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OPINION

New year

New year
July 30, 2014
New year

As will the time horizons we are using today, monthly or annual candles which are at last complete for the year 2015. So let's roll up our sleeves, look, and think. First, take an overview, comparing similar and related markets. Just skim through the charts quickly to see if anything really stands out, and then focus on that; leave the dreary stuff 'til later. Consider whether the salient features shed new light, support, or alter one's view; even if long held, always be prepared to review as and when the facts change. Draw lines very precisely and consider including potential alternative ones. Draw in patterns and their measured targets, annotate Elliott wave counts (and their alternatives) - if that's your thing. Now you're ready.

 

FTSE 100

Kicking off with the FTSE 100, we can see that over the past two years the index hasn't really gone anywhere. However, it was certainly not plain sailing as last year's range, specifically Q2 and Q3, was bigger than both the two previous years (including a false break above 6900). Opening and ending the year somewhere in the middle of things, we have a poor doji candle denoting some instability - and a market looking for direction. Following 2014's bearish hanging man candle, this is another small negative on this chart. Far more worrying is the fact that all of the above is taking place at the 1999 and 2007 highs; this is not coincidence, it's a chart level that has precedents and must be respected. A sustained break below important support at 5800 targets next support at the trend line and 2010-11's lows at 4800 - maybe not this year but in 2017.

 

FTSE All-Share

Looking at the FTSE All-Share to see the bigger picture, it has spent the past five months desperately trying to hoik itself off key support at 3275. This marks most of the lows of the past three years, which in turn forms the bottom edge of a broadening top formation, and lines up with 2000's high. Trend line support was broken last summer and recent consolidation has been below it, so that the line is now resistance. Momentum has been bearish since June, and the MACD clearly suggests a short position, and the index is certainly not oversold on the RSI. All of the above is very top-heavy indeed, and worrying too because rarely do we find such a clear, long-term, major topping pattern.

 

Dow Jones Industrial Average

Looking across the pond, the Dow Jones Industrial Average has held up better, and the chart patterns, candles, and counts are less obviously bearish. Perhaps it's because there are only 30 companies in the equation, possibly dominated by price action in a handful, but it is worrying that volume has been so very poor for the past three years, a time which coincides with a possible rounded top formation. The fact that Q3's slide was the biggest points loss since Q1 2009 is also something to make one sit up and listen. While below last year's record high the tendency will be for repeated testing of the 16000 area and trend line support. Below 15470 the picture gets an awful lot uglier, facing a drop to 14500 and probably 13500.

 

Russell 2000

Interestingly, at the other end of the US spectrum, the Russell index of 2,000 of the smallest shares in their 3000 index looks very similar to the Dow. Struggling and potentially topping in a broadening formation since late 2013, it is yet another set of shares that must be a bitter disappointment to its owners. December's test of trend line support turned long-term momentum bearish and although above key support around 1030, it probably won't take more than a month or two before this is tested. A break below here should cause a massive swoon to 890 and then 850, 2007 and 2011's highs.

  

Cable

Setting equities to one side for now, let's take a look at the exchange rate between the two countries. As we pointed out last week, consensus opinion is still largely in favour of the US dollar, but perhaps because of 2015's poor show some economists have pulled in their horns. This is reflected in implied volatility, which is well within the parameters that have held sway for the past four years; puts slightly more expensive than calls as one would expect seeing as momentum has been bearish for more than 12 months. Now cable is at some of the lowest levels since the slump in the financial crisis of 2008, where it lost a whopping 60¢, bettered only by 1981's 65¢ carnage; this is in turn the lower boundary that has held since 1986. Therefore we feel that the first half of this year will be dominated by cautious downside probing, between 1.4800 and probably no lower than 1.3500, before a painfully slow recovery back above 1.5500 might just be possible with a maximum topside around 1.7000. In other words, pretty much more of what we have seen since 2010.

 

Sterling/euro

In terms of sterling's value against the euro, it sort of depends which of these two dogs behaves the worst. We ought to point out that our favourite currencies for 2016 are currently the Swiss franc (again), the New Zealand dollar, and more controversially the Japanese yen - plus some of the Asian currencies. Sterling/euro struggled all last year with resistance around 1.4400 and the chance of breaking above here over the next three months is probably slim. However, this does not mean that the slow trend to appreciation has ended, where a move very late in the year to the psychological 1.5000 is a possibility, although any higher than 1.5500 is unlikely.

  

Brent Crude

Obviously the value of all commodities, where wholesale markets are usually priced in US dollars, will depend to a certain extent on the greenback. It will also depend on demand, and the outlook for energy is not exactly rosy. The outlook is not dire, mind you, as we are getting close to historically cheap levels in crude oil, natural gas and gasoline. Rather like the pound, Brent crude (which has been oversold for most of last year) should see myriad attempts at basing, probably unsuccessfully until closer to $25 per barrel. Then sideways with a break above $55 highly unlikely.

 

Gold

Gold is still viewed as being in a secular bear phase, and while a lot cheaper than the record highs, is not even close to cheap. Momentum has been negative since the start of 2013 when a series of gently marginally lower highs started. This should prevail again this year because it is not in the least bit oversold. Very long-term support comes in closer to the $900 area than the psychological $1,000.