GBP/USD

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One of the best long-term opportunity is presenting itself on the GBP/USD chart. This widely followed currency pair is now forming a perfect symmetrical triangle. Since 2009, GBP/USD has been consolidating in a range between 1,35 and 1,70. As it is always the case with symmetrical triangles, consolidation range narrows and is usually followed by a strong breakout. It is hard to guess the direction of the breakout. Symmetrical triangles can be continuation patterns as well as reversal patterns. In order not to anticipate it is always better to wait for a decisive close outside of the boundaries as a confirmation.

Over the past 3 years consolidation range has narrowed on the GBP/USD chart and the boundaries are now between 1.52 and 1.65. We are getting close to a strong breakout that is likely to result in a medium/long-term trend. Watch these two levels carefully on a weekly basis. 1.52 is support and 1.62-1.65 area is strong resistance.

U.S. Unemployment Rate (%) & Chicago PMI

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U.S. unemployment rate jumped to 8.2% in May. U.S. Employers added 69,000 jobs, fewer than forecast. If you remember from the earlier posts I’ve analyzed the unemployment rate with technical indicators and applied moving average crossovers to see the changes in trend on this time series. Study showed improving job market followed by bullish cross-over on the 1 & 2 year moving averages. Employment figures improved for at least one year after the technical signal. 1972-1973 and 1959-1960 were two periods where unemployment declined but improvement last only one year. All other cycles last between 3 and 7 years. So it is extremely important to see the continuation of the positive trend as we have now finalized 1 year since the last cross-over. However today’s data warns us to be more cautious going forward. It is a clear indication of weak job market and if we don’t see better figures in the next few months we can experience a repeat of 1960-1962 and 1973-1976.

Here is another data point that looks like it has peaked. Throughout the recovery this report has been posting strong rates of growth, and the slowdown here points at the risk of monthly slowing and even contraction for an increasing number of other regional surveys. The official name of this report is ISM – Chicago although it is commonly referred to as the Chicago PMI.  ISM stands for Institute for Supply Management while PMI is shorthand for purchasing managers’ index.  The traditional name goes back to the years when the ISM was called the National Association of Purchasing Management. Investors should track economic data like the Chicago PMI to understand the economic backdrop for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers a moderate growth environment that won’t generate inflationary pressures. The Chicago PMI gives a detailed look at the Chicago region’s manufacturing and non-manufacturing sectors. Many market players don’t realize that non-manufacturing activity is covered in this index and tend to focus on the manufacturing side only. This survey is somewhat local in nature – reflecting overall economic activity in the Chicago area.  But many see the Chicago PMI as being representative of the overall economy.
Markets focus on the overall index – the Business Barometer which many refer to as the Chicago PMI.  The breakeven point for the index is 50.  Readings above 50 indicate positive growth while numbers below 50 indicate contraction.  The farther the reading is from 50, the more rapid the pace of growth or decline.

COFFEE

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Back in January and February I analyzed Coffee price and posted long and medium term charts. A that time Coffee had tested its long-term trend resistance at 280 levels for the 4th time and it was trading slightly below its 200 day moving average at 240 levels. Coffee had a perfect parallel trend channel and the target for the medium-term correction was the lower boundary of this trend channel. When technical outlook deteriorated further in February, I posted another update on this commodity warning of more downward pressure.

http://techcharts.wordpress.com/2012/01/23/coffee/ (January)

http://techcharts.wordpress.com/2012/02/15/coffee-2/ (February)

We are now in June and Coffee is very close to its major support level at the lower boundary of the long-term trend channel. With RSI reaching oversold levels and price nearing to test the long-term trend support, Coffee is presenting a good buying opportunity at these levels. By placing a medium/long-term stop-loss at 150 levels, we can expect the price to stabilize and move higher in the following months.

U.S. DOLLAR INDEX

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Lately I’ve been focusing more frequently on the currency markets and especially on crossrates against the U.S. dollar. Several developed and emerging market currencies are forming major reversal patterns (inverted Head & Shoulder) that is bullish for the dollar in the short/medium-term.

http://techcharts.wordpress.com/2012/01/22/u-s-dollar-index-eurusd/ (January)

http://techcharts.wordpress.com/2012/02/11/u-s-dollar-index-eurusd-2/ (February)

Inverted H&S pattern is a widely followed technical chart formation and has a very low failure rate. As a major reversal pattern, Head & Shoulder bottom (inverted Head & Shoulder) forms after a downtrend and its completion marks a change in trend. Head & Shoulder bottom pattern is not complete, and the downtrend is not reversed until neckline resistance is broken. With friday’s close, U.S. dollar index breached its neckline between 81.70 and 82 levels. This should be regarded as a positive technical action for the dollar and would require to search for more evidence that signals dollar strength in the short/medium-term. Below are some of the charts that have similar inverted H&S patterns, either in the phase of completion or already completed. These charts also support the case for dollar strength in the following weeks/months.

USD/BRL broke above its neckline at 1.92 as we have discussed in an earlier update. USD/IDR, USD/SEK are two other crossrates that have breached above their strong resistances. USD/CAD and USD/ZAR are still completing their base patterns. I’m not sure if we are going to see another QE that might put pressure on the dollar but so far, analyzed charts above are signaling an increasing demand for the dollar.

WHEAT

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While global equity markets and commodities are experiencing sharp corrections, an underperforming commodity in the grains complex, wheat started breaking out of its range. Latest technical action is similar to the earlier breakout that wheat experienced in the summer of 2010. In July-August period it took 4 weeks for wheat prices to rally 60% after the breakout.

Wheat is breaking out of its consolidation in a similar fashion by recording a strong weekly close above the 200 day moving average and the trend resistance. Watch this commodity with a bullish outlook by placing an intermediate term stop loss at 650 levels.

USD/TRY (U.S. DOLLAR/TURKISH LIRA)

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USD/TL chart tells us 1.75-1.76 is strong support and unless broken on the downside dollar will continue to stay strong against Turkish Lira. Over the past week, USD/TL rebounded from 1.75 for the third time in the past 7 months. 1.75-1.76 area is long-term horizontal support and also a strong support level for the 200 day moving average. USD/TL will move between 1.75 and 1.90. Watch this crossrate with a bullish outlook (USD strength) with a long-term stop loss at 1.75.

USD/BRL (U.S. DOLLAR/BRAZILIAN REAL)

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U.S. dollar continues to gain strength against emerging market currencies. I’ve analyzed several bullish dollar charts in the past and USD/BRL was one of them. Over the past few weeks we have seen a fast move in USD/BRL, breaking above 1.92; inverted H&S pattern’s neckline. This resulted in a spike towards 2.0 levels and it is likely to continue towards the H&S pattern price target at 2.4 levels. Emerging market currencies are completing 2-3 year-long base formations against the USD and this signals strength for the dollar in the intermediate term.

CBOE VIX (Volatility Index)

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Yesterday’s trading session pushed the Volatility Index higher and CBOE VIX breached the important resistance at 22 levels. This is an important breakout as VIX is now above the inverted Head & Shoulder pattern neckline. Higher VIX signals weakness for equities in the intermediate term. Please note that inverted H&S pattern price target is 30. 22 level will now become support and also stop-loss for long VIX positions.

CBOE VIX (Volatility Index)

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VIX is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market’s expectation of stock market volatility over the next 30 day period.

In the beginning of March I analyzed the CBOE VIX right after the volatility rebounded from 15 levels to 19 levels. Followed by a short period of equity market correction, optimism improved during March and the volatility index eased towards 14.6 levels. However, optimism in global equity markets didn’t last long and since the beginning of April VIX reversed from 15 levels and reached 22 levels. Three month-long sideways consolidation between 14 and 22 could be an inverted Head & Shoulder reversal chart pattern. This bullish reversal pattern suggests higher levels for the CBOE VIX in the coming weeks if the index breaks above 22 levels, the resistance of the technical chart formation . Please note that extreme pessimism in  equity markets mirrored the re-test of 50 levels on the VIX.

A decisive break above 22 levels can be followed by a surge in CBOE VIX towards 50 levels once again. In the past four years April-May period proved to be negative for equities.