Dec 14, 2011

Gold Correction Already Started?



There are many opinions when it comes to the question whether gold is overvalued. Last three months gold reached historical high and traded in consolidation leaving open question for further rise.

From fundamental point of view latest developments in global financial system set bearish note for the precious metal. Weakness in Europe have risen dollar’s value as investors stay away from euro denominated assets, thus lowering gold price. Another threat for gold price is slowing growth in main gold markets China and India which leads to low demand. Combination of above mentioned factors support current weakness of the commodity and short term outlook is negative.

Technically last few months gold consolidates and trades in technical triangle. Exit from this technical figure has two outcomes – braking up or downward. Usually the following move coincides with the triangle height (in our case approximately $450). After last three sessions the price broke down the triangle, which could trigger steep correction to $1200 in next few months. Close under the strong support on a daily chart - 200 MA (at $1618) is confirmation for prolonged bear move. Next major support would be the 200 MA on a weekly chart - approximately $1200 suggesting extremely bearish move. 

Possible gold correction to unfold


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Dec 13, 2011

EURUSD Showing Reversal Sign



The divergence between the price and MACD occured in September 2011correctly signaled reversal of EURUSD. After yesterday close another devergence has been spotted. It coincides with strong support level formed from previous bottom at 1.3150. The double bottom and divergence form strong indication for trend reversal with target 1.38.

EURUSD trend reversal
Chart published by CapitalHubs on Tradingview
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Dec 6, 2011

Silver Wheaton Close To Crucial Level



SLW close to crucial level by CapitalHubs on TradingView.com

SLW is trading in positive parallel channel within bigger negative one. Positive markets and silver move could drive price to $38, otherwise $24 is the support level.
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Nov 23, 2011

The Impact of Government Default on European Banks



It is important to know what would be the effect of eventual government default. Reuters Breakingviews has created stress test calculator for estimating what possible implications to Euro banks and governments in such case would be.

Recently conducted stress test of European banking system in July has been widely criticized. Often stated was the fact that requirements in the test were lowered, which question credibility of the test. According to the results most of the EU lenders had enough capital to sustain tough economic conditions. The problem is that minimum capital requirement in the test conducted by EBA (European Banking Authority) was 5%, far low below EBA’s current 7% threshold. Moreover after latest painful developments European banking regulator has discussed option for rising capital requirement to 9% as additional buffer. Another pitfall of the test is that includes only half of EU banks and excludes smaller ones.

The Breakingviews Euro Zone bank stress test aims to be more stricter than previously conducted. There are some details to be considered when reading the output. As described in the test notes it uses the same data as EBA. Results show how many banks would fail, which of them will suffer most, what amount capital is needed to cover core Tier 1 ratio and the impact of the recapitalization on each Eurozone country’s debt. General assumption is that calculations are made with 12 Oct market prices for 5 year bonds.
If we consider 63% Greek bonds haircut and 40% Portugal with 7% Tier 1 capital threshold, then capital shortfall would be €95.6B. Most of the burden has to be taken from Greece as €31.9B must be raised, Spain - €15B, Germany - €13.8B. In this case most vulnerable are Greek banks: NBG, Eurobank EFG, ATE Bank, Piraeus, Italian Unicredit, German Commerzbank and Deutsche Bank.
Euro zone stress test with Greek and Portugal haircuts
If we assume worst case scenario with Spanish and Italian haircuts of 30% (added to Greek and Portugal) and implementation of 9% core Tier 1 ratio, the picture looks ugly. Banks considering significant capital shortfall are – Unicredit, RBS, BNP Pariba, Santander, Banco Bilbao, Deutsche Bank, Commerzbank. Capital shortfall is close to €400B. In this case Spain must raise additional €104B, Italy - €58B, Germany - €53B, France - €53B, UK - €45B. Unfortunately in such conditions credit markets are practically paralyzed and funding is impossible. Where does money come from? The European Financial Stability Facility (EFSF) was designed to help stressed EU countries. With latest approval for increase of its funds to €780B there should be some relief that even worst case scenario is manageable.
Euro zone stress test with Spain and Italy haircuts
After the both tests conclusion is that there are certain banks considered to bear additional risk of capital shortfall in extreme conditions. Countries with highest recapitalization level (cost of recapitalization/GDP) are Greece, Cyprus, Portugal, Spain, and to lesser extent Germany, France, UK, Italy. In real terms, however, Spain, Germany, France, UK have greater impact of recapitalization related to total shortfall. It is clear that problems are not lack of funds but rather lack of decisions i.e. political willingness for quick resolving of the crisis.

You could perform your own stress test here!


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Is 2008 Comming Back Again?



If you look around there are many similarities. Should we worry about next economic downturn or market crash?

Almost one month ago markets enthusiastically cheered EU leaders’ agreement over Greek debt drama. Since then, however, the situation is not getting any better. This is obvious looking at the market indices performance over that period. S&P lost 9.85% since its 27 Oct. peak, yield on Italian, Spanish and even Belgian government bonds are persistently climbing despite ECB efforts to keep them low. There are more and more signs that we could face similar financial storm. Growing borrowing costs, freezed credit markets, higher volatility and frightened investors are common scars between present and 2008.

Current problem has no short term solution as it have been accumulated over years. Now we are witnessing painful process of deleveraging which could last longer than previously thought. The core of the entire mess is lost credibility as it appeared in 2008. This is seen with undersubscribed German bond auction few days ago. According to the latest research Japan investors prefer investing in UK gilts rather than German bunds. As to Japan it is one of the countries with highest level of debt as percentage of GDP (199%* as of 2010 according to CIA) and Standard&Poors has risen concerns over its ability to reduce it. As result is latest announcement from the rating agency for possible credit rating downgrade. This could be additional shock to already vulnerable markets.

Back to Europe France’s credit rating could also be reviewed as consequence of possible rescue plans for Belgian bank Dexia which suggest higher French involvement. Markets have been calculating eventual difficulties since July as spread between German and Belgian bonds is gradually widening since then. In addition Italian yields are stubbornly staying above crucial 7% level despite massive buybacks from European Central Bank. Up to now ECB manages to keep situation under control but rising speculation and losing investors’ confidence could undermine those efforts if market switch to panic mode.
Belgian-German 10 year bond spread

Considering all latest developments Federal Reserve recommended stress test to largest US banks. Such step in current situation is two sharp knife. Good results could strengthen investor and banking management confidence in the system but the fact that this test is undertaken now suggest growing concern for the economic conditions.

Negative news continues flooding news wires and we imperceptibly go to downward spiral. To get out of this firs and most important is returning credibility. This is the toughest part of the plan. Unfortunately Eurpean leaders still lack necessary attitude to return investors trust. In addition in most troubled countries there are no signs for growth, hence difficulties paying their obligations rise which additionally frustrates investment public. Ultimately help from countries with cash surpluses such as China is logical solution but for now there in not clear sign for action in that direction.

Definitely there are difficult times ahead but situation if still far from 2008, at least for now. Realization of consequences of destructive event such as defaulting of given (European) country has led to enormous efforts toward resolving the problems. Decisionmakers pressured from financial markets have no other choice accept moving toward stabilization. Election of new technocrat governments in South Europe prove the process is on the move. Specialists take responsibility now and crucial steps have been undertaken. Unfortunately measures for restructuring debt levels taking place now will have long term impact. Short term improvements are needed at the moment because new failure similar to Lehman Brothers this time of government scale could destroy entire financial system. The world cannot afford another financial disaster. Important decisions in Europe have to be made untill 8-9 Dec. (European leaders meeting) hopefully it is not too late.

 *Japan’s public sector debt is very high, however savings rate is relatively higher which compensate debt burden to some extent


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Should You Start Buying



It is clear that better buying falling stocks than skyrocketing, which is not to be mistaken with buying bad stocks. Opening position in oversold market is one of the keys for successful trading as you buy at discount. The fortune question is when is that time? Recent correction has uncovered numerous opportunities and still the markets are falling.

Closer look at market breadth indicators could give us perception about current market mood. To measure current market state we use numbers of stocks in S&P index above its 50 day moving average. Latest pullback of the index drove percentage of stocks above mentioned level to 38.7%, lowest since early October. The threshold indicating buying signal is 30%. That level is -1 standard deviation from its mean and is considered to be extreme level.  As indicated on chart numbers under 30% coincide with correction bottoms.

% of S&P 500 Stocks aAbove 50-day Moving Average

Quick view of the long trend indicator – S&P relative to its 200 day moving average suggest market is under the trend. Long term trend of the indicator itself is negative showing markets having bigger slumps under its 200 day MA.

S&P 500 Realtive to Its 200-day Moving Average

Fear gauge VIX is still leveraged now at 32. Readings above 30 indicate downturn and high volatility. Although market rallied and VIX touched 25 in late October current slump rises markets fear. In such conditions VIX levels above +1 standard deviation (31.58) is proven to be best time to load.

Volatility Index VIX

Definately market have been under pressure last month and prices now are attractive. Unfortunately things first go wrong before start going better and this is would be the case for next couple of days considering current negative market sentiment. However this is the time to be cautious in order to catch the following sweet rally.

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Oct 7, 2011

Market Reversal Started



S&P500 did not break through the 50 period moving average several times after the big crash in AugustDuring the latest movement the index formed a double bottom, which is a technical confirmation of trend reversals. If this turns to be true, we will see roughly 10% rally to the resistance level 200 MA to 1280. This suggestion is supported by the formation of W-shape pattern at the double bottom. It usually indicates turning point of the markets. Another support for the upcoming rally is the divergence between the index and histogram of the MACD (Moving Average Convergence Divergence) indicator.

Fundamental concerns about Greek bankruptcy and European debt contagion still continue to worry investors and this has limited the market growthHowever, earnings season coming, with expectations on the positive side is expected to give direction to the markets. Eventual corporate outperformance is likely to support the formation of W-shape with S&P target of 1280.

S&P 500 W-shape projection
Chart Source: stockcharts.com
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Sep 21, 2011

Market Sentiment Review



In this weekly sentiment review indicators show more bullish signals as markets tend to rebound from August lows. Investors are still cautious measured by investors fear gauge (VIX), although the indicator stalled showing reversal signs.



Number of companies above 50 MA started to rise with markets rebounding but its move coincides strictly with S&P500 index move. Current  reading of 35% of the companies out of the S&P still indicates oversold signals, leaving markets place to recover. Levels between 10% and 35% signal oversold markets since those levels are -1 to -2 standard deviations from mean level of 59% for the period one year back.


Put/call ratio is falling from its extreme levels in mid August signalling fading bear mood. If compared to previous year correction started April 2010 the indicator's peak is higher in current, which means that current market is heavy oversold. In April 2010 put/call ratio started falling but market trend reversed after the ratio crossed its mean (0.92). Still we are far away from that level, however direction is downward, sign for upcoming reversal.

% of S&P 500 stocks above 50-day MA, Put/Call ratio, VIX


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Sep 9, 2011

Markets Set To Rise



Just before the sell-off one month ago I predicted recent market drop in the post Next market wave and signalled it in June post S&P Technical Outlook. Actually it was not me but the Elliot Wave Theory used in the analysis. Current market condition suggests that applied wave analysis was correct, which leads to the question regarding next market move. There are clear signals that latest correction shaped fourth wave. Considering that and if we assume it bottomed out at 1072 we should be at the beginning of new bullish market - the last fifth wave of the theory. 

S&P 500 just finished 4th wave
Chart Source: stockcharts.com

Recall last correction (third wave), which lasted 4 months, we should be in the middle of current pull back. That statement is supported by weak macro data and huge uncertainty about further easing from FED. According to Bernanke's statement inflation is "on its way down" thus indicating that possibility of implementing stimulus package is rising although its shape is expected to be different from last two QE's. Meantime President Obama signalled new jobs plan which is claims to support hard hit labour market. $447 bln Jobs Stimulus Plan includes investments in infrastructure and tax vacation for small businesses. The plan is going to be financed with next decade tax increases. Last proposal disappointed markets yesterday and they reversed the initial rally. 

Historically September and October have been crucial for the markets. If mentioned above policies are implemented they could be positive for the financial markets and thus give a boost, completing last fifth wave from the bull market started March 2009. The correct policy at the moment is not austerity sacrificing the growth but shоrt term stimulus in order to stabilize the fragile economy and after is generates enough growth followed by long term consistent austerity measures.


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Sep 2, 2011

Market Sentiment Review




Recent days all sentiment indicators show oversold markets. There is large level of uncertainty and thus high volatility still shaking markets. Recent rally gave some relief and question is whether it is going to last for a while. Weekly review of the sentiment indicators shows short term market mood and could give us clue for next one. The charts analysed below plot specified indicator on left hand axis and SandP500 index value on right hand.


Total put/call ratio is at one year high. This is bullish signal since the measure is above its +2SD (standard deviation). As seen in mid June extreme levels indicate market bottoms. According to put/call ratio we should be in such at the moment.
Put/Call ratio

After reaching two year peak volatility index started declining. Now at level of 32 markets calculate high possibility of double dip. Levels above 30 are crucial for market confidence, since investors perceive higher volatility with downturn.
Volatility Index

S&P500 relative to its 200 day moving average indicates the spread between mentioned. It is straightforward measure and is positively correlated with actual index move. It shows deviation of the market from its long term trend. On the chart is visible that currently market is 6% under its 200 MA and indicator is under -2SD – extreme negative value signalling oversold market.  
S&P 500 Relative to Its 200-Day Moving Average

Charts source: indexindicators.com

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Sep 1, 2011

September Sentiment



Last week was very volatile for the markets. Obviously the bottom has been formed, at least short term one, since S&P500 returned 9.6% in just 7 days. Right scale of the graph shows the value of the index and the left indicator. The indicator on the chart shows, however, that there are still room for growth after only 29% of companies in the index trade over their 50 day moving average. Values ​​below-1SD (standard deviation) is a signal to buy, as seen in the previous two corrections. This indicator has shown historically that can induce relatively accurate entry levels.

% of S&P 500 Stocks Above 50-Day Moving Average

Still the rally is fragile since investors are cautiously buying after sharp selloff seen previous weeks. Most attractive at the moment are blue chip companies with stable growth prospective. Therefore we can not expect a sharp return rather moderate growth, which will depend mainly on data on employment and unemployment and potential of the world's leading economies to generate growth that can lead us out of crisis.


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Jul 20, 2011

Gold Rally Close To An End?


Gold reached historical high and many investors are questioning further rise. In following post Elliot Wave analysis and Fibonacci levels are employed in order to predict following gold price move.
The source of long-lasting gold rally could be found in financial assets instability. As a common rule during severe crisis after conventional instruments are exhausted alternative stimulus is established in form of pumping money into the financial system also known as quantitative easing. That lowers currency rate, which helps economy returning back to growth by boosting exports, but inflates commodities. US stimulus started late 2008, depreciated dollar exchange rate from 1.25 per euro (10/2008) to 1.50 (11.2009) and inflated gold price 100% since beginning of 2009 to present.
During last ten year gold rally the only significant correction occurred in 2008. The year of the fear and financial collapse did not spared the precious metal. However the trend was not broken, gold traded above 200 moving average even in that turbulent year. Later when printing machine started the only way for gold was up.
End of June 2011 quantitative easing was officially terminated gold still still rockets the sky. There is another problem keeping it so precious - debt burden threatens credibility of most developed areas as European Union for example. Recent debates for another US debt ceiling raise undermine the dollar. Summarized all those factors leave average investor with limited options for investing. Even government bonds considered riskless now bear higher risk. In such situation gold is perceived as safe heaven investment and price is raising constantly. Unfortunately investors easy forget that market prices have two directions and downside is often possible. Same apply for gold. Maybe the turning point has come?
Previous two gold corrections formed corrective Elliot waves 2nd and 4th.  According to theory each cycle consist of 5 waves positive trend and 3 waves corrective. More details regarding Eliot Wave Theory. On a 10 year chart we distinguish four completed waves. First gold correction during period 2004-2005 is triangle shaped while second appeared 2008 is classical 3 impulse correction. Since then there are almost tree years bull market without significant slide. Is now time for finishing fifth wave, which is last before sharp drop? Applying Fibonacci ratio for 2008 correction gives us important levels around 161.8% and 261.8% retracements. That is $1247 and current strong resistance $1600. Braking last level is crucial for the precious metal. 
gold_fibonacci2
Gold Price Close to Important Resistance

Chart source: Saxotrader, Chart analysis: investink.net
If price fail to brake $1600 this could confirm fifth wave and set the beginning of sharp and prolonged correction. Fundamental factors, however, suggest opposite. As long as risk aversion is high gold will find its ground higher. Debt burden and consequent deleveraging process usually takes a lot of time which could limit investment opportunities for a while and gives gold advantage. The forecast for US growth is slowing to moderate and under potential. If economy doesn’t show firm signs of recovery QE3 is option for FED pushing commodities and gold prices to another sky levels. Thus until all problems resolved buying commodities on a dip seems reasonable strategy.
You may also like:
S&P Technical Outlook
Silent gold correction Read more...

Jul 15, 2011

Gold Tech View



Gold proved to be best performing asset in recent turbulent days. As suggested in previous post (Silent gold correction) it broke its resistance level $1560 reaching new historical high. Now many investors are curious is there any more room to grow. Considering current situation of growing concern over credit credibility of most developed countries there is strong support for the metal. All growing risks and uncertainty in the system is bullish sign for the precious commodity. However every experienced investor knows that direction of every asset is not only north. Risks for gold correction are real, although do not seem to appear in short term. Debt burden is long term problem and governments around the world started realizing that now take necessary steps to limit it. Steps in this battle are US debt ceilings debates and efforts of several European countries to cut costs. It takes time to turn back to normal fiscal policy but when those measures give first results gold is expected to step back as it is considered safe heaven in raised market volatility. In short run we could expect test of the breaking level around 1560 after positive move is restored. This pull back could be short lived because rising concerns over US debt rating cut (now 50% probability) will depreciate dollar. Cheap dollar will inflate the gold as it is often perceived substitute.
gold_tech_overview
Gold Brake Consolidation Triangle
Chart source: stockcharts.com, Chart analysis: investink.net
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Jul 14, 2011

Next market wave


Despite recent sharp drop markets realized significant gains last 2 and a half years. After severe 2008 decline stocks (in S&P500) gained 19.67% in 2009 and 12.78% in 2010 and 4.95% year-to-date. However signs of fading recovery strength have lowered expectations and put stock prices under pressure last days. In addition rising debt problems in Europe clouded the summer investor mood. Those fundamental factors determine general market direction but markets are people driven system and thus human behavioral patterns exist.
Elliot wave theory
R.N. Elliott's essay, "The Basis of the Wave Principle"
Most widespread method for counting cycles is Elliot wave principle. In theory Elliot wave principle is based on collective investor psychology or crowd psychology. According to that in bull market each cycle consist of two stages - one 5-wave positive move – dominant trend and 3-stage corrective trend. Within the first move waves 1, 3, 5 are positive and 2, 4 retracing.

Using this principle in practice gives us power to predict coming bull markets or corrections but only in case we are sure that our counting is correct. Sometimes is hard to imagine that markets follow certain pattern because market trend is determined by independent not necessary repeated events. Here dominant is crowd psychology and chart proves it.
s&p500 chart analysis
S&P 500 Expected to Pull Back
Chart source: stockcharts.com, Chart analysis: investink.net
If Elliot wave theory is applied to the latest trend started with march 2009 bottom we can follow tree completely formed waves up to current moment. The first one from dominant trend (labeled with blue square) is consisted of 5 subwaves as described in theory. Second corrective wave started April and finished august 2010. Third, which again is formed from 5 subwaves, marked its top May 2011. How
can we be sure this is the end of third wave? Pattern formed from recent market move has appeared to be classical head and shoulders - trend reversal formation (for more details see latest S&P Technical Outlook). If theory is correct again we are at the end of 3rd wave which should be followed by 4th corrective. Closer look at fundamental factors proves that might be the case for summer months. European dept crisis pushed world markets under great pressure. Moody’s raises pressure for US debt deal,  China’s growth is slowing and speculations for hard landing are rising. Those factors rise risk in the system and as consequence we see new gold price record and high market volatility. Should market confirm its down trend with lower highs and lower lows next support for S&P500 is 1175, completing 4th wave.
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Jul 8, 2011

Where is market headed?



Recent recovery from June 16th bottom has proven to be sharp one, but considering current fundamental data is it sustainable or is just another speculative move for profit taking?
In our recent technical post we noted the broad S&P index as forming second shoulder for the technical formation head and shoulders. This might be the turning point as latest jobs data contradict with recent steep market rise. There is no analyst who will disagree that US labor market is far away from stabilizing. With unemployment rate at 9.2% and 18K jobs added for June the trend is not expected be reversed soon. Jobs creation has to be at least 120K in order to see slow down in the rate. Recent data again question the efficiency of QE2. In theory rising liquidity should support inflation which push down unemployment. Data shows this is not the case now. Is it time for QE3? Although Bernanke firmly denied next round of quantitive easing the ensuring growth is essential for FED and for the whole economy.
unemployment
Unemployment rate, monthly

Chart source: forexfactory.com
In investment decision one should consider coming earnings season. Despite ongoing consumer deleveraging, which translate to weak labor market, companies are expected to post stronger results with S&P operating earnings at 15% gain on yearly basis and 5% on quarterly (Standard & Poor's predictions). This would limit downside move of the markets. However should expectations seem to be overestimated the downside pressure will be serious firing new doubts about growth and recovery.

S&Pearnings
S&P long term earnings
Chart source: Standard & Poor's and Robert Shiller
See also:
US Really Getting Out Of Recession? Cross Sectional View Of Key Economic Measures
S&P Technical Outlook


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Jun 30, 2011

Silent gold correction



Gold is considered safe haven and long term chart proves it. Latest movements indicate slowing of price growth, but is that start of deeper correction?
Macro view of the picture still supports the precious metal. Debt problems around the world suggests vulnerable currencies. Capital markets reflect rising system risk and only store of wealth seems to be obvious. The big gold rally could be stopped if money become expensive i.e. FED starts tightening, but this is not expected at least until the year end. Still gold looks like good pick.
Closer look at the chart shows triangular technical pattern. This is corrective move usually confirmation of the trend. Considering again declining dollar short term target of $1551 is reasonable.
gold_silent_correction
Gold In Consolidation

Chart source: dukascopy.com, Chart analysis: investink.net

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Jun 23, 2011

June Market Breadth

Recent market moves have left stocks in oversold area. However markets are still under pressure – European debt, slow growth prospective. Desperate and oversold moments have always been excellent profit opportunity, if you know the right entry point, of course.
One reliable way to estimate market top-downs is using market breadth indicator percentage of stocks above 50 day moving average. This indicator is showing short term momentum of the stocks.
As seen on the chart only 24.7% (green line) of the stocks in broad S&P500 (black line) trade above their 50 day moving average. This measure is close to previous big correction seen in June – July 2010 and middle of March drop. Reading between standard deviation -1 and -2 is in oversold area and indicate buy signal.
sentiment-2011-06-23
% of S&P 500 Stocks Above 50-Day Moving Average
Chart source: stockcharts.com, Chart analysis: investink.net
Another good measure for the market sentiment is Put/Call ratio. Current levels for this indicator are extreme. The ratio is between +2 standard deviation and is close to June 2010 peak showing bullish signal.
sentiment-2011-06-23-2
Put/Call Ratio
Chart source: stockcharts.com, Chart analysis: investink.net
Put /call is also useful in detecting market tops. The red ovals indicate such points before correction. January, April 2010 and April 2011 tops pushed Put/Call ratio to below 0.85 around the –1 standard deviation.
This technique is useful in timing over or under sold markets, but if there are major fundamental news or events as happened in the beginning of 2011 where extreme low put/call ratio did not stop markets from rising. Rapid recovery expectations were so strong that this indicator simply did not work at that time. Although not so precise you can use both indicators to have perception for the market mood and what direction most likely to expect.

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Jun 22, 2011

S&P Technical Outlook

Recent rally raised questions is it sustainable. It is obvious that markets were oversold at June 16th bottom. Considering that and recent developments about European debt crisis and US interest outlook capital markets are still nervous and react sharply on every signal.
Using Elliot Wave Theory we can determine in which wave of the cycle we are. Close investigation of S&P500 index chart shows finished positive 5 wave upward cycle. Now we have finished A-wave - the first of the three corrective waves and forming positive B-wave. Each cycle is formed from 5 wave bull market and 3  waves bear. Current upward move is limited to the level of 50 MA around 1320 level, some 2% up. Of course brake above this resistance is possible if economy shows better than expected macro indicators. This would mean that we are again in bullish mode and economy is back on track.
s&p500_outlook_22-06-2011
S&P 500 Expected to Rebound
Chart source: stockcharts.com, Chart analysis: investink.net
Fail to brake 1320 level will form positive B-wave and start final negative C for the corrective cycle. In other words pattern formed is also known as “Head and shoulders”. It is reversal formation and further drop would be expected. The downside is limited to November 2010 top support lever around 1230 level. Last scenario is expected to break 200 moving average, considered to be long term trend line, which could mean entering extremely oversold area. Move least likely to occur.
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Jun 20, 2011

Gold Near Peak?

Gold is showing signs of slowing its price growth in recent weeks. Does it have room for future gains or it’s time for healthy correction?
The method used in the analysis is Fibonacci retracement applied for the previous correction in order to determine key support, resistance levels and turning points. Gold has proved to be technically predictive but one should consider fundamental factors as well.
Measuring the corrective wave with Fibonacci retracement gives 1x and 2x projections of the important 61.8% level also known as the golden ratio in the nature. Those 161.8% and 261.8% levels determine possible resistance levels of the future move.
gold_fibonacci
Gold Price Projection Using Fibonacci Ratio
Chart source: Saxotrader, Chart analysis: investink.net
In 2008 gold started correction before the markets feel the destructive effect of Lehman collapse. The peak that year was 261.8% positive move from the bottom of the 2006 negative correction, seen on the chart. 161.8% level appeared to be resistance but significant correction did not occur at that time.
gold_fibonacci1
Gold close to Important resistance Level
Chart source: Saxotrader, Chart analysis: investink.net
2008 correction determine recent move. Now we are close to 261.8% line that suggest strong resistance. If the pattern is correct we should now be close to the peak of recent gold cycle. This is the case only if fundamental factors support such a move. Current economic environment is not the same as that in 2008. At the end of QE2 and cheap money, gold is poised to correct with rising dollar. This would not happen if economic situation force central bankers to continue with quantitive easing – in case that economic recovery is still more fragile than expected. Slowing US and world growth would prevent gold from decline because the markets would calculate eventual QE3 or additional stimulus in other form. Pumping liquidity means pressure for the dollar, cheap dollar means expensive gold. All this is connected with safe heaven perception of the precious metal. So correction would be limited to the downside if not horizontal as it appeared to be at 2010 end.
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Jun 16, 2011

Is Market Turn Point Close?

S&P500 has recently dropped more than 8% from its peak on growing concerns over the strength of the recovery. After riding the optimistic wave investment crowd fell in the trap of its own expectations.
Now the broad index, S&P500, reached 200 moving average. This is strong technical support which is expected to sop the decline. At least for a while. Index oscillators are showing extremely negative values indicating oversold pattern. The slow stochastic lines are crossing below 20, a case not seen since last September.
s&p500_outlook_16-06-2011
S&P 500 Touched Important Support Level (200-Day Moving Average)
Chart source: stockcharts.com, Chart analysis: investink.net
At this point it is worth playing long but be cautious. Rally is expected to occur but only supported by good fundamentals. The upward move is limited by 50 moving average at 1323, some 4% gain. Fail to mark new index top above previous (1376) would form negative short term trend and additionally push the prices down.
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Jun 10, 2011

EUR vs. USD – Short Term Outlook

 

The Euro index movement almost coincides with actual forex move of the pair. Recent peak of the index was clean expectation based trading of the ECB decision of possible rate hike in the Euro zone. At the moment it has the higher interest among developed world – 1.25% compared with close to zero rates in US and Japan. After the Thursday announcement the index dropped in contradict with logic that widening interest differential should support the euro. The fact that market are in correction and investors are more risk averse is pushing them to support the greenback.

20110610eurindex

Chart source: stockcharts.com, Chart analysis: investink.net

Technically the trend is positive for the euro but divergence between last two index peaks and moving average histogram is clear signal for trend reversal. The support is determined by cross point between parallel channel support line and 200 moving average around 137.50 level of the index. This could be translated to roughly 1.38 usd per euro.

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