U.S. Initial Jobless Claims, Housing Starts and Unemployment

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After a long break let me start with updating the latest economic data on housing and unemployment. I think these are the two most important economic data that we should be watching closely over the next few months. Housing because it is the latest bubble that burst and it was the cause of the global financial turmoil. Unemployment because it is the result of the economic slowdown. Recovery in housing will no doubt help the markets and a pick up in employment will restore confidence and help economic recovery.

Yes, there has been a recovery in the housing market with increasing housing starts when compared with the low in 2009 but housing starts are far from 2008 levels and still below major resistance at 850,000. We should expect this major support at 850,000 level to become resistance over the next few months. Before we see housing starts above 850,000 level it will be early to call for a strong recovery in the housing market.

Downtrend continues in jobless claims but unemployment rate rebounded from 8.1% to 8.3% over the past few months. Since the last cross-over on the 1 & 2 year moving averages it has been 1 year and historical data warns us to pay attention to the critical time cycle. In 1960 and 1973 recovery in the job market and downtrend on the unemployment rate reversed in the year following the moving average cross-over . Recoveries were shortlived. Longest recoveries (downtrend) last 7 years between 1962 & 1969 and 1993 & 2000. It is important for the downtrend in unemployment rate to continue past the 1 year threshold to extend the recovery into 3-7 year time cycle.

Earlier analysis on U.S. Unemployment Rate:

http://techcharts.wordpress.com/2012/06/01/u-s-unemployment-rate-chicago-pmi/

U.S. Initial Jobless Claims

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Fewer Americans than forecast filed first-time claims for unemployment insurance payments last week. Applications for jobless benefits decreased by 26,000 in the week ended July 7 to 350,000, the fewest since March 2008, Labor Department figures showed today. Even though the sharp drop is reflecting the volatility of applications during the annual auto-plant retooling period, it is positive and shows one more time the significance of the 1 year average. 52 week moving average was the important resistance and jobless claims reversed downwards after testing the long-term average in June. Downtrend in jobless claims continues and this is good news. Going forward we should keep a close eye on the 1 year moving average as strong resistance (385K).

Earlier updates:

http://techcharts.wordpress.com/2012/06/14/u-s-initial-jobless-claims-2/

http://techcharts.wordpress.com/2012/06/08/u-s-initial-jobless-claims/

GBP/USD & SOY MEAL

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Followers of Tech Charts blog will remember my earlier analysis on Soy Meal which was posted in March. Soy Meal had one of the best technical chart patterns; symmetrical triangle. It was a long-term chart pattern which made it even more significant.

http://techcharts.wordpress.com/2012/03/05/soy-meal-3/

Soy Meal broke out of its long-term consolidation at 370 levels in March and has been moving higher since then. It has been a powerful breakout followed by a pullback in June. Recent rally is being supported by the weather news in grains market. Whatever the reason is it has been a perfect technical action.

This is how a long-term symmetrical triangle resolves and this is the type of technical action we should expect after such a breakout.

Now let’s look at another long-term symmetrical triangle on GBP/USD. Please not that for ease of display I  have inverted the price scale. So a breakout on the upside will result in weak GBP and strong USD. GBP/USD not only formed a large-scale symmetrical triangle it also formed a minor horizontal consolidation range between 1.52 and 1.62. GBP/USD should be on our watch list. I expect a strong move in the following months which should be no less than the magnitude we have seen on Soy Meal breakout and rally. A breakout above (below) 1.52 levels can easily target 1.35 levels. This would be a massive devaluation for the pound and strength for the dollar.

U.S. DOLLAR INDEX

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In U.K. the Monetary Policy Committee led by Governor Mervyn King raised its asset-purchase target by 50 billion pounds ($78 billion) to 375 billion pounds and said the purchases will take four months to complete. Separately, the European Central Bank cut its key interest rate below 1 percent for the first time and China lowered benchmark rates for the second time in a month.

I believe it is time to update the most exciting chart: the U.S. Dollar Index. I’ve analyzed the dollar index in the past few months and drew attention to the bullish outlook on the price chart. This was due to a major inverted head & shoulder pattern getting closer to completion. In May, U.S. dollar index broke above 81.70 levels and started consolidating above this critical support/resistance level. The index has a chart pattern price target of 89 levels. After the breakout above 81.70, the index moved sideways for almost a month and now it is close to another strong move. As long as price stays above 81.60-81.70 area, dollar index will remain strong and target 89 levels.

It is important to note that volatility is now at a 6 month low and suggests high volatility in the coming days/weeks.

COFFEE

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Another update is on the long and medium term Coffee charts. One month from the last update Coffee has found support at the lower boundary of the long-term trend channel and rebounded sharply.

http://techcharts.wordpress.com/2012/06/01/coffee-3/

Before we identify the direction of the next medium/long-term trend, Coffee is likely to consolidate between 200 levels (200 day moving average) and 160 levels in the next few weeks. Though, it is important to note that price found support at 150 levels and this confirmed the validity of the upward trend line (which should act as support going forward).

FEEDER CATTLE & LIVE CATTLE

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In this post I’m analyzing two long-term commodity charts from the meat complex. Charts above are continuous prices for Live Cattle and Feeder Cattle. Both charts had strong breakouts from their long-term consolidation ranges. Feeder cattle and Live cattle prices broke out of 6 year-long consolidation periods in the beginning of 2011. Feeder cattle breached 120 levels and Live cattle 104 levels. Both commodities moved higher by forming consistent uptrends. During the uptrends there have been pullbacks to major support levels and to long-term moving averages.

We are now at a stage where these two powerful uptrends will either reverse course and enter into a corrective period or rebound and resume their positive technical outlook. It all depends on how price will react at the support area formed by the long-term moving averages. Feeder cattle tested the long-term average for the 3rd time and Live cattle for the 2nd time after the breakout from 6 year-long consolidation ranges. Support for Feeder cattle is at 145 levels and for Live cattle it is at 112 levels. If price breaks down these two strong support levels feeder cattle will fall towards 120 levels and live cattle towards 105 levels.

NATURAL GAS

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Since my last update on Natural Gas price moved higher and reached the important resistance area between 2.75 and 2.80. Earlier analysis discussed the possibility of a head & shoulder bottom reversal.

http://techcharts.wordpress.com/2012/06/18/natural-gas-3/

Natural gas is now closer to a decisive price action. A breakout above 2.75-2.80 will confirm the head and shoulder bottom and target 4.0 levels. It is important to note that 3 different technical resistances are overlapping at this resistance area. Year-long downward trend line, 200 day moving average and the neckline of the inverted head & shoulder pattern. A breakout should be significant. Failure to break above 2.75-2.80 area will pull the price back to 2.5 levels and result in more sideways consolidation below 2.75.

 

MSCI EMERGING MARKETS

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High volatility in May is followed by a calm period in June. After the sharp sell-off in almost all asset classes during May we are now seeing short-term rebounds. Even though some commodities, equity indices and currency pairs are resuming their slide. MSCI Emerging Markets is a widely followed index that found support in the beginning of June. Index rebounded from an extremely critical level. MSCI EM formed a 3 year-long head and shoulder top reversal with the neckline standing at 890 levels. Head and shoulder top hasn’t been confirmed yet. For confirmation we need to see a decisive “weekly” close below 890 levels. Given the symmetry between the left and the right shoulders on the H&S top, there is a high chance of this chart pattern being a classical head & shoulder top.

A decisive break below 890 levels will target 650 levels in the medium/long-term. Head and shoulder tops or bottoms do fail. A failure will occur only if the index breaches above the peak of the right shoulder at 1,070 levels. For now we continue to follow MSCI EM index with a bearish outlook and watch this major chart pattern as a Head & Shoulder top.

U.S. HOUSING STARTS & U.S. BUILDING PERMITS

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Housing starts in U.S. fell 4.8% in May. Total starts dropped 4.8 percent to a 708,000 annual pace in May from a revised 744,000 rate in the prior month that was the highest since October 2008, today’s report showed. Building permits increased 7.9 percent to a 780,000 annual rate, reflecting gains in single-family and multifamily homes.

How strong are these numbers and what has it been like historically? I’m posting two historical charts on both housing starts and building permits.

Since 1960s housing starts have been cyclical between 2,270,000 and 850,000 units. Until the latest collapse (2006-2009) there has been 4 consecutive troughs and peaks. 1966,1975, 1982 and 1991 were depressed housing market years with housing starts reaching 850K level and 1972,1978, 1984 and 2006 were strong housing market years reaching 2,270,000 level. What is different in the latest housing collapse (2006-now)? First, the market overshoot the 850K number, second it has taken longer to rebound when compared with the previous V-shaped reversals/recoveries.

It is true that building permits are rising and this is definitely positive. However, we should see the housing starts back above 850K threshold to be more optimistic about the U.S. housing market.

 

NATURAL GAS

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Natural gas had a strong rebound from 2.2 levels. It recorded +10% gain in one day. Price formed a perfect symmetry after finding support at 2.2 levels, a requirement for a head and shoulder pattern. Now we have symmetrical Left and Right shoulders. Confirmation of the inverted head and shoulder pattern will be a decisive break above 2.75-2.85 area. It is important to note that both the neckline and the long-term 200 day moving average is forming resistance between 2.75 and 2.85. Breakout above this area will be positive for Natural Gas. Keep this chart on your watch list.