Technical weekly 14032008

Equities

In the medium term, stocks are caught in a bear market.

The main reasons for that are: continued inflationary pressure, a coincident bull market in gold and commodities (switch from soft to hard assets) weak earnings growth and outflow in equity funds.

In the short term, most indices are caught in a trading range and are testing January lows. In the event of renewed panic selling, like in mid-January, I think that the correction could extend below this level.

However, most sentiment surveys now highlight extreme pessimism on equities and as I said last week a recent low risk buy signal was made by TD Combo&Sequential. In the past, such extreme pessimism has often coincided with significant short term bottoms.

Bonds

No change, bond yields trade now close to major support.(3.65%)

The risk/return is not good for bonds right now but a break below this level (which corresponds of the 61.8% retracement of the last bull move) could imply a downside move towards 3% for the coming months.

Brent

The Brent is now close to our 112$ target. I suspect oil prices is vulnerable to pullback as crowd sentiment is now extremely optimistic.

Euro

Also close to our target of 1.56, the exchange rate is now extremely overbought and a correction may follow soon.

Technical weekly 07032008

Equities
In the medium term, equity indices remain in bearish trends.In the short term, most indices are caught in a trading range and are testing January lows. In the event of renewed panic selling, like in mid-January, I think that the correction could extend below this level.

However, I suspect they are trying to bottoming out in the coming weeks but for now the only bullish signal we have is the recent low risk buy signal made by TD Combo&Sequential (green arrows on the daily chart of the DJ Euro Stoxx 50).

The behavior of the index during the next meetings will inform us about this assumption.

If the market is going to successfully test its January lows, it needs to rally soon with good upside volume.

Bond Yields

Bond yields resume their downtrend and could reach the big support zone of 3.65% in the coming weeks.

A break below this level which correspond of the 61.8% retracement of the last bull move (September 2004-July 2007) would imply a downside move towards 3% for the coming months.

Brent

The recent breakout through the psychological 100$ resistance zone triggered an upside acceleration.

The target of the bullish broadening pattern is around 112-113$.

Euro

On the last weekly, I said that if the 1.5 resistance level were broken up, the exchange rate could reach 1.55-1.56.

I don’t change our scenario for this week.

Technical Weekly 25012008

Equities
Most short term indicators are now at oversold levels and most intermediate term indicators we looked are also at oversold readings.
Market internals remain oversold but are improving.
So that the market is oversold enough to rally but for now there is no pattern suggesting a sustained rally.
Taking risks have few chances to be rewarded as long as a valid signal did not appear.A wait and see market is the norm after a very strong decline but, as long as the process of reflection did not come to a end (base forming or distribution pattern?), it is highly preferable to stay on the sidelines.
This week we take a look at emerging markets, the MSCI EM Latin America made a new high (for 2008) last week and is strongly outperforming the Stoxx 600 (black line)















The MSCI EM Asia remains weak and volatile and the MSCI EM Eastern Europe technically ranges between the two others and is outerperforming European stocks.

Bonds

On the short term, positive action is expected (higher yields) towards the upper end of the descending channel (around 4.1%) but as you see the mid-term trend is still down.

Commodities

Most commodities are showing parabolic upside accelerations.

Their momentum is incredibly strong and most of them have made significant technical bounces since last month but are trading now close to resistance zone.

Aluminium, copper, oil and agriculture are just reaching long term key resistances.

The chart below shows the DJ-AIG Agriculture total return index; any break through these areas would suggest that the advance may extend a lot further.

Euro

The exchange rate is still trying to break above the 1.5 resistance level.

A break above this level could open the door to the 1.55-1.56.

Technical weekly 18022008

Equities

Last week I said equity markets were likely to test new lows.

As you can see on the daily chart of the DJ Euro Stoxx 50, the index seems to draw what looked like a flag pattern. This pattern is a bearish one, so that the odds favor a break down and a retest move on the January lows.

A successful re-test could be the basis for at least a stronger rally attempt.

With developing a second down-leg and re-testing the January trading lows, we could expect a double bottom speculation coming into the markets near-term.

I'm watching out for a key reversal confirmation on the support and for a confirmation of at least a double bottom pattern to start buying tactically.

The next chart, a weekly-based chart of the MSCI World Index, continues to confirm that we are in a bear market. There has been a moving average downside crossover (20 weeks below 40 weeks), and the moving averages and Macd continue to move downward.

Bonds

This week, I compare the prices of 3 German Govt bonds.

They represent different durations in the yield curve. (30 years in red, 10 years in yellow and 1 year in black)

The chart shows that the longer duration bonds did better than the shorter-term ones. That situation, however, may be changing.

Recently, longer duration bond have fallen faster than shorter-duration funds.
That could be a reaction to new fears of inflation and that is why we decide to buy inflation linked bonds for our clients.

These are bonds that have some protection against inflation built into their pricing. That would seem to make them a good alternative in the current environment of falling yields and rising inflation pressures (record high commodities).

Brent(Oil)

No change , the Brent remains caught in a trading range (broadening pattern) between 87 and 98$.The long term trend is still up.

Euro

No change, the exchange rate was not able to break above the 1.5 resistance level. The short term correction may continue to the 1.43 support level.

Technical weekly 12022008

Equities

Equity indices remain quite weak and they will more likely retest January lows.

We are waiting for a major selling climax (capitulation) and a bottoming process to go long (buy equities).

Most significant bottoms are a several step process, as steep market declines usually do not reverse straight to the upside (’V’ recovery), but typically involve a period of backing and filling.

For instance, the last major bear market bottom which ended in 2002 (SP 500) involved a period of base building, as prices tested the lows not once, but twice over a several month period.

For now the market (investors) thinks on the possibility of a technical recovery or of the continuation of the bearish trend.

But it will still spend several weeks to decide.

The hourly chart below shows that the trend is still down for the DJ Euro Stoxx 50 and that trading indicators like RSI or Stochastics are neutral.

Bonds(yields)

The trend is still down with the 3.65% level as target.

The risk/return is not so good for bonds (lower end of the descending channel) and once the current fly to quality will run its course, we believe bond price will be vulnerable to downside risk.

Brent(Oil)

The Brent remains caught in a trading range (broadening pattern) between 87 and 98$.The long term trend is still up.

Euro

The exchange rate was not able to break above the 1.5 resistance level. The short term correction may continue to the 1.43 support level.

Technical Weekly 04022008

Equities

With an oversold bounce over the last two weeks, the DJ Euro Stoxx 50 is approaching a resistance zone from broken support and the 50-day moving average.(yellow line)

Before going further, we should know that the overall trend remains down for two reasons.

First, the index broke down in January with a decisive move below its 2007 lows.

Second, the 50-day moving average is below the 200-day.

The next thing to expect is a reaction rally back toward the recently violated neckline support, which is now overhead resistance.

While the market's recent performance has been good for bulls, you can see on the chart below that strong overhead resistance in the form of the long-term rising trend line lies dead ahead.

The next chart shows the same index but on a monthly basis.

Note that the monthly stochastic lines have just given a sell signal and the monthly MACD histogram has been negative for two consecutive months.

This downside crossover is the first since the last bear market began in 2000.

Technically speaking, I think the current rally may continue in the near term but I also think renew weakness will follow with indices possibly retesting January lows.

One last observation, according to the Stock Trader's Almanac, the January Barometer predicts the year's course for the SP 500 with a .754 accuracy and every down January on the S&P since 1950, without exception, preceded a flat or bear market

Bonds

No change, yields are still caught in a downtrend channel.

For the coming months I can not exclude the possibility of a deeper correction towards the important support of 3.65%.

Brent(Oil)

Oil is trading above support and the double top pattern highlighted last week was not validated . The long term trend remains bullish.

Euro

The rate continues to trade below the important resistance of 1.5.

Watching the two last candlestick patterns, I do not expect significant move in the coming days.

Technical Weekly 21012008

Equities
Last week was another bearish week for the market. It is now clear that the technical outlook remains bearish following the recent breakdown below key major supports. I also still think that technical bounces could start anytime,(see last weekly) because most indices are deeply oversold and sentiment is now very bearish. In these conditions, we do not think that the current downside move will be sustained. Nevertheless, it remains extremely difficult to time such technical bounces and even more dangerous to trade them, which confirms that the mid-term trend has changed. In a bear market, technical bounces are always surprising and often preceded by unexpected downside accelerations. So, due to the technical damage on long term trending indicators, we can not anticipate a major bullish reversal at this stage (even if we anticipate a sharp but short term rebound) and prefer to wait for a more significant bottom or at least a stabilization to start some bottom fishing. The long term chart of the Stoxx 600 presents a long-term view, which makes it more clear how serious the situation is. The questions remain as to how far down prices will go and how long the bear market will last? In the shorter term we have a minimum downside projection from the bearish descending triangle of 300-310, which correspond to the bottom of wave 4. That could mark a medium term low from which a bear market rally (wave B) could rise.

Bonds

Last week I said that a move towards the 4% was a high probability. This week, we believe a deep break below this level seems unlikely. For the coming months we can not exclude the possibility of a deeper correction towards the 3.65%.

Brent(Oil)

No change, the Brent is still correcting and a clear breakdown below the neckline (see arrow on chart) could validate a double top pattern. In this case the target of this bearish pattern would be 80$.

Euro

Start a pullback last week, this correction may continue towards 1.43. There is a strong resistance around 1.5.

Technical weekly 11012007

Equities

The new year on the US and European market got off to one of the worst starts in recent memory, with the SP 500 and the Stoxx 600 breaking below support zone.

Despite the amplification of the correction in the United States and the opening of bearish tendencies on the three principal indices (SP 500, dow Jones and the Nasdaq), the European narrow indices (Footsie 100, Eurostoxx 50, Cac 40, Dax 30) resist on or around their decisive supports. Currently, there is thus exists a dichotomy between the small and mid caps and the large caps which are overall considered as safe haven.Now that bearish tendencies were open on the three American indices, the realization of pullbacks bulls (which will come to reinforce these mid-term bearish tendencies) is foreseen at the immediate horizon. In Europe, the good resistance of the narrow indices during the American corrections makes it possible to think that many stocks are able to benefit from pullbacks and to rebound appreciably on a short term basis. That will not change their trend but will allow to sell under better conditions that in the beginning of the year.

The recent sector moves have been easy to track.

Investors have started the year buying defensive sectors (health care, telecom, utilities, oil majors) and selling cyclicals (auto, industrials, retail).

Bonds

No change, since May, the German 10 year bond yields are trading in a downside trading range. A move towards 4% is a high probability.

Brent(Oil)

The Brent has reached our target is still challenging the ascending support trend-line.A break below this support could extend the correction towards 90 $ but the long term trend is still up.

Euro

The recent correction was short lived and the rate is now close to challenge the 1.5 resistance level. As it is now overbought and close to resistance zone, I think that a more significant rise is unlikely for the coming days/weeks.

Technical weekly 18122007

Equities

Based on a favorable seasonality, short term oversold condition, extreme pessimism and a friendly Fed, I turned short-term bullish for a year end rally. However the recent downside acceleration deteriorates the short-term technical outlook.

So, I need a long term model to convince us that the long term outlook is still good.
A model’s greatest value is that it provides an objective assessment of the consensus of the indicators.
Forecasting procedures can be used to place current developments in the context of long term probabilities if they are used in conjunction with an objective model that enable you to maintain flexibility in responding to changing market conditions.
This model isn’t a market timing tool, but it will give you a clear perspective on risk and reward.
If it indicates that the market outlook is risky, you should respond by maintaining a defensive investment approach.
When the model starts to indicate that the skies have cleared and that there is little risk on the investment horizon, you can again be confident in taking an aggressive approach.
To determine the quality of the trend, I use a weighted combinaison of 3 waves of trend, based on different time frames.(monthly, weekly and daily)
The stronger weight is given to the long term trend.
I also used a risk return approach; this tool tries to define the potentiel of a trend.
The higher the score, the higher the probabilities of higher prices in the future. The stronger weight is also given to the long term trend.The combination between the trend and the risk return model is the matrix.

As you can see, based on this technical model, the risk/return and the trend for the Stoxx 600 remain weak.

Bonds
Since May, the German 10 year bond yields are trading in a downside trading range. As the yields trades now close to resistance and are overbought, I foresaw lower yields for the coming days.

Brent(Oil)
No change, the Brent is still challenging the ascending support trend-line.

A break below this support could extend the correction towards 80 $ but the long term trend is still up.

Euro
Last week I said that a break below support would suggest a much larger correction.For the coming days/weeks a move towards the 1.422 level, which is upper part of the bullish long term channel, seems likely.

Technical Weekly 10122007

Equities
On a short term basis equity indices are still bullish but as you can see on this first chart of the DJ Stoxx 50, the index is now overbought and a test of the resistance is now developping.

The second chart shows the same index but with a DMI system. The DMI system is made up of three lines ; the green line which measures the buying pressure (+DMI), the red one which measures the selling pressure(-DMI) and the white line which is the ADX.
This indicator measures the difference between +DMI and –DMI and indicates the trend of the market.
For now the system is bullish.(green line above red line)

What is interesting is the level of the ADX, a level below 25 indicates that the market is caught in a trading range and a level above 25 indicates a trading market. The latest values of the ADX for major indices confirm that equity markets are now range bounded and that the “buy and hold” approach must be change into a “buy and sell” approach.
DJ EuroStox50 :ADX :18.43

SP 500 : ADX: 20.26

MSCI World : ADX :19.94
MSCI Emerging markets : ADX : 20.56

Bonds

The German 10 year bond yields are still trading around the 4% level.

The ADX indicator (16.07) indicates a sideways range between 4% and 4.25% for the coming days.

Brent(Oil)
The short-term correction continues and Brent is now challenging the 88 support zone.

A break below this support could extend the correction towards 80 $ but the long term trend is still up.

Euro

After the recent correction, the trend of the euro remains long term bullish.

As long as the euro remains above its channel support line (currently, this line lies around 1.46), the outlook would remain higher with the upper part of the channel 1.500 as first target.
A break below channel support would suggest a much larger correction.

Technical Weekly 27112007

Equities
As you can see on this weekly chart, the DJ Euro Stoxx 50 is testing its 2003 support level.
That level must hold to keep the 2003-uptrend alive!

A successful bounce from that level would be a strong signal and could take us higher for a end year rally.

A break below this level however officially ends the 2003-uptrend, taking the market into a sideways or a bear market trend.

The SP 500 is also testing crucial levels (August low on the daily chart).

A lot of stocks and sectors are now deeply oversold, (YTD :real estate - 34.47%, banks -19.74%, Insurance -16.4%...) which means a short term bottoming process should begin soon.

On the other way, risk is still quiet high and most indices could soon validate big double tops pattern.

Needless to say, a breakdown below those lines could trigger another bearish wave

Bonds

The German 10 year yields fall below 4% confirming the bullish technical outlook for bonds. As you can see on the chart, the first target of the bearish C wave is 3.776, the next one is the strong support zone around 3.7-3.65%.

Brent (Oil)
No change, the Brent has now reached all of my short term targets (the last one was 94$) and have started a short-term pullback.The long term uptrend still prevails.

Euro

No change, long term bullish but target reached and very overbought on all time frames.(montly chart)