Sive Morten
Special Consultant to the FPA
- Messages
- 18,748
Fundamentals
Reuters reports dollar tumbled more than 1 percent against the euro and the yen on Friday as strikingly weak Chinese factory data fanned global growth worries and cooled betting that the Federal Reserve will raise U.S. interest rates next month.
Chinese manufacturing activity shrank at its fastest pace in 6-1/2 years in August, compounding investor concerns over slowing growth in the world's No. 2 economy and ignited sell-offs in equities and commodities.
Markets had been reckoning that a solid U.S. economy could prompt the Fed to raise rates for the first time in nearly 10 years as soon as September. However, soft Chinese economic data, sliding commodity prices and unconvincing U.S. inflation data have dulled expectations of a near-term U.S. rate hike.
Higher rates would raise borrowing costs for consumers and companies, possibly hurting spending and economic growth.
One indicator of Fed policy expectations, interest rates on overnight indexed swaps , suggested traders now see a 27 percent chance of a rate hike next month, down from 32 percent on Thursday and off from 48 percent a week earlier, according to data from inter-dealer money broker Tullett Prebon.
Fears of a China-led global economic slowdown drove Wall Street to its steepest one-day drop in nearly four years on Friday and left the Dow industrials more than 10 percent below a May record.
Wall Street's selloff this week suggested investors are growing nervous about paying high prices for stocks at a time of minimal earnings growth, tumbling energy prices and an expected rate hike by the U.S. Federal Reserve that could gradually usher the end of almost a decade of easy money.
Stocks have seen few large moves this year, staying in a narrow range throughout 2015, but volatility spiked this month once China surprisingly devalued its currency. Weak Chinese manufacturing data on Friday, and another drop in China's stock market, rattled investors' nerves and led to Friday's tumble.
While this month's selloff has been swift, many analysts feel the declines may be close to being exhausted, with a turnaround possibly starting as soon as next week.
"You're definitely witnessing a perfect storm in terms of China timing, people on vacation that affects liquidity, and you've got a lot of questions on the Fed and people are obviously focused on oil," said Andrew Frankel, co-president of Stuart Frankel & Co in New York.
"If you're buying a stock, you're dipping a toe in here."
The CBOE Volatility index, Wall Street's so-called fear gauge, touched its highest since October and notched its biggest-ever weekly percentage gain.
The S&P slumped 5.8 percent for the week, its biggest weekly decline since September 2011. The index lost more than $1 trillion of its value this week, according to S&P Dow Jones Indexes. Only 10 S&P 500 components advanced on Friday.
The selloff was broad, with all 10 major sectors in the red. Volume was heavy, with about 10.6 billion shares traded on U.S. exchanges, well above the 6.75 billion average this month, according to BATS Global Markets.
The euro, which is used as a 'funding' currency borrowed to buy riskier but higher-yielding emerging market currencies, easily topped $1.13 as investors reversed such trades and bought it back.
The euro was last trading against the dollar at $1.1358, up 1.05 percent. Earlier the euro hit a session high of $1.1375, last touched on June 22.
Data showing euro zone business growth unexpectedly accelerating this month gave the euro a brief boost, but most investors reckon China volatility and other external factors are more important drivers at the moment.
Against the yen, which is also used as a funding currency and is a more traditional safe haven, the dollar fell to its weakest in six weeks, down 1.10 percent on the day at 122.28 yen .
"Receding expectations for the Fed to raise rates at its coming meeting on Sept. 16-17 wield the potential to weaken the dollar further over the short run," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. "However, a door seen as still ajar to a move next month should help limit losses in the dollar."
CFTC data shows now changes in sentiment as open interest has remained mostly the same. It puts some shadow on talks that investors unwinded there shorts on EUR. Currently, at least at 18th of August we do not see it.
The same is true as for speculative shorts as for longs. Yes, short positions were contracted two weeks ago, but last week they mostly remain the same. Well, may be on next week we will see shifts in sentiment as soon as will get COT data for last week:
Longs
Shorts
Technicals
Monthly
Despite sentiment CFTC data that shows no shifts yet, we just can’t miss or ignore some signs on technical charts and it seems that they could be early bells of coming changes. Monthly charts mostly brings more questions rather than answers.
Here, on monthly picture currently we have just one new issue – possible second close above 3x3 DMA. Yes, there is ~2 weeks till the end of August still, but right now EUR stands above 3x3 and if it will close above it by the end of the month – this one will be second close. This fact tells that we haven't got B&B "Sell" that probably would be more logical in current circumstances. As there is fewer and fewer time till the end of the month, perspectives that we will get DRPO "Buy" LAL pattern becomes greater. It will be LAL (look-alike) mostly because we do not have any signs of bears’ capitulation, we do not have two recognizable bottoms that typical for DRPO pattern. This is new information that forces us to review perspectives of upside action.
First of all despite the depth of this retracement, we still will treat it as bounce, if even EUR will reach 1.20-1.22 area. Market too long stands in downward action, especially during recent year and market has solid bearish momentum. Also take a look at butterfly pattern. Here we see definite acceleration right to 1.27 target point. Usually it leads market to next 1.618 target after retracement.
Now, let's talk on perspectives of upside action. We have two patterns of different kind here. First one is bullish engulfing that finally has started to work. It's target equals the length of it's bars and coincides with nearest 1.18 Fib resistance level.
Second is - DRPO. We do not have confidence that it will definitely work as it should to, because it doesn't have perfect shape, and mostly we call it as LAL. Still, DRPO usually leads market to 50% resistance of it's thrust. Additional support to this idea comes from EUR habit - it also likes 50% levels. Also 1.20-1.22 area includes former lows that could be re-tested.
That's being said, monthly chart leads us to following conclusions:
1. Market stands in upside retracement. Bearish trend is still intact and time is not yet to come to review long-term perspectives.
2. Most probable target of upside bounce is 1.18 Fib resistance - 3/8 level;
3. Possible target that has less chances to be reached is 1.22 area - 50% resistance.
Weekly
This picture brings very important information. Market stands just 50 pips below grabbers' target that is 1.1466 top. It should be taking out. Grabbers do not prevent market from further upside action, but after top will be exceeded we should find another patterns that will specify further targets. Grabbers' mission will be over as soon as market will create new top.
Around the top stands very strong resistance area. First is - this is combination of Fib level @1.1384 and weekly overbought. This deadly combination gives us weekly bearish "Stretch" pattern. Second - we have minor 0.618 AB-CD target. Third - here we have previously broken YPS1. So, we could get retracement down.
If we have so strong resistance, what chances on further upside continuation. Let's see, what we have on the other side. Actually not as much... EUR has closed above MPR1 and this tells that upside action is not just retracement within bear trend. It indicates shifts in sentiment (although we do not see it yet in CFTC data). Second - take a look at the action on last week. Market has shown strong rally and closed right at the top. We definitely see signs of thrust and acceleration.
That's being said, weekly chart does not cancel perspectives of further upside action, but tells that after market will hit 1.1470 area - retracement down is very probable. It means that hardly we will see 1.18 area on coming week.
Daily
Here market shows tremendous rally. EUR has passed through all pivot resistances as monthly as weekly, so I even do not plot 'em here. Market is not quite at overbought, but stands very close to it. At the same time EUR has no strong barriers right to the top, since it already has broken all major Fib levels.
Here, guys, we have detail that makes complex our analysis. And this detail is butterfly. This pattern suggests action to 1.16+ area, while above we've said that 1.1460 will be strong resistance and market should bounce down. How to combine this opposite issues? I see only two possibilities.
First one, if, say EUR will show just spike up to 1.16 after it will hit stops above 1.1460 and then will show fast return back. Second - if market will creep inside weekly overbought for awhile as it has happened in April rally (see weekly chart). Taking in consideration recent rally this scenario does not seem as impossible right now.
So, what we should do? Those of you who were lucky and got position at 1.1010 according to our analysis could keep it till market will reach our target around 1.1460 area. Just manage it - move stops etc...
For others, who do not have position have the choice. Conservative approach is to wait major bounce down on weekly chart. May be we even will trade it on short side, I do not know yet. But later we could use this bounce for long entry.
Aggressive tactic is trying to take scalp long positions on intraday charts with 1.1460 target as we've tried recently. It is not the fact that you will get lucky and get it(thus, we haven't got B&B patterns that we've counted on recently), but we could try.
For example, currently market has completed daily 1.618 AB-CD pattern. If market will turn to retracement, this will the chance again to get B&B:
4-hour
Speaking further on possible intraday retracement, on 4-hour chart EUR also has completed AB=CD pattern. CD leg is much faster than AB and this issue points on shy retracement. Thus, we again could try to catch B&B "Buy" here. From that standpoint 1.1245 level looks interesting. This is 3/8 Fib support and WPP of coming week. Also this is former top and "B" point of AB-CD pattern.
Conclusion:
In long term perspective we should treat current upside action as retracement by far. If even market will reach 1.20-1.22 area this will not break yet bearish tendency on monthly chart. Our first long-term target is 1.18 area and it's based on monthly bullish engulfing pattern. Next target is based on DRPO "Buy" LAL pattern and suggests moving to 1.22 area.
In short-term horizon we probably will work with upside action as market is approaching to 1.1460 top and target. Since there are 100 pips still till the target, we could try to catch B&B "Buy" pattern in the beginning of the week and will be monitor 1.1245 area.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Reuters reports dollar tumbled more than 1 percent against the euro and the yen on Friday as strikingly weak Chinese factory data fanned global growth worries and cooled betting that the Federal Reserve will raise U.S. interest rates next month.
Chinese manufacturing activity shrank at its fastest pace in 6-1/2 years in August, compounding investor concerns over slowing growth in the world's No. 2 economy and ignited sell-offs in equities and commodities.
Markets had been reckoning that a solid U.S. economy could prompt the Fed to raise rates for the first time in nearly 10 years as soon as September. However, soft Chinese economic data, sliding commodity prices and unconvincing U.S. inflation data have dulled expectations of a near-term U.S. rate hike.
Higher rates would raise borrowing costs for consumers and companies, possibly hurting spending and economic growth.
One indicator of Fed policy expectations, interest rates on overnight indexed swaps , suggested traders now see a 27 percent chance of a rate hike next month, down from 32 percent on Thursday and off from 48 percent a week earlier, according to data from inter-dealer money broker Tullett Prebon.
Fears of a China-led global economic slowdown drove Wall Street to its steepest one-day drop in nearly four years on Friday and left the Dow industrials more than 10 percent below a May record.
Wall Street's selloff this week suggested investors are growing nervous about paying high prices for stocks at a time of minimal earnings growth, tumbling energy prices and an expected rate hike by the U.S. Federal Reserve that could gradually usher the end of almost a decade of easy money.
Stocks have seen few large moves this year, staying in a narrow range throughout 2015, but volatility spiked this month once China surprisingly devalued its currency. Weak Chinese manufacturing data on Friday, and another drop in China's stock market, rattled investors' nerves and led to Friday's tumble.
While this month's selloff has been swift, many analysts feel the declines may be close to being exhausted, with a turnaround possibly starting as soon as next week.
"You're definitely witnessing a perfect storm in terms of China timing, people on vacation that affects liquidity, and you've got a lot of questions on the Fed and people are obviously focused on oil," said Andrew Frankel, co-president of Stuart Frankel & Co in New York.
"If you're buying a stock, you're dipping a toe in here."
The CBOE Volatility index, Wall Street's so-called fear gauge, touched its highest since October and notched its biggest-ever weekly percentage gain.
The S&P slumped 5.8 percent for the week, its biggest weekly decline since September 2011. The index lost more than $1 trillion of its value this week, according to S&P Dow Jones Indexes. Only 10 S&P 500 components advanced on Friday.
The selloff was broad, with all 10 major sectors in the red. Volume was heavy, with about 10.6 billion shares traded on U.S. exchanges, well above the 6.75 billion average this month, according to BATS Global Markets.
The euro, which is used as a 'funding' currency borrowed to buy riskier but higher-yielding emerging market currencies, easily topped $1.13 as investors reversed such trades and bought it back.
The euro was last trading against the dollar at $1.1358, up 1.05 percent. Earlier the euro hit a session high of $1.1375, last touched on June 22.
Data showing euro zone business growth unexpectedly accelerating this month gave the euro a brief boost, but most investors reckon China volatility and other external factors are more important drivers at the moment.
Against the yen, which is also used as a funding currency and is a more traditional safe haven, the dollar fell to its weakest in six weeks, down 1.10 percent on the day at 122.28 yen .
"Receding expectations for the Fed to raise rates at its coming meeting on Sept. 16-17 wield the potential to weaken the dollar further over the short run," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. "However, a door seen as still ajar to a move next month should help limit losses in the dollar."
CFTC data shows now changes in sentiment as open interest has remained mostly the same. It puts some shadow on talks that investors unwinded there shorts on EUR. Currently, at least at 18th of August we do not see it.
The same is true as for speculative shorts as for longs. Yes, short positions were contracted two weeks ago, but last week they mostly remain the same. Well, may be on next week we will see shifts in sentiment as soon as will get COT data for last week:
Longs
Shorts
Technicals
Monthly
Despite sentiment CFTC data that shows no shifts yet, we just can’t miss or ignore some signs on technical charts and it seems that they could be early bells of coming changes. Monthly charts mostly brings more questions rather than answers.
Here, on monthly picture currently we have just one new issue – possible second close above 3x3 DMA. Yes, there is ~2 weeks till the end of August still, but right now EUR stands above 3x3 and if it will close above it by the end of the month – this one will be second close. This fact tells that we haven't got B&B "Sell" that probably would be more logical in current circumstances. As there is fewer and fewer time till the end of the month, perspectives that we will get DRPO "Buy" LAL pattern becomes greater. It will be LAL (look-alike) mostly because we do not have any signs of bears’ capitulation, we do not have two recognizable bottoms that typical for DRPO pattern. This is new information that forces us to review perspectives of upside action.
First of all despite the depth of this retracement, we still will treat it as bounce, if even EUR will reach 1.20-1.22 area. Market too long stands in downward action, especially during recent year and market has solid bearish momentum. Also take a look at butterfly pattern. Here we see definite acceleration right to 1.27 target point. Usually it leads market to next 1.618 target after retracement.
Now, let's talk on perspectives of upside action. We have two patterns of different kind here. First one is bullish engulfing that finally has started to work. It's target equals the length of it's bars and coincides with nearest 1.18 Fib resistance level.
Second is - DRPO. We do not have confidence that it will definitely work as it should to, because it doesn't have perfect shape, and mostly we call it as LAL. Still, DRPO usually leads market to 50% resistance of it's thrust. Additional support to this idea comes from EUR habit - it also likes 50% levels. Also 1.20-1.22 area includes former lows that could be re-tested.
That's being said, monthly chart leads us to following conclusions:
1. Market stands in upside retracement. Bearish trend is still intact and time is not yet to come to review long-term perspectives.
2. Most probable target of upside bounce is 1.18 Fib resistance - 3/8 level;
3. Possible target that has less chances to be reached is 1.22 area - 50% resistance.
Weekly
This picture brings very important information. Market stands just 50 pips below grabbers' target that is 1.1466 top. It should be taking out. Grabbers do not prevent market from further upside action, but after top will be exceeded we should find another patterns that will specify further targets. Grabbers' mission will be over as soon as market will create new top.
Around the top stands very strong resistance area. First is - this is combination of Fib level @1.1384 and weekly overbought. This deadly combination gives us weekly bearish "Stretch" pattern. Second - we have minor 0.618 AB-CD target. Third - here we have previously broken YPS1. So, we could get retracement down.
If we have so strong resistance, what chances on further upside continuation. Let's see, what we have on the other side. Actually not as much... EUR has closed above MPR1 and this tells that upside action is not just retracement within bear trend. It indicates shifts in sentiment (although we do not see it yet in CFTC data). Second - take a look at the action on last week. Market has shown strong rally and closed right at the top. We definitely see signs of thrust and acceleration.
That's being said, weekly chart does not cancel perspectives of further upside action, but tells that after market will hit 1.1470 area - retracement down is very probable. It means that hardly we will see 1.18 area on coming week.
Daily
Here market shows tremendous rally. EUR has passed through all pivot resistances as monthly as weekly, so I even do not plot 'em here. Market is not quite at overbought, but stands very close to it. At the same time EUR has no strong barriers right to the top, since it already has broken all major Fib levels.
Here, guys, we have detail that makes complex our analysis. And this detail is butterfly. This pattern suggests action to 1.16+ area, while above we've said that 1.1460 will be strong resistance and market should bounce down. How to combine this opposite issues? I see only two possibilities.
First one, if, say EUR will show just spike up to 1.16 after it will hit stops above 1.1460 and then will show fast return back. Second - if market will creep inside weekly overbought for awhile as it has happened in April rally (see weekly chart). Taking in consideration recent rally this scenario does not seem as impossible right now.
So, what we should do? Those of you who were lucky and got position at 1.1010 according to our analysis could keep it till market will reach our target around 1.1460 area. Just manage it - move stops etc...
For others, who do not have position have the choice. Conservative approach is to wait major bounce down on weekly chart. May be we even will trade it on short side, I do not know yet. But later we could use this bounce for long entry.
Aggressive tactic is trying to take scalp long positions on intraday charts with 1.1460 target as we've tried recently. It is not the fact that you will get lucky and get it(thus, we haven't got B&B patterns that we've counted on recently), but we could try.
For example, currently market has completed daily 1.618 AB-CD pattern. If market will turn to retracement, this will the chance again to get B&B:
4-hour
Speaking further on possible intraday retracement, on 4-hour chart EUR also has completed AB=CD pattern. CD leg is much faster than AB and this issue points on shy retracement. Thus, we again could try to catch B&B "Buy" here. From that standpoint 1.1245 level looks interesting. This is 3/8 Fib support and WPP of coming week. Also this is former top and "B" point of AB-CD pattern.
Conclusion:
In long term perspective we should treat current upside action as retracement by far. If even market will reach 1.20-1.22 area this will not break yet bearish tendency on monthly chart. Our first long-term target is 1.18 area and it's based on monthly bullish engulfing pattern. Next target is based on DRPO "Buy" LAL pattern and suggests moving to 1.22 area.
In short-term horizon we probably will work with upside action as market is approaching to 1.1460 top and target. Since there are 100 pips still till the target, we could try to catch B&B "Buy" pattern in the beginning of the week and will be monitor 1.1245 area.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.