Technical Outlook For Turbulent Markets

Technical Outlook For Turbulent Markets

It’s a difficult environment for the dollar, stocks and commodities, to say the least.   Here is a quick roundup of technical observations from our team that may help navigate this period of high volatility.

It’s a difficult environment for the dollar, stocks and commodities, to say the least.  The Chinese yuan, which had been a catalyst for some recent volatility, stabilized and actually finished last week slightly firmer. Some have noted the break above the USD/CNY 6.40 level overnight as meaningful, but we don’t read too much into it. The Chinese yuan is doing what officials said it would do: there is more volatility but no large moves.  Here is a quick roundup of technical observations from our team that may help navigate this period of high volatility.

The DXY has broken below the 200-day MA at 94.7 and is now looking at the May and June lows near 93.14 and 93.56, respectively.

Short-covering helped lift the euro to its highest level since February. We note that the euro has not traded above the 200-day moving average since early July 2014, after having broken above it on Friday. The next area to watch is a decisive entry into the $1.1500-$1.1535 area.  A note of caution comes from the Bollinger Bands.  The upper band is near $1.1290.  Support is now seen near $1.1213.

The sell-off in stocks and decline in US yields spurred short covering of the yen as well, which is the best performing major currency today.  The dollar fell through the 50-, 100-, and 200-day MAs, each in the last three sessions.  Having broken below the July lows, we are now back to the top of the right range seen between mid-March and mid-May: 118.50-120.50.

The speculative short sterling position was not nearly as extended as the euro and yen, so it is not surprising it failed to show similar momentum.  In addition, sterling was supported by ideas that the BOE would also be raising rates, and the heightened fears of global deflation undermining a source of fundamental support.  Still, sterling is trading above the $1.5700 level today but has not closed above it for nearly seven weeks.  If it does, the next target is the June 1.5930 high.  It will probably take a break of $1.5560 to take the pressure off the upside.

The Canadian dollar broke out if its recent range today.  The US dollar traded mostly between about CAD1.3015 and CAD1.3180 since August 13. In line with the signals from the RSI, the Canadian dollar resolved this range to the Loonie’s downside.  If a close above CAD1.3200 is confirmed, CAD1.4000 will be the next level to watch.

The Australian dollar has recorded lower highs for seven consecutive sessions.  After breaking below the $0.7290 support level, the Aussie made a new cycle low, a level not seen since mid-2009.  It will take a move back to the $0.7380-$0.7400 to ease the bearish technical indicators.  There seems to be little in terms of fundamental or technical considerations that argue against a test on $0.7000 in the period ahead.

The S&P 500 dropped nearly 5.8% last week to post the biggest weekly decline of the year.  It finished at its lowest level since last October, which was almost four standard deviations below the 20-day moving average (~1961).  This, more than the RSI and MACD, warns that the market is over-extended.   Lows in the S&P 500 over the past two years have mostly been signalled by a one or two-day reversal.  These are often characterized by testing or making a new low, and then recovering to close near the highs.  Sometimes this has been followed by a gap higher opening.  Investors may want to monitor the price action and await such a technical signal that a low is in place.

Oil prices were drilled again.   The front-month October light sweet crude oil futures contract has fallen each week since mid-June (ten-week losing streak).  With the convincing break of the $40 level today, the late-08 and early-09 lows near $32.50 come into view.  Despite the long declining streak, there is no compelling reason to think an important bottom in place.

Observations from the speculative positioning in the futures market:

1. There were three significant gross position adjustments by speculators in the reporting period ending August 17.  The gross short euro position was cut by 21.4k contracts to 161.2k contracts.  The gross short yen position was reduced by 14.9k contracts, leaving 136.1k.  The gross long sterling position rose by 10.3k contracts to 52.0k.

2.  There were a few distinct patterns.  While the short euro and yen positions were cut, there were small adds to the gross longs.  The net short euro position of 92.7k contracts was the smallest in two months.  Speculators reduced gross long and short Australian and Canadian dollar positions.  Gross short positions were generally reduced.  The 3.9k contract in the gross short sterling position (to 56k) and the 1.4k contract increase in the gross short Swiss franc position (to 18.1k) are the two exceptions.

3.  The net long speculative 10-year Treasury position was culled by 40.5k contracts to 7.3.  This was primarily a function of bulls taking profits.  They liquidated 46.5k contracts to 453.7k.  The bears covered 6k short positions, leaving 446.4k contracts.

4.  The net long speculative light sweet crude oil position was trimmed by 15.3k contracts to 212.6k. The gross longs were trimmed by 5.7k contracts to 473.2k.  The gross short position increased by 9.6k contracts to 262.6k.