm. Nonetheless the formation developing on GBP/USD looks very much like a top and a close below 1.5937/May low will trigger a slide to 1.5500. Sterling looks set to under perform generally. EUR/GBP looking pivotal and well placed to break higher through the .8980 downtrend. Such a break would target .9414 slightly longer term. NOK-SEK major inverse head and shoulders base evident. Base measures to 1.2150.
Fixed Income
Bund futures have reached the 50% retracement of the move down from 2010 peak at 127.36, US 2Y swap is on its 9 month uptrend at 1.9835 and the EU 5Y swap is on the 2005 low at 2.56, all of which suggest we will see some profit taking very near term. EU 10Y asset spread. Risk remains for extension to top of channel at 46.83. US 2-10 swap curve has broken below the 2.425 level and targets 2.305/2.300. September US 10Y T-Notes September 10Y T-Notes have eroded the significant 124-035/15 resistance area and target 126-28/128-01. JGB is seen breaking above the 50% retracement at 141.23 and thus targets 141.95 next
Commodities and Other Markets

NYMEX Crude oil has started to erode its 2 year uptrend, focus on the 55 week ma at 88.77 and risk increased that the slide will extend to 83.44. Spot Gold- Breakdown targets the 50% retracement at 1442.70. We are short to medium term bearish (next 3 months). The ITRAXX 5Y crossover - The 200 day moving average at 417.98 has been surpassed, target 452.77/460.35
Karen Jones & Axel Rudolph | Technical Analysis Research | Monday, 27 June 2011 1
Technical Trade Ideas
Date
Instrument
Trade Idea
Stop
Take Profit
Outcome Short at 2.2850, currently at 2.3225 (exit trade at market) Cancel trade as we wish to lower entry point
P&L
13.06.2011
Sell EUR/TRY
Sell at 2.2700, add at 2.30 Sell 1.6140, 1.6225 1.62, 1.6140 Sell 1.6025, 1.6140
Stop at 2.3310
2.2100
-1.6%
23.06.2011 27.06.2011 27.06.2011
Sell GBP/USD Buy USD/TRY Sell GBP/USD
1.6395 1.5920 1.6265
1.5550 1.73 1.5550
We wish to exit the EUR/TRY trade idea USD/TRY has broken up and we suspect the TRY will significantly under perform both the US dollar and EUR. We have issued a new buy recommendation in USD/TRY and have lowered the entry point on GBP/USD
Bullish and bearish trending signals

Bullish (ADX>20, MACD>0 and +DI>-DI) Bearish (ADX>20, MACD<0 and +DI<-DI)
NB: This is NOT a model and is intended for reference only. It is a basic system to determine if a market is trending or not. It cannot judge strength of support or resistance or whether various momentum oscillators have diverged. For this reason it is possible that the we will occasionally hold a different position to that indicated by the tables above.
Currency ranking vs the US Dollar for the past 5 days
Source Bloomberg 6.16 AM Bloomberg 8.50 AM

Foreign Exchange
US Dollar Index trading through the 75.60 2010-2011 downtrend

US Dollar Index weekly
The US dollar spent much of last week consolidating just below the 2010-2011 downtrend, and has started to erode this resistance this week. We note that price action is underpinned by the 2008-2011 support line, which is located at 72.78. We also note that the market has recently sold off to and held over the 73.48/78.6% retracement of the move seen in May and this coupled with the 13 TD count on the May low, leads us to assume that the US dollar is trying to base. Slightly longer term we suspect that the dollar is in the process of establishing a larger base here, however in order to confirm that view, a close through this downtrend is necessary. This would target initially 78.89/96, the location of the 38.2% retracement of the move down from the peak seen in 2010 and the 200 week ma. However longer term we look for a move to the top of the multi year range at 87.80 see next slide. 13
2010-2011 downtrend at 75.60 being eroded
US Dollar Index longer term outlook - weekly

Weekly chart
We view the US dollar executing a major base. This will be confirmed on a weekly close above 75.60. Price action over the last 3 years is viewed as a contracting range. The range is 72.80- 87.80. Which implies that we will now see a move to the top of the range at 87.80, from current levels this is approx a move of 15%. We would expect to see this move by the end of 2012.
EUR/USD focus on the 1.4017/1.3860 supports

weekly The dollar has recently failed at the 78.6% retracement resistance at 1.4732. We regard this as an interim peak for the market. It has eased lower and focus has shifted to the 1.4017/1.3860. This is the location of the 200 week ma, the 200 day ma and the May low. Failure here will trigger losses to the 55 week ma and uptrend at 1.3620/1.3570. As we suspect this is part of a major turn we would regard a move below 1.3500 as the signal that the market is heading back to the base of its range at 1.20. Only a close above 1.4732 would negate our bearish bias (not favoured). This guards the 1.4940 May high and the more important 1.5140/45 2009 high. This is not our favoured scenario. GBP/USD looks to be forming a large top and USD/SEK is bouncing from a 9 year uptrend. Both suggest the US dollar is attempting to base.
Uptrend and 55 week ma at 1.3620/1.3570
Weekly RSI is breaking down

EUR/USD - Negative sentiment

EUR/USD 3 month 25 delta risk reversal
Break down in risk reversal has indicates that the options market is clearly nervous of the downside
Note the top in the risk reversal led the EUR/USD price by over 3 weeks
The Risk Reversal is a measure of the skew in the demand for out-of-the-money options at high strikes compared to low strikes and can be interpreted as the market view of the most likely direction of the spot movement over the next maturity date. It is defined as the implied volatility for Call Options minus the implied volatility for Put Options on the base currency with the same delta.
BOE Sterling Trade Weighted Index

Eroding its one year shallow support line at 78.02.
Sterling has caught our attention it is starting to erode its 78.02 one year shallow support line (this connects the lows from May 2010, October 2010 and the April 2011 low). It is looking exposed. We would highlight that although pretty much sidelined, within the range the market has charted lower reaction highs since February 2011, which implies pressure is on the downside. In addition both the 55 day moving average and the 200 day moving average are pointing lower, which is negative.
Market charting lower reaction highs in its range.
All 3 factors suggest that pressure is now on the downside and the 78.02 uptrend should break shortly. Below 78.02 we target the 76.28 2010 low, then the 73.20 2008 low. This would imply another 6% slump for Sterling from current levels. Support line at 78.02 is exposed
10
GBP/USD is eroding the 1.5937 May low. Outlook negative

Daily
GBP/USD has broken down through support at 1.6091/1.6033. This was the location of the neckline, 38.2% retracement of the move up from seen this year, the May low and the 200 day moving average. The sell off has reached the 1.5937 May low, which is now being eroded We view the market as building a large top and this will remain valid while below the 2 month resistance line at 1.6374. Failure here will target initially 1.5855, the 55 week moving average and then 1.5510/00, the 38.2% retracement of the move up seen since 2010. Rallies are expected to find good interim support at 1.6265 and be contained by the 1.6374 2 month downtrend for our bearish bias to be maintained.
Resistance line at 1.6374
1.5937 May low is being eroded
11
GBP/USD weekly chart also negative
Market has recently failed ahead of the 200 week moving average at 1.6849
Market has broken down from the 20102011 uptrend
Weekly RSI is also breaking down.
12
Sentiment turning more negative GBP/USD 3 month 25 Delta Risk Reversal

Options market is becoming more nervous regarding the downside
Topped downside pressure evident
The Risk Reversal is a measure of the skew in the demand for out-of-the-money options at high strikes compared to low strikes and can be interpreted as the market view of the most likely direction of the spot movement over the next maturity date. It is defined as the implied volatility for Call Options minus the implied volatility for Put Options on the base currency with the same delta.
EUR/GBP - poised to challenge (and overcome) the top of the channel at .8980
A weekly close above the top of the channel at .8980 would be significant as this would imply the market has further upside potential to initially .9140/48. The 2010 high and the 61.8% retracement of the move down from the 2008 spike. Our secondary target is .9414/31, the October 2009 high and the
The recent low at .8723 should now hold for an upside bias to be preserved.
14
NOK/SEK - inverse head and shoulders points to continued under performance of the Swedish Krona
NOK/SEK has completed a large inverse head and shoulders base over the past 9 months. I believe it is heading higher. The base formed on the 19 year channel and forms part of a major turn in NOK/SEK, we view the low at 1.1050 as a major intermediate low. The base offers an upside measured target to 1.2150, this is achievable within 4 months approx. Initial target is 1.1875, the 20092011 downtrend. This is likely to provoke short term profit taking. However dips are expected to find support at 1.1644/00 (neckline of base) and be contained by 1.1460 (50% retracement). While we are above the latter level the base is fully intact. Initial target is the 1.1875 2009-2011 downtrend. Base measures to 1.2150
Monthly chart base formed on 19 year channel
15
Fixed Income
16
Bund weekly chart

The 50% retracement resistance at 127.36 exposed. Pressure on topside
Bund Futures Weekly Continuation Chart
The bund has reached a major target zone, namely the 2009 high and long term pivot and 55 WEEK ma at 126.52/69. The consolidation/profit taking that we were expecting has just not materialized and the market continues to work higher. There is no sign of reversal and the next resistance at 127.36 is already being eroded, this is the 50% retracement of the move down from the 2010 peak. As a general theme while dips hold above the 124.60/37 February high (from the continuation chart) an upside bias will remain. Above 127.36 we target 129.10, the 61.8% retracement of the move down from the 2010 peak. Interim support lies at 125.57, the 200 day ma on the daily continuation chart. Only below 124.37 would suggest that the market has topped and signal the start of a slide lower to 123.46, the 50% retracement of the rally since April this will act as the break down point to 122.49/121.13. 50% retracement at 127.36
17
EU 5Y Swap
Key support remains the 2.56/2005 low.
EU 5Y Swap Weekly Chart
The EU 5Y swap has now reached the 200 day ma at 2.61. The risk remains for a slide to key support at the 2.56 2005 low. This is major support and we look for it to hold the downside and provoke reversal. This together with the 55 week ma at 2.46 represent a key juncture on the chart. Immediate resistance is offered by this weeks peak at 2.75, with the June high at 2.86 offering tougher resistance. However to really generate some upside interest a break above the 2.91 55 day ma and downtrend is needed. Below 2.46 will target 2.28, the 61.8% retracement of the 2010-2011 move.
2005 low at 2.56
18
EU 2Y Swap
Has sold off to the 2010-2011 uptrend at 1.9835
EU 2Y Swap Weekly Chart
The EU 2Y swap is approaching the 9 month uptrend at 1.9835. Ideally we would like to see this hold and provoke recovery towards 2.12/13. Currently however the daily chart is dominated by the 2 month downtrend at 2.13 and while capped here the focus will remain on the up trend at 1.9835. Failure to hold over 1.9835 would trigger losses to the 1.92 200 day moving average en route to the 1.78/55 week ma A move above 2.13 would alleviate immediate downside pressure and signal a recovery to 2.25, the 55 day ma, however only a move above here would be enough to reactivate upside interest currently.
Uptrend at 1.9835
19
EU 10Y Asset Spread

Risk remains for extension to top of channel at 46.83
EU 10Y Asset Swap Daily Chart
The EU 10Y asset spread is in 2 year highs and the risk is that we will seen an extension to the top of the channel which has dominated the chart for the past 2 years now. This is located at 46.83. We would allow for this to hold the initial test and provoke initial failure. The market will maintain an immediate widening bias while above 35.00/35.35. Initial support lies at 37.00 Top of channel at 46.83.
2 year highs at 39.70
20
US 10Y T-Notes
September 10Y T-Notes have eroded the significant 124-035/15 resistance area and target 126-28/128-01
US 10Y T-Notes Equalised Active Daily Continuation Chart
September US 10Y T-Notes have eroded the 124-035/155 resistance area (the October and November highs). This targets the October low at 125-04 (on the June contract) will be in play. Above it lurks the 126-28/128-01 resistance area which contains the March 2009, as well as the August, October and November 2010 continuation chart highs. The market will remain directly bid while above the channel support at 123-20. Further potential support comes in around the 122-155 August 2010 high and then at 122-075, the late November high point. These levels are not expected to be revisited at this stage, however. We continue to view the last few weeks advance as a medium term correction higher in a long term bear market and will do so as long as the 2008-11 downtrend line at 127-02 on the weekly continuation chart caps on a weekly closing basis.
Weekly chart resistance line at 127-02
Resistance at 124-035/15 is being eroded
21
US 2-10Y Swap Curve

Breaks below the 2.425 level. Target 2.305/2.300
US 2-10Y Swap Curve Daily Chart
The US 2-10Y swap curve has broken down through the 38.2% Fibonacci retracement of the 2010-11 at 2.425 and we look for further narrowing to the 2.305/2.300 support zone. This contains the 50% retracement of the 2010-to-2011 advance as well as the 2008-2011 uptrend line and as such should lead to stabilisation. Previous support should now act as resistance at 2.425 and minor resistance is now found at the most recent minor interim high at 2.49 and along the 2011 downtrend line at 2.535. Slightly above it, at 2.54, sits the 55 day moving average. While below here, the outlook is for more narrowing to be witnessed. Below 2.30 would introduce scope to 2.21/2.19 (November 2010 low and 61.8% retracement of the 2010-2011 advance)
Significant top building
38.2% Fibonacci retracement at 2.425 broken
Monthly
JGB Futures
Is seen breaking above the 50% retracement at 141.23 and thus targets 141.95 next
JGB Daily Continuation Chart
September JGB futures last week oscillated around the 50% retracement of the late 2010 descent at 141.23 but have now cleared this resistance. Now that the 141.23 level has been bettered on a daily closing basis, the 61.8% Fibonacci retracement at 141.95 is in play. This also means that our negative longer term forecast has been put on the back burner. Minor support is seen around the 141.00 level and along the 200 day moving average at 140.77 with more coming in at the 38.2% Fibonacci retracement at 140.50. While trading above this level, the short term outlook will remain bullish. Should 141.05 be bettered this would target 142.08 (July 2010 high) and 142.33 (early August high), followed by 142.90/143.14 (mid-November high, 78.6% Fibonacci and Aug and Sep highs).
Resistance at 140.80/141.23 has been taken out
23
Commodities
24
Spot Gold
Breakdown targets the 50% retracement at 1442.70
Spot Gold Daily Chart
Spot gold has dropped through the 2011 uptrend line at 1530.20 last week and now also trades below the 55 day moving average at 1515.95. The 38.2% Fibonacci retracement of this years advance at 1474.54 and the May trough at 1462.10 are now being targeted and should be fallen through in the weeks ahead. The 50% retracement of the 2011 advance at 1442.70 is our medium term downside target for the second half of the year. Further down lurks the 200 day moving average at 1415.73, together with the 2008-11 uptrend line at 1404.88. Minor resistance above the 55 day moving average at 1515.95 is seen along the breached 2011 uptrend line at 1530.20 and in the 1550/1558.75 region which is where last weeks high and subsequent reversal lower was made. We are now short- and medium-term bearish.
Support 1474.54/1462.1 1442.7&1415.7 Resistance 1515.9&1530.2 1550.0/1554.1 1-Week View 1-Month View
2011 uptrend line and 55 day moving average have both been slid through
25
ITRAXX 5Y Crossover
The 200 day moving average at 417.98 has been surpassed, target 452.77/460.35
ITRAXX 5Y Daily Chart
The ITRAXX 5Y Crossover index came off the 200 day moving average at 417.98 last week but managed to rise above it on Thursday. The next higher 430.70 November 2010 low is therefore in the limelight now. Above it lurks the more significant 452.77/460.35 resistance area which comprises the August 2010 low, the 38.2% Fibonacci retracement of the 2010-11 decline, this years high, made in early January, and the March 2010 peak. As such it should nip any spike higher in the bud. Support remains to be seen around the 408.64 March high, at the psychological 400 level and can also be found at the 381.88 2010 low point. While trading above here, the short term outlook remains bullish.
Targets the November low at 430.70
26
NYMEX Crude Oil Focus on the 55 week ma at 88.77
Market is eroding the 91.10 2 year uptrend and the focus is on the 55 week ma at 88.77. While we would expect this to hold the initial test, we note the market has broken down from a pennant and this suggests that we allow for a deeper sell off to the 200 week ma and Fibo support at 83.44/38
Uptrend at 91.10 being eroded focus on 55 week ma at 88.77
27
Commodity Markets tend to come under pressure in the latter half of the year
Seasonality declines after July, markets are sidelined at best
28
Technical Signals
If MACD>zero And +DI>-DI YES
Then Bullish trending signal
Is the market trending? Is ADX>20 Neither criteria is met
Market is trending but not yet registering a bullish or bearish signal
NO If MACD< zero Market is not trending And +DI<-DI Then Bearish trending signal
29
Glossary
ADX
J. Welles Wilder developed the Average Directional Index (ADX) to evaluate the strength of a current trend. The ADX is an oscillator that fluctuates between 0 and 100. Even though the scale is from 0 to 100, readings above 60 are relatively rare. Low readings, below 20, indicate that the market is not trending and high readings, above 40, indicate a strong trend. It does not determine if the trend is bullish or bearish BUT just establishes whether a trending situation exists. DI+ = positive directional indicator, DI- = negative directional indicator. Buy and sell signals are generated when DI+ and DI crossover.
Moving Average Convergence/Divergence (MACD),

MACD uses moving averages, which are lagging indicators, to include some trend-following characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits. There are many ways to use this indicator but the simplest is that when above zero is denotes market strength and when below zero denotes market weakness.
NB: This is NOT a model and is intended for reference only it a basic system to determine if a market is trending or not, it cannot judge strength of supports or resistance or whether various momentum oscillators have diverged. For this reason it is possible that the we will occasionally hold a different position to that indicated by the tables.
30
Other technical analysis reports we publish are:

Monday: Tuesday: Wednesday: Thursday: Friday: Daily Market Technicals (FX), FX Emerging Markets Weekly Technicals; Daily Market Technicals (FX), Bullion Weekly Technicals; Daily Market Technicals (FX), Commodity Currencies Weekly Technicals; Daily Market Technicals (FX), Commodity Weekly Technicals; Daily Market Technicals (FX), Fixed Income Weekly Technicals.
Disclaimer
This document has been created and published by the Corporates & Markets division of Commerzbank AG, Frankfurt/Main or Commerzbanks branch offices mentioned in the document. Commerzbank Corporates & Markets is the investment banking division of Commerzbank, integrating research, debt, equities, interest rates and foreign exchange. The author(s) of this report, certify that (a) the views expressed in this report accurately reflect their personal views; and (b) no part of their compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or views expressed by them contained in this document. The analyst(s) named on this report are not registered / qualified as research analysts with FINRA and are not subject to NASD Rule 2711. Disclaimer This document is for information purposes only and does not take account of the specific circumstances of any recipient. The information contained herein does not constitute the provision of investment advice. It is not intended to be and should not be construed as a recommendation, offer or solicitation to acquire, or dispose of, any of the financial instruments mentioned in this document and will not form the basis or a part of any contract or commitment whatsoever. The information in this document is based on data obtained from sources believed by Commerzbank to be reliable and in good faith, but no representations, guarantees or warranties are made by Commerzbank with regard to accuracy, completeness or suitability of the data. The opinions and estimates contained herein reflect the current judgement of the author(s) on the data of this document and are subject to change without notice. The opinions do not necessarily correspond to the opinions of Commerzbank. Commerzbank does not have an obligation to update, modify or amend this document or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. The past performance of financial instruments is not indicative of future results. No assurance can be given that any opinion described herein would yield favourable investment results. Any forecasts discussed in this document may not be achieved due to multiple risk factors including without limitation market volatility, sector volatility, corporate actions, the unavailability of complete and accurate information and/or the subsequent transpiration that underlying assumptions made by Commerzbank or by other sources relied upon in the document were inapposite. Neither Commerzbank nor any of its respective directors, officers or employees accepts any responsibility or liability whatsoever for any expense, loss or damages arising out of or in any way connected with the use of all or any part of this document. Commerzbank may provide hyperlinks to websites of entities mentioned in this document, however the inclusion of a link does not imply that Commerzbank endorses, recommends or approves any material on the linked page or accessible from it. Commerzbank does not accept responsibility whatsoever for any such material, nor for any consequences of its use. This document is for the use of the addressees only and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose, without the prior, written consent of Commerzbank. The manner of distributing this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves about and to observe such restrictions. By accepting this document, a recipient hereof agrees to be bound by the foregoing limitations.
32
Disclaimer (contd.)
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Comm erzbank Corpor ates & Markets Fr ankfurt London Commerzbank AG Commerzbank AG DLZ - Gebude 2, London Branch Hndlerhaus PO BOX 52715 Mainzer Landstrae 153 30 Gresham St reet 60327 Frankfurt London, EC2P 2XY Tel: + 49 69 136 21200 Tel: + 44 207 623 8000 New York Branch Commerzbank AG 2 World Financial Center, 31st floor New York, NY 10281 Tel: + 1 212 703 4000 Singapore Branch Commerzbank AG 8, Shenton W ay, #42-01 Singapore 068811 Hong Kong Branch Commerzbank AG 29/F, Two IFC 8 Finance S treet Central Hong K ong Tel: +852 3988 0988
Tel: + 65 63110000
33
Karen Jones
Head of FICC Technical Analysis Tel. Mail +44 207 475 1425 [email protected]
Axel Rudolph
Senior FICC Technical Analyst Tel. Mail +44 207 475 5721 [email protected]
Zentrale Kaiserplatz Frankfurt am Main www.commerzbank.de Postfachanschrift 60261 Frankfurt am Main Tel. +49 (0)69 / 136-20 Mail [email protected]

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Strategic Technical Themes

Weekly Outlook and Technical Highlights

Commodities and Other Markets

Technical Trade Ideas

23.06.2011 27.06.2011 27.06.2011

Sell GBP/USD Buy USD/TRY Sell GBP/USD

1.6395 1.5920 1.6265

1.5550 1.73 1.5550

Bullish and bearish trending signals

Currency ranking vs the US Dollar for the past 5 days

Source Bloomberg 6.16 AM Bloomberg 8.50 AM

US Dollar Index trading through the 75.60 2010-2011 downtrend

2010-2011 downtrend at 75.60 being eroded

US Dollar Index longer term outlook - weekly

EUR/USD focus on the 1.4017/1.3860 supports

Uptrend and 55 week ma at 1.3620/1.3570

Weekly RSI is breaking down

EUR/USD - Negative sentiment

BOE Sterling Trade Weighted Index

Market charting lower reaction highs in its range.

GBP/USD is eroding the 1.5937 May low. Outlook negative

Resistance line at 1.6374

1.5937 May low is being eroded

GBP/USD weekly chart also negative

Market has broken down from the 20102011 uptrend

Weekly RSI is also breaking down.

Sentiment turning more negative GBP/USD 3 month 25 Delta Risk Reversal

Topped downside pressure evident

Bund weekly chart

2005 low at 2.56

EU 10Y Asset Spread

2 year highs at 39.70

Weekly chart resistance line at 127-02

Resistance at 124-035/15 is being eroded

US 2-10Y Swap Curve

Significant top building

38.2% Fibonacci retracement at 2.425 broken

Resistance at 140.80/141.23 has been taken out

Targets the November low at 430.70

NYMEX Crude Oil Focus on the 55 week ma at 88.77

Uptrend at 91.10 being eroded focus on 55 week ma at 88.77

If MACD>zero And +DI>-DI YES

Then Bullish trending signal

Is the market trending? Is ADX>20 Neither criteria is met

Market is trending but not yet registering a bullish or bearish signal

Moving Average Convergence/Divergence (MACD),

Other technical analysis reports we publish are:

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