WTI CRUDE OIL

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Oil prices are rebounding but strong resistance area remains between $32 and $40. In 2009, when oil price dipped below $40 support area, it took two months to recover back above critical level and there hasn’t been a single month of close below $40. Latest breakdown below $40 has been decisive and unless we see a rally above $40 in the last trading day of the month, this will be the second monthly close below $40.

It is highly likely that the new equilibrium will form between $10 and $40. Recovery above $40 can take longer. Possibly there  will be a lengthy consolidation and the upper boundary of that consolidation remains at $40.

Both charts are plotted on monthly scale. Each bar represents one month of price action.

WTI CRUDE OIL

WTI CRUDE OIL II

MSCI ACWI, EUROSTOXX and DOW JONES

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Volatility increased in the global equity markets. Last week of January will be important as we get closer to the end of the month. Why the last week of January is important? After the sharp sell-off equities are now trying to rebound. Another week of strength will result in a “close” at the higher end of monthly bars. This is the case for almost all the indices analyzed below. However, a flat or weak market action in the last week of the month will result in a “close” at the lower end of the monthly bars. A long monthly bar with a close at the lower end will confirm sellers willingness to push the markets lower. When there is an increase in volatility, it is always better to step back and look at charts with long-term focus. Preferably one or two higher degree than your usual template. This is one of the reason I’m paying close attention to monthly charts. Daily price movements can be considered “noise” in such highly volatile trading.

If EURO STOXX 600 manages to push above 350 levels, an immediate correction will be negated. However, a weak monthly close below August 2015 low (330) will suggest weakness for the coming months.

EURO STOXX 600 INDEX II

MSCI ALL COUNTRIES WORLD INDEX has similar technical outlook. Failure to push above August 2015 low at 374 levels will result in further weakness in the coming months. In order to compare all charts in this update, I added the 3 year simple moving average. You can pick different periods for the long-term average. Having a long-term filter on a chart is better than not having at all. When price is below the long-term average one should be more alert on the possibility of continued correction. In this case it is important to note that price is below several long-term averages.

DOW JONES COMPOSITE INDEX II

MSCI ALL COUNTRIES WORLD INDEX

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2016 started with negative performance for global equities. And weak performance can continue in the coming months. Sharp sell-off in Chinese equities mainly driven by a devaluation of the Chinese yuan, resulted in a broad market weakness. Sharp price action is making the headlines as it is one of the few bad starts for the new year in several decades. However, since April 2015 charts have been showing market weakness. (Earlier updates on MSCI ALL COUNTRIES WORLD INDEX here)

Weakness can be seen from the MSCI ALL COUNTRIES WORLD INDEX failing to breakout to new high levels in April 2015. Global equities experienced the first sharp sell-off in August 2015. Last quarter of 2015 was a reaction to August sell-off. Now, it seems like the downward momentum is picking up steam. Index is below its long-term average once again. Breakdown below the September low at 374, can send the index towards 300-350 area. MSCI All Countries World Index captures large and mid cap representation across 23 Developed Markets and 23 Emerging Markets countries. (For more information on MSCI indices) With 2,491 constituents, the index covers approximately 85% of the global investable equity opportunity set.

MSCI ALL COUNTRIES WORLD INDEX

Europe’s STOXX 600 index has similar deteriorating outlook with the index now testing a 7 year-long trend line support. In April 2015 STOXX 600 reversed from 400 levels for the third time since 2000. Failure to clear 400 during its 3rd test suggests supply is overcoming the demand every time index tests 400 levels. If we see Euro Stoxx 600 breaking down its long-term trend line support, we will expect a larger scale correction towards 300 levels.

EURO STOXX 600 INDEX

Dow Jones Composite index that measures changes within the 65 companies that make up three Dow Jones averages: the 30 stocks that form the Dow Jones Industrial Average (DJIA), the 20 stocks that make up the Dow Jones Transportation Average (DJTA) and the 15 stocks of the Dow Jones Utility Average (DJUA), is also showing weakness with a classic bearish chart pattern; Head and Shoulder Top. Support level for the index is at 5,600 levels. Breakdown below 5,600 can send the Dow Jones Composite Index towards 4,700-5,000 area. (For more information on Head and Shoulder Top chart pattern)

DOW JONES COMPOSITE INDEX

 

U.S. DOLLAR/CHINESE YUAN

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2016 can be another year of weak performance for the emerging markets. USD/CNY chart will have significant impact on emerging market currencies and equities. In the second half of 2015, sharp devaluation of the Yuan resulted in a sell-off in emerging market equities. Current technical outlook for the USD/CNY suggests further devaluation for the Chinese currency is likely in the coming months. A runaway price movement on USD/CNY can trigger another wave of selling in the emerging market equities.

USDCNY

MSCI EM

Already, emerging market equities are underperforming the developed markets. This trend is likely to continue if the above two (sharp devaluation of the Chinese Yuan and another sell-off in emerging market equities) takes place in the following months.

MSCI DM VS MSCI EM

LONG-TERM BOND YIELDS

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First half of 2016 can be a volatile time for developed market bonds. Yields can move higher from current levels. I’m not sure what could be the economic trigger for such price action but charts suggest possible trend periods in the coming months. Here are the charts I will be following in the first quarter of 2016.

After sharp rebounds in the first half of 2015, developed market bond yields moved sideways in the remaining part of the year. Yields failed to test 2015 lows and the consolidation formed flag chart patterns. Flag formation is regarded as a continuation, usually forms halfway through out the price action. Breakout from the flag signals continuation in the direction of the breakout.

GERMANY 10 YR GOVT BOND YIELDS

While German 10 year government bond yields pulled back in an orderly correction, MACD found support around 0 levels. Breakout from the 6 month-long channel will be confirmed with a weekly MACD buy signal.

FRANCE 10 YR GOVT BOND YIELDS

SPAIN 10 YR GOVT BOND YIELDS

US 10 YR GOVT BOND YIELDS

Chart pattern on the U.S. 10 year government bond yield is different from its European peers. U.S. yields have been forming a symmetrical triangle. Breakout in either direction will confirm this chart pattern. Resistance is at 2.4 and support at 2.0.

EURO BUND

When yields go up, bonds move in the opposite direction. Euro BUND which is the 10 year German government bond, reached an important resistance area with a clear negative divergence on its momentum indicator. When analyzed with the underlying yields, we can conclude that higher interest rates can result in a pullback towards 148 levels.

VANGUARD LONG TERM CORP BOND ETF

Another interesting chart that drew my attention is the long-term corporate bond ETF. The chart above shows the Nasdaq listed Vanguard Long-Term Corporate Bond ETF (VCLT.O). Price is now challenging 6 year-long trend support. A decisive breakdown on the weekly scale chart will signal higher yields and lower corporate bond prices. (For more information on the above ETF)

DOW JONES COMPOSITE INDEX

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Dow Jones Averages are price weighted indices, while most of the broad market indices such as S&P 500 and Nasdaq 100 are market-cap weighted. In a price-weighted index higher prices will influence the direction of the average more than lower prices, regardless of the actual size of the company.

Dow Jones Composite Index measures changes within the 65 companies that make up three Dow Jones averages: the 30 stocks that form the Dow Jones Industrial Average (DJIA), the 20 stocks that make up the Dow Jones Transportation Average (DJTA) and the 15 stocks of the Dow Jones Utility Average (DJUA). The Dow Jones 65 Composite, like the three sub-indexes, is price-weighted.

Over the past two years Dow Jones Composite Index has formed a top formation usually regarded as Head & Shoulder. Head and shoulder chart pattern forms after a prolonged uptrend and signals a possible change in trend. Chart pattern is confirmed with the breakdown of the neckline. Similar chart patterns can be seen on some of the constituents of the top US indices. If not in the next few weeks, the first quarter of 2016 we can see some corrective price action on these charts. Confirmation of such price movement will be a decisive break below horizontal support levels (neckline).

DOW JONES COMP INDEX

GS

UPS

AAPL

USD/CAD

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Weak energy and metal prices continue to put pressure on the Canadian economy and its currency. Since the beginning of 2011, Canadian dollar has been losing ground against the U.S. dollar (for earlier analysis on USD/CAD). 1.3040 was an important resistance – levels that were seen during the 2008 financial meltdown.

In the last quarter of 2015, USD/CAD breached the strong resistance at 1.3040 and possibly completed a longer-term base formation. With the last couple of week’s sharp depreciation we can conclude that there is further weakness due for 2016. Unless the cross rate falls below 1.3040 levels in the following months,  the new trading range will be between 1.3040 and 1.62.

USDCAD

WHEAT, SOYBEANS & METALS

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SILVER VS GOLD

Silver is likely to outperform Gold prices in the coming months. Long-term chart of SILVER/GOLD suggests the ratio is at a major turning point. Multi-decade support reversed the ratio three times over the past two decades and this could be the fourth time. Reversal from the strong support in the past resulted in an approximately 1.5x-1.6x outperformance with the exception of 2.3x during 2009-2011 period.

SOYBEANS

Grains and beans complex is at a major turning point. Soybean price is trying to reverse from a multi-year trend support. Two long-term trend lines acted as support around 850 levels. Momentum indicator RSI formed positive divergence. This could prove to be a major low for Soybeans.

WHEAT

Similar price action can be seen on Wheat price. Last three year’s downtrend found support around 455 levels. Strong support can prove to be a turning point for the agricultural commodity.

HUNGARY BUDAPEST SE INDEX

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Since the beginning of 2011, developed market equities have been performing better than emerging markets. This trend is still intact.

MSCI DM VS MSCI EM

Though there is one emerging European equity market that is showing clear strength against its peers. That is HUNGARY. Budapest SE index is ready for another upward leg, after an initial breakout followed by a pullback.

HUNGARY BUDAPEST SE INDEX

Since the beginning of the year MSCI Hungary has been outperforming MSCI emerging markets index. Also, a major reversal chart pattern; head and shoulder bottom, might be developing on the MSCI HUNGARY price index. These are bullish sign for the emerging European country.

MSCI HUNGARY

MSCI HUNGARY VS MSCI EM

Two charts from the constituents of Budapest SE index have positive technical outlook:

OTP BANK formed a flag (or symmetrical triangle) continuation chart pattern.

RICHTER GEDEON formed a massive bullish ascending triangle.

Breakouts from these chart patterns should resume existing uptrends.

OTP BANK

RICHTER GEDEON