The long and steady decline in the Australian dollar from $0.93 to $0.69 has paused and developed a significant reversal pattern. » Read More
In 1962, the Soviets moved nuclear missiles towards Cuba, a few hundred kilometers from the U.S. coastline, and the world held its breath at the provocation.
Fast forward 50 years, a similar development is unfolding: North Korea has moved nuclear armed ships within a few kilometres of its Southern neighbor, which some argue it remains still technically at war with (There was no formal peace treaty to the Korean war, just a ceasefire), and within a short distance of its major ally China. The Korean markets started a slide that sent shivers through world markets. Currencies were the first to react, and the most volatile.
But is it an over-reaction? The weekly chart of the Seoul's benchmark Korea Composite Index (KOSPI) suggests the long term uptrend for the market remains intact. The retreat was exacerbated by the face-off between North and South, but, technically, the retreat was not unexpected. All other issues aside, this is significant because the KOSPI tends to lead the behavior of other regional Asian markets. A continuation of an established trend is bullish. A move below the established trend is bearish, and sends a warning signal to other markets to watch for similar change of trend signals.
The KOSPI chart has three main trend signals.
Global events like heightened Korean tensions and a spreading European debt contagion may have supported the U.S. dollar in recent days, as investors flee risk assets for the safety of the greenback; but the uptrend has already been in place for a few weeks now, ever since the Federal Reserve announced its second round of quantitative easing on November 3.
The reaction is seen as counter intuitive, and, according to technical analysis, shows the reversal from the prolonged downtrend has the potential to develop into a significant trend change.
Takeovers provide a range of different trading opportunities. Many investors closely scrutinize the financials of the predator and the prey to decide the merits of the offer. Others, like Warren Buffet, play the arbitrage opportunities, trading today’s value against a known, or estimated future value. This is the classic investors play and the objective is to buy in now in anticipation of the 'takeover dance'. This dance starts with a takeover offer. Its followed by a ritualistic rejection of the offer as being undervalued or inadequate. The third step is an increase in the offer, followed by a possible coy refusal. Sometimes there is a third round of offers. It’s a predictable market axiom, and often a profitable dance.
Gold prices powered to a new record high of $1,410 on Tuesday, extending its record-breaking rally to a third day, as safe-haven buying prompted by renewed budget problems in Ireland more than offset a sharp dollar bounce.
Prices were also bolstered by the Fed's easing - spot gold has risen almost 6 percent since the U.S. central bank unveiled plans to buy $600 billion worth of Treasurys last week.
Have traders missed the rally, or does this market still have further upside?
In my recent discussion on the prospect of the Australian dollar reaching parity with the U.S. dollar , I indicated that I will go short on the Aussie when, and if, I receive a "parity invite".
Well, the invitation has arrived. Am I sticking to my guns, or will I attend as a reluctant guest?
Lets get one confusion out of the way - trading is not about being right. Trading is about being profitable. We take the action we think will be profitable, and if it proves otherwise, we quickly change our position. We may be wedded to our partners, but traders are not wedded to their positions.
In this party, I am a "banquet bug", so-called invited guests who turn up for no other purpose than to enjoy the hospitality and eat as much free food as possible. In this case, the surge in the Australia dollar certainly offers this opportunity.
So what is the evidence that suggests a retreat in the Australia dollar? And conversely, what are the signals that suggest a continuation of the upward trend of up to $0.20 above parity, as some forecasters have predicted?
I love gold.
I have mined for physical gold deep underground, fossicked for it in alluvial plains in central Australia, but I find that it is most easily turned into a profit trading COMEX and its derivatives.
Having said that, I am not blinded by love so I would begin to worry as gold moves towards the target price of $1,355. When that happens, I will need to identify the conditions that will predict either one of the following scenarios.
Momentum is weakening before reaching $1,355.
Momentum and trend reversal signals around the $1,355 level.
Continuation patterns around $1,355 that suggest the uptrend may continue.
The U.S. dollar index is not listening to the talk coming out of the U.S. mid-term elections. The greenback has continued to trend lower, now hovering at eight-month lows, despite Washington's threat to introduce a bill to pressure Beiing to revalue the yuan, in a bid to appease voters.
Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.