Geopolitical tensions between Ukraine and Russia has accelerated the rally in Nymex oil prices that started in the week of January 18.» Read More
The events in Egypt have pushed oil towards new highs but this remains a rally rather than a new uptrend. Nymex crude has been unable to breakout above the upper level of long term resistance near $109.
The fear in oil markets is that the current price activity is part of a new long-term uptrend that may see oil reach highs of $120 or $130. The chart suggests these fears are unfounded because oil trades in well-defined trading bands. The breakout above resistance near $98 had a target projection near $109. Despite the ongoing unrest in Egypt, oil has been unable to breakout above the $109 resistance level.
(Read more: Egypt risk premium built-in, limiting oil's gain)
The weekly Nymex chart shows four levels of support and resistance.
The Governor of the Reserve Bank of Australia has done a hatchet job on talking down the Australian dollar towards a preferred target of $0.87.
Glenn Stevens signaled last week that the currency had more room to fall by flagging dovish view of RBA's monetary policy, citing Australia's weak economic growth and subdued inflation.
The comments exaggerated a sell-off in the currency which has fallen around 14 percent against the dollar this year, alongside a broad sell-off in commodities and on fears of a slowdown in China, Australia's biggest trading partner.
(Read more: Australia cuts rates to record low of 2.5%)
The Australian dollar may have rebounded slightly on Tuesday to trade near a 3-year low of $0.89, after the RBA offered no clear hints on further easing after a quarter point rate cut, but according to technical analysis, there is simply no reason to hold the currency.
The Aussie-U.S. dollar pair is simply, a carry trade that has collapsed.
The new market bogeyman in the oil markets is the flash crash. When we are short of catastrophe, we tend to summon up the potential for such a scenario and this has been applied to trading in Nymex oil.
A flash crash is when algorithms go bad. In previous times, it was often called a fat finger error where a much lower sell order was placed by accident and the market plummeted to meet the sell before rapidly returning to the previous trading level.
We developed 'snatch and grab' trading strategies around these so-called "kangaroo tails." Whilst it's comforting to think that algorithms do not make mistakes, it's useful to remember that programmers do make mistakes.
(Read more: Prince warns US shale could hurt Saudi economy)
In our July 7 column, we flagged a Stop and Reverse (SAR) trade opportunity with oil. It was predicated on the divergence in behavior between the Egyptian Stock Exchange and the developing Egyptian crisis. The "frightened" money flees, and the "confident" money stays. In Egypt it was staying, but foreigners were driving up the price of oil, a slow moving flash crash in reverse.
The trading strategy was to apply an SAR, or stop-and-reverse trade. This is a rally trade. It's not a trend trade. We expect this to be a short-term momentum pop, followed by a retreat back to under $100. It starts with trading from the long side with upward momentum.
Contrary to popular perception, the important number for dollar-yen is 102, and not 100, according to technical analysis. This is the most powerful support and resistance level on the long term-chart. It has acted as a support level in 1994, 2000, 2005; and as a resistance level in 2009. And as the currency pair flirts with the 100-level, the 102 mark is once again a decisive level for the dollar-yen.
In April, we wrote that a move by gold prices below the support level near $1540 had a downside target near $1280. This calculated target is above the historical support level near $1260 so this suggested that any fall below $1540 has the potential to fall to support near $1260.
We suggested that this downside target would take many months to achieve. The development, however, has taken just two months to materialize. Bullion fell to $1182 in late June before developing consolidation near $1260.
On the morning of July 3, on CNBC we talked about the developing situation in Egypt. We looked at two charts. The first was Nymex oil just starting to move above $100/barrel. The second chart was the Egyptian EGX 30 market index. There was an interesting divergence, and this opened the way to a trading strategy.
The EGX30 was showing a strong rally. This suggested the market was expecting a rapid resolution of the current problems and a return to stability. Frightened money flees markets, causing them to crash. Confident money stays in markets. This is what was happening in Egypt with the market rallying.
(Read More: Oil Rally Not Just About Egypt: Deutsche)
So what's the trading solution in this environment? It's a SAR – stop and reverse trade. This is a rally trade. It's not a trend trade. We expect this to be a short term momentum pop, followed by a retreat back to under $100. It starts with trading from the long side with upward momentum. Entry is as near to the $100 breakout as possible. The stop loss is calculated using the Guppy count back line. This is a self adjusting volatility based stop.
The stop distance from the current price changes as the significant volatility of price changes. On the day of entry the count back line is calculated from the high of the previous day. The count back line is the stop loss. The position of the count back line is adjusted whenever a new daily high is made. A close below the count back line (CBL) is a signal to exit the trade.
If you didn't already guess it, then you know that long-term investing is dead. It's so dead that it actually stinks. The idea should be consigned to the dustbin of history and replaced with more of an up-to-date thinking. It's part of the core belief that influences the way we look at market outlooks over the next six months.
You want proof? Take a look at the S&P 500 monthly chart. We are routinely told by investment advisors that we should invest for the long term. Well let's put them to task at a 15-year time frame.
(Read More: Second-Half Stock Surge or Swoon?)
Forget individual stock picking because that's a waste of time. Evidence? Where are Enron, WorldCom, and other giants of the blue ribbon investment world? Delisted and busted. The reality is you cannot tell who will or who will not survive so we can only use the index for this exercise.
The investors who entered at point 1 in 1998 have made a 31 percent return over 15 years. That's about 2 percent per year!!! The investor who entered at point 2 has made essentially a ZERO return over 13 years. During that time he has twice suffered a 48 percent draw down. The investors who entered at point 3 has in theory made a 93 percent return over 12 years but he has watched his capital go from a 93 percent return and then drop to below zero in 2009. This is still an average of 7.75 percent per year.
The weekly chart of the U.S. dollar index shows the index has been trading in a broad trading band between 79 and 83.5. The index activity has been oscillating around a central support and resistance level near 81.5.
The breakout above 83.5 failed. The trading band has defined the activity of the dollar index starting in March 2012.
The index stays in the upper section of the trading band between May 2012 and September 2012. This showed continuing bullish pressure.
The dollar index then entered a bearish phase trading below the central support and resistance level from September 2012 until February 2013. The dollar index remained in the bullish upper half of the trading band from February 2013 until June.
The move below 81.5 suggests a return to the bearish phase of this oscillation around the central support and resistance level.
China remains one of Asia's worst-performing stock markets this year, but there are reasons to believe the prevailing downtrend for the long-time laggard may be coming to an end.
In broad terms, the benchmark Shanghai Composite Index is continuing part of a long term trend breakout pattern. There are three defining features on the weekly chart.
(Read More: This Worries Us Most About China, Says World Bank)
Two weeks ago we looked at the Nikkei and suggested that the Nikkei could develop a strong rebound from support. This has not happened so this week we want to take another look at the analysis, and also develop new analysis.
Fast rises are inevitably followed by retracements. The retracement is a signal to protect profits when the market has developed end-of-trend behavior. This is often shown with chart patterns such as a rounding top, a head and shoulder pattern, or a significant drop below an established trend line.
In June one of these features – a significant drop below the established trend line – developed. This immediately changed the analytical environment.
Our analysis concentrates on identifying the conditions that will signal when a high probability development is occurring. On the Nikkei chart the critical line was the trend line because this acted as a support level.
(Read More: An End in Sight for Japan's Turbulent Markets?)
The analysis framework has two parts. The first part is the potential future development if the Nikkei remained above the trend line and used this as a support level. The second part was the potential future development if the Nikkei fell below the trend line.