Crude Oil Update

On Twitter the afternoon of 05.21.08, I stated the maximum upside for crude oil before a pullback was 13450.  Crude peaked out that evening at 13508 and has, as of this morning off the weekly API statistics, begun to test the stated objective of 11850-12250.  The maximum downside for this move before retesting the mid-to-upper 120s is roughly 110-115; a move below that and the mentality of the market will have changed.

So who is going to take credit for this recent pullback?  More-than-likely, you’re elected officials in Washington (where perception of action is actually more important than substantive action).

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Chicken Little or the Boy Who Cried Wolf?

These charts and the implications of reversals in their trends aren’t for the faint of heart, but prudence suggests you at least take a look.  How long can these trends persist?  Who knows, but trees don’t grow to the skies.  Also consider the long-term chart of the US dollar; see a correlation?  Check out the past 35 years here.

Which will it be for you – Chicken Little or the Boy Who Cried Wolf?  I’m hoping for the latter, but am hedging for the former.

Currencies – Buy the Rumors, Sell the News…and repeat

The US Dollar Index (DXC) tumbled to new weekly lows at 8450 with the major crosses including the Euro (ECM6), Pound( BPM6), Canadian (CDM6) and Yen (JYM6) eclipsing recent highs going into the FOMC rate decision news. News of another 25 bps increase initially caught the longs off guard, producing a quick drop to new session lows before reversing to new weekly highs (day session basis) with the Dollar Index setting another low at 8437.

Obviously, the buyers remain the dominant force and until there is a catalyst otherwise, don’t fight the momentum.  The breakout patterns mentioned over the past month remain in effect and continue to be tested.  Due to the continued move higher, support has moved as well. Watch for retracements to the late-April, early-May trading levels for entries with the objectives at the recent extremes. These levels are approximately as follows: DXC 8610-8640, BPM6 18250-18300, CDM6 8950-8970, ECM6 12600-12630 and JYM6 8860-8890.

Forex Update – Pre-FOMC 2-day meeting

With the upside objectives met last week, I suggested that the upside move was nearing a short-term top and the forex and debt markets were setting up for a retracement. A period of stagnation is likely now as the market awaits the results of the two-day FOMC meeting on Tuesday and Wednesday. The news decision will be announced at approximately 1415ET, 05.10.06. A summary of the major crosses follows.

As stated last Thursday, the initial upside objectives for both currencies was tested after strong moves over the prior month. The Pound (BPM6) ran 13.52 pts from the 04.03.06 low of 17284 to Friday’s NFP high of 18636, a 23-day rally. The majority of the move was posted in the last 7 days from 17813-18636 after the Monday 04.17.06 gap up at 17550-17688. Overnight Sunday, it moved to 18700. At a minimum now, expect a consolidation with a potential for a test back down to the breakout area of 17950-18050 realizing that there is a small gap at 18059-18070 from 04.27.06-04.28.06. Aggressive buyers could look for entries in the 18150-18200 area with conservative traders waiting for a test to at least 18075-18125 realizing that the breakout zone is the potential target.

During the same time frame, the Euro (ECM6) rallied 6.89 pts with a Monday 04.17.06 gap at 12158-12262. Its key support zone, the breakout area, is at 12350-12450 with the 12550-12600 area offering initial support for aggressive buyers. Conservative traders should look for the breakout zone test.

The Loonie (Canadian Dollar) broke key support during Monday’s session at 9020-9025. Major overhead resistance is at 9025-9055 with the move setting up a potential break of the past 5-days range of roughly 8985-9090 targeting 8880-8900. The key support zone is at 8920-8950, a potential area for aggressive buyers, with the conservative entry area down at 8875-8900.

Despite the Euro failing to break the NFP high overnight, strength in the Asian currencies forced the US Dollar Index (DXC) through the Friday lows to 8468. The Japanese Yen (JYM6) traded at its highest level since Sept 05 with 8875-9025 now major support on any retracement. Coinciding with the above levels on the major currencies, look for the US Dollar Index to test to 8650-8700.

The bottom line is that a rebound in the US Greenback (pullbacks in the major currencies) is likely into the FOMC news. Likewise, watch for and upside test in the US debt markets to setup short entries. The US T-Bond (USM6) breakdown area is roughly 110 with a test to that area offering a potential short play. Roughly 106-1/2 on the 10-yr notes (TYM6) offers a similar opportunity.

April Non-Farm Payrolls – the following took place between 0800 and 0900ET

The April US NFP report came in weaker than the consensus at only 138,000 jobs vs. 200,000 expected. Hourly wages however were up 3.8% YOY, the strongest gain in 5 years. On the news, the Euro, basis the Jun contract (ECM6), traded up to 12802 on the news, 40 ticks above the prior-day high while the Pound surged to 18636, 76 ticks above the Thursday day-session high. The US Dollar index (DXC) traded down to 8500. US Treasury Bonds, basis the Jun contract, USM6 are up over 1 pts from the Thursday low.

The major currencies are pressing the levels mentioned yesterday at 12825-12925, 18625-18725 and 8500-8525 for the Euro, Pound and US Dollar respectively. Today the key intraday downside zones to monitor are 12770-12785, 18575-18600 and 8530-8540. Note that 12760, 18560 and 8545 are the most significant trading levels. For those watching the Loonie (Canadian Dollar CDM6), 9020-9025 remains the most significant support area.

With all the economic news out and the markets are heading into the weekend, look for choppy trading for the balance of the session unless the aforementioned levels fail.

Showtime – Non-Farm Payrolls – 05.05.06

US Treasury notes/bonds (TY #F and US #F), US Dollar and major currencies are at or nearing critical levels.  Tomorrow morning at 0830ET the US non-farm payrolls numbers are released.  Strap on your speed-jeans, this could be a wild one!  The Jan-May 2005 levels are the keys.  For the Euro, Pound and US Dollar, the major zones to watch are 12825-12925, 18625-18725 and 8500-8525 respectively.  It’s been quite some time since we’ve had a 2-pts move in the US Treasuries.  Today may be the day and if so, the currencies will join the ballistic reaction.

* Note that since the earlier intraday post, ECM6 and BPM6 set new weekly highs at 12762 and 18560 while the DXC hit 8531.  With less than 30 mins to the pit-session close the million dollar question is "who will jump ship – the longs that are in control or those caught short?".  Logic would say the shorts, but anything is possible in front of such a key economic number.

Showtime – the following took place between 0800 and 0900 ET

The US NFP report came in stronger than consensus and the markets are currently digesting the news.  The Euro, basis the Jun contract (ECM6), set a 12228 day session low, within 23 ticks of the real gap from 04.04 and into the key support zone.  The cable traded to 17508 (17491 on the Globex contract) while the US Dollar index continues to consolidate around 8900.  The stage is set – stay tuned!

Bernanke Countdown – Wrong Place, Wrong Time?

The countdown to the semi-annual testimony by the Federal Open Market Committee (FOMC) chairman on Wednesday has begun. The forex market saw a wild ride on Friday’s trade numbers and will now be range bound into his appearance. The fact that Mr. Bernake is taking the helm from Greenspan after a nearly 20-year tenure is the reason for the markets’ concern. IMO, Chairman Greenspan’s success was just another case of being the in right place, at the right time. Many fail to recall the tumultuous economic times when his reign began in 1987 as well as his role in the Crash and the US Dollar debacle.

The question for the upcoming months and years is whether Mr. Bernake is not as fortunate, and ends up in the wrong place, at the wrong time.