“Risk OFF” or “Risk ON” ? Is this a bear market or a bull market? Are we in a recession or not? Are we headed for a double-dip or not? When opinions are too divided like this and everyday people have a tendency to change their market outlook from negative to positive and vice versa, it is called a corrective period. During corrective periods, markets have tendency to move with wide swings and form choppy trading ranges. It is those type of periods that are most difficult to forecast. Trading ranges or consolidations are periods of disagreement while trending markets show consensus.

EUR/USD is in a long-term consolidation. It is a wide trading range between 1.50 and 1.20. However, in the long-term consolidation range short/intermediate term trend is down. With the latest breakdown below 1.3250 levels, EUR/USD breached a critical support that is likely to be the neckline of a H&S top. The top formation has still not been confirmed but our technical levels on the 3 year-long price chart suggest that there has been technical damage. EUR/USD should now push above 1.3250 to reverse the negative technical outlook. If it can move above 1.3250, we will expect the currency pair to trade between 1.3250 and 1.3750. Unless EUR/USD moves above the critical resistance at 1.3250, it is headed towards 1.20-1.25 area. Please note that EUR/USD is below the 200 day moving average and has major resistances ahead. Weak technical outlook could persist.

U.S. Unemployment Rate (%)

In August I analyzed the U.S. unemployment rate from a technical perspective. Technical analysts (Chartists), look at pure price information and analyze directional movement. In doing so, they use different technical indicators. Here I’m using 1&2 year moving averages to identify cross-overs. Unemployment in U.S. has peaked around 10% in October 2009 and since then it has fallen towards 8.6%. Moving average cross-over in the beginning of 2011 signaled improving job market for U.S. If we analyze past data we can see that every cross-over was followed by better employment figures for at least one year after the technical signal. Given that the cross-over signal was generated in the beginning of 2011 we can expect better figures in 2012.


If stock markets are discounting mechanisms, China’s SSE 50 index is not giving us positive signals for the chinese economy and possibly for the global growth. At a time when almost everyone is expecting China to lead the global growth and help the rest of the world, weak stock market performance is telling the opposite… that China might be facing more trouble. SSE 50 index has been falling below its 200 day moving average and lately confirmed its downtrend by breaking below its 2010 low levels at 1,780. RSI has clearly established its move below 50 levels (a sign of a bear market). Lower lows and lower highs has formed a medium-term trend channel and the lower boundary of the trend channel is between 1,450 and 1,500. Expect further weakness in the Chinese stock exchange and  the index to reach the lower boundary of its medium term trend channel.


When all the commodities experience sharp sell-off, this is reflected on the major commodity indices. One of the widely used commodity index is the Goldman Sachs Commodity Index. The weight of energy products in the index is higher when compared with the Reuters/Jefferies CRB Index. As a result changes in Crude Oil price has a larger impact on the technical outlook for the GSCI. Yes, we have seen agricultural commodities and industrial metals weakening in the past few months but Light Crude Oil’s sharp correction in the past few days brought GSCI clearly below its 200 day moving average. Lower lows and lower highs define the medium-term downtrend and before Goldman Sachs Commodity Index moves back above 650-670 area stay bearish on commodities.


Strength in U.S. dollar and weakness in global equities and commodities has been the theme for the past few months. U.S. dollar strength can be seen not only against Euro but against several emerging and developed market currencies. Technical chart patterns are extremely bullish for the dollar. One of those bullish patterns is the inverted head and shoulder on USDBRL. 2 year-long base formation has almost completed with the neckline (last intermediate term resistance) for the bullish chart pattern standing at 1.92 levels. A confirmed breakout above 1.92 levels will target 2.45 levels in the intermediate term. This chart shows weakness for Brazilian Real and strength for the U.S. dollar.


MACD divergences are great tools to anticipate trend reversals. They are the first warning signal to show the weakness in momentum. When combined with technical support/resistance levels their message could be extremely valuable. Dow Jones Industrial Average has been ranging between 12,800 and 10,600 levels for the past 8 months. MACD warned us before every major market reversal. In July, in October and now… Dow Jones Industrial is now testing a strong resistance at 12,300 levels with a negative divergence. We can conclude that the index will not be able to break above the strong resistance with the current momentum. A sell signal on MACD could pull the Dow Jones Industrial Average lower towards its 200 day moving average at 11,700 levels. Equities are having difficulty to move higher. This is bearish for equities…

S&P/TSX Composite Index (CANADA)

The longer price stays below the 200-day moving average the harder it gets for the long-term trend to reverse and the price to move back above the resistance areas. This could be the case for most of the equity markets as major equity indices are now forming consolidation ranges below their long-term moving averages. Bearish outlook remains intact and suggests these chart patterns could resolve on the downside for several equity markets. Canada’s S&P/TSX Composite Index reversed its 2 year-long uptrend in August 2011 with a long weekly bar that breached 13,000 levels. Since August the index couldn’t move back above 13,000 and during the same time the long-term moving average (200-day) declined to 12,550 levels. Unless the index breaks above the 200 day moving average and out of the sideways consolidation range Canadian equities would see more downward pressure. Watch this consolidation range with a bearish bias and place a long-term stop-loss at 12,550 levels.


A long-term consolidation… A classical technical chart pattern (symmetrical triangle) and a strong technical support level… This chart would be a perfect fit for a text-book example. We will be looking for this commodity to find support at 270 levels. Wide trading range has contracted to as low as 100 points and now we are at the lower boundary. RSI is close to 30 levels (oversold) and the weekly chart is showing strong support. Soy meal should be on our watch list in the agricultural commodities.


Emerging market equities are showing weakness. Most of them are off of their 2011 high levels, below their long-term moving averages and in a downtrend. One example is Korea’s KOSPI Index. Weak and choppy rebound towards the 200-day moving average has formed a rising wedge (usually considered bearish). Meanwhile RSI hasn’t moved above the 50 levels (another bearish sign). When combined together; – below 200 day moving average – rising wedge pattern and – RSI finding resistance at 50 levels, it is not a bullish outlook for Korea. If the index breaks below 1,750 level it will confirm the rising wedge and we are likely to see lower prices towards 1,500 levels.However a sustained break above 2,000 levels should be positive for the intermediate term trend.

MSCI EM (Emerging Markets)

While European countries are trying to come up with a good plan to save the euro zone, 6 central banks around the world  the Federal Reserve, European Central Bank (ECB), and the central banks of Canada, U.K., Switzerland, and  Japan decided to provide “temporary U.S. dollar liquidity swap arrangements.” Those  dollar swap lines and programs are authorized through 1 Feb. 2013. This definitely helps the equity markets and could be seen as a “monetary easing”. While collective central bank move can have both positive and negative implications, the impact on the equities hasn’t been big enough to change the technical outlook. MSCI EM index is possibly completing a sideways consolidation below its 200-day moving average. Once completed, a breakout should take place. Given that this consolidation is forming after a downtrend, I would expect a resolution on the downside which should eventually break below 850 levels. Though we need to see a confirmation. Intermediate/long-term bearish outlook remains intact.