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5 October 2011

A New Low for Sterling?

Sterling is set for a significant period of weakness, according to Anders Soderberg, technical strategist at SEB in Stockholm.

As he explained to the Technical Analyst, since the beginning of 2009 the Bank of England's GBP index has been digesting the 2007/09 decline within a triangle formation (see Chart below):

“As triangles are continuation patterns and the index entered it from above, a downside exit has been expected. This exit took place in early June with GBP falling down to 77.50, exceeding the low point of wave d, thereby confirming the break. Recently a retesting of the break has taken place, so sterling should be in a vulnerable position, especially below 77.50. Ultimately the index should be heading for a new cycle low."

Soderberg noted however that "the case will lose credibility above 80.60 and will be wrong above 82.30, the e-wave high.”

Gold to Fall Further Before Grand Finale Rise

Technical Strategist at MIG Bank in Switzerland, Ron William, says that gold declines to $1300 and possibly below will offer unique buying opportunities. Despite the recent 20% fall, William maintains that gold is still bearish and that there is heightened risk of a much larger decline if it confirms a weekly close below $1600 and $1534 (200-day MA), a level which has not been breached in three years. This decline, says William, will offer a unique opportunity to buy into gold’s “grand-finale” rise that is likely to start in mid-2012. Read the full report >

Contrarian Comfort for EUR/USD

Highly polarised sentiment in EUR/USD is providing short-term contrarian opportunities, according to David McBain, technical strategist at Absolute Strategy Research (ASR) in London.

He told us that ASR’s proprietary EUR/USD sentiment indicator (Chart 1) has reached excessive pessimism territory, while speculators’ net short EUR positioning is around 10 year extremes (Chart 2). This suggests increased potential for short-term rallies as EUR tests 1.34.

However, given the one-step forward and two-steps back nature of Eurozone developments, contrarian investors may well be advised to remain nimble in playing EUR/USD reversals. Without genuine progress in addressing the Eurozone crisis, a re-test of 1.287 support appears more likely medium-term than a break through 1.40 resistance.

India to Lead BRICs Equities Out of Doldrums

It’s been 10 years since Jim O’Neill of Goldman Sachs coined the acronym BRIC to group together the four largest and most important emerging markets, giving rise to a host of BRICs analysts and funds. But how are the BRIC markets performing today and is it still appropriate to treat them as one bloc? And can their equities rise when Western markets are falling?

Few in the market believe that BRICs equities can fare well when western markets are suffering. Chris Roberts, Asian Technical Strategist at Mizuho Securities Asia told the Technical Analyst: “Positive de-coupling for emerging markets remains an urban myth – in the event of a deepening crisis we’d anticipate greater correlation of markets. Typically, emerging markets underperform in a bear market and we’re in a bear market.”

Kamran Sheikh, Technical Analyst at Informa Global Markets in London, agrees, but also points out the particular weakness of China:

“Overall the emerging markets have been underperforming the developed markets since October last year (Table 1). Until earlier this year this underperformance had been minor, however since August we have observed an escalating trend (Chart 1). Interestingly, the biggest market among the BRICs, China, has been underperforming the developed world since July 2009. This is the third consecutive month HSBC’s China PMI has been below the boom/bust 50 line, indicating weakness of the broader economy.”

Richard Ross, Global Technical Strategist at US-based broker Auerbach Gray is similarly pessimistic for Chinese equities: “Chinese H-Shares are down 36% year-to-date and heading lower. If this is the “Engine of Global Growth”, then my Volvo Wagon is a Porsche 911. The decisive breakdown from a well defined multi-year rolling complex Head and Shoulders top suggests further downside for stocks and commodities.”

Despite the fact that all BRICs markets are in bear trends and well below their 250 day moving averages, Sheikh does see some near term improvement in the next couple of months. “This is simply because we are currently close to a cyclical low. In last seven or eight years, I have observed an average distance between the stock market troughs of approximately 20-32 weeks. Assuming this remains the case, there should be some improvement in October-December to form a medium term lower peak before the we see things getting ugly, possibly after the New Year.”

On the question of de-coupling, Sheikh agrees that a deepening crisis, which he sees as technically very likely, will make global correlations rise and that the emerging markets will maintain their higher beta relative to developed markets. However, he remains on the lookout for a “temporary de-coupling”:

“Temporary de-coupling, or let’s call it divergence on the charts, has been observed only near the major turning points on the charts in the last 10-15 years (Chart 2). Each time one market (emerging or developed) made a new high or low, which was not confirmed by the other, we saw a massive reversal. In 2002 the MSCI World Index made a new low, while the MSCI Emerging Market Index made a higher low, instead. This divergence was followed by a 5 year bull market. Divergences between these indices were again observed near the 2007 peak and then again at the 2009 bottom, as shown on Chart 2. If we again observe a divergence in the future, we would take it is a strong signal of a broader trend reversal, rather than de-coupling.”

Julius de Kempenaer, Director of Quantitative Strategies at Taler Asset Management shares the bleak outlook for BRICs equities, but makes an important distinction between the BRICs countries:

“From a relative point of view there is indeed a de-coupling going on but it’s not between BRICs and the rest of the world but inside the BRICs itself. India is clearly standing out as one of the stronger regions at the moment with good prospects while Brazil, China and Russia are severely lagging with no signs for improvement anytime soon. Going forward outperformance of Europe, US and India is expected over Brazil, China and Russia.” Read Julius de Kempenaer's full report >

De Kempenaer’s analysis is based on Relative Rotation Graphs, available on Bloomberg at RRG .

Don't miss Behavioural Finance 2011 on 13 October in London. This year's event takes a closer look at Quantitative Behavioural Finance and how it can be used to firm-up BF into workable trading and investment strategies.

T: +44 (0)1483 573150 E: enewsletter@technicalanalyst.co.uk

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