2006 Wrap and Set-Up For ’07
With 2006 in the rear
view mirror and over 2 years of FxMoneyTrends analysis in the books, we wish to
start 2007 with a look back in time. In early 2005, a tightening
campaign from record lows in US interest rates prompted us to trumpet a dollar
recovery against the persistent widespread dollar bearishness. Fed funds had
just broken the 2.00% plane but the dollar appeared to be lagging behind.
Subsequent recovery in USD has proven our assessment correct. In early 2006, we
warned traders that with the Fed’s tightening being closer to the end than the
beginning and the European central banks coming into the fold, the dollar will
tend to be far more capricious an difficult to track and trade. The ensuing
reversal and a 6-month wave (4) consolidation chop-fest showed just as much. We
turned our attention to continued economic recovery in Australia (and emerging
economy of Mexico) against the backdrop of the dusk in economic cycle in Canada,
recommending a long position in AUDCAD as “the trade of the year” in a special
report on January 8, 2006. As the charts below show, we may have been early to
the party, but the subsequent inverse head-and-shoulders and late 2006 rally
have proved this macro call correct to the tune of 600 pips.
Both Aussie and the Lonnie are key commodity
currencies. As such, they should not exert any overwhelming “trending”
behavior against each other. Instead, they should oscillate within a wide
range similar to what we have seen in EUR/CHF over the last two years.
We arrive at early 2007 to find overwhelming
dollar bearishness and the threat of diversification away from USD-based assets
against improving US fundamentals that portend the soft landing goldilocks
economy and see a wave (5) bottom in the dollar. Last week’s daily reports
profiled the possibility of wave (5) being reached, while the weekend macro look
and the overnight USD slide point to the contrary. The jury is still out whether
the 82-level will be re-tested – from a purely technical perspective, a re-test
of the low is the more plausible setup while pure Elliott Wave theory and it’s
targets suggests that the bottom has been reached. As we stated previously, only
a breach of 82 support or 85 resistance will prove one case and negate the
other. The more important consideration here is to look for a dollar to bottom
or confirm bottom in the coming days/weeks and stage a pronounced recovery in
the first half of ’07. The bond market, proving to have overstated its
assessment of a US slowdown, is once again ahead of the curve and it’s only a
matter of time before USD follows.
Gold: No change: Picture-perfect
technicals continue to support our view of a gold recovery. After a brief
correction toward the trendline support of the rising channel, gold is once
again in rally mode above $620, confirming our bullish bias by finding support
at $615 prior to a test of key resistance at $610. With our technical outlook
and projected wave count from over a month ago confirmed, we now look for an
explosive rally toward $700.
No change to long-term view: Since the
theoretical price of gold is around $800 we view the recent consolidation as
another opportunity to position long because we expect the correction from $730
to end the larger “wave II” pullback followed by a soaring “wave III” rally or
at least a run to $800.
Recall that we called a at $720 and said to
expect a pullback to $580/540 which would be “wave 2 of V” followed by an
explosive rally in “wave 3 of V” to new all time highs. Below we give to
alternate views of acceptable wave counts. Each are bullish and saying to expect
a good run here.
Stocks: No change: The last days of the
year are notorious for window-dressing disguise by mutual funds and portfolio
managers which explains the most recent run-up. We have anticipated a more
pronounced top in the 1420/1440 range which has now been reached. As the S&P
approaches the multi-month trendline support however, the dreaded confirmation
of the end of the party comes that much closer to realization. Look for a drop
below 1,400 to generate strong selling momentum.
Otherwise, our macro analysis remains in place:
The measured move to our target from November at 1420/1440 is underway (See Nov
10 chart below). So we are getting ready for a nice top around here, but
tempering any bearishness as the market remains in full gear with bond yields so
low.
Recall that liquidity remains the key driver in
markets, which is why we see a high degree of positive correlation between
metals like gold and silver and the stock market. But also remember that gold
gains have outpaced stock gains to such an extent that we have seen a
simultaneous rise in nominal stock prices and a decline in the stock/gold ratio.
This has not occured since 1972, the last time
there was a dollar crisis, rising rates, a failed war, debt, etc. Therefore, we
continue to place bullish bets on key foreign markets covered in our ETF Global
Research reports. And we also continue to stand aside on US markets despite our
positive view on gold and liquidity.
Bonds: 107-10 is still a hurdle for the
treasury bears with the bond markets seeing some profit taking at the start of
2007. Despite the correction, the yields remain on the upward course which
should be dollar beneficial over the medium term.
No change: Bond prices are finally breaking down
from the targeted top in the 109/110 range. Our view remains unchanged: We have
recommended that traders look to sell bonds against the resistance at 109 (which
has thus far been confirmed) and then ADD to that on a deeper break below key
trendline support crossing below at 107.
Crude Oil: Oil is recovering slightly
after failing to test the psychological $60 support, but only a breach of $62
would suggest that the near-term correction has run its course.
No change to the macro perspective. After a
rebound from the recent wave (5) bottom, oil prices are running into near-term
resistance at $64. A key technical support at the psychological $60 level
remains strong and we welcome this dip as a buying opportunity ahead of what is
likely to be an explosive wave (3) higher.
As we have said for the past month: The current
test of the $57 lows is compelling enough to GET LONG NOW.
Jes
Black is the fund manager at Black Flag Capital Partners and Chairman of
the firm’s Investment Committee, which oversees research, investment and
trading strategies. You can find out more about Jes at
BlackFlagForex.com.
Prior
to organizing the hedge fund he was hired by MG Financial Group to help
run their flagship news and analysis department,
Forexnews.com. After four
years as a senior currency strategist he went on to found
FxMoneyTrends.com – a research firm catering to professional traders.