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A Positive Bearing on Equities and Tumble for the Dollar Wouldn’t Leverage Crude above $80

A Positive Bearing on Equities and Tumble for the Dollar Wouldn’t Leverage Crude above $80

2010-07-26 23:00:00
John Kicklighter, Chief Currency Strategist

North American Commodity Update

Commodities - Energy

A Positive Bearing on Equities and Tumble for the Dollar Wouldn’t Leverage Crude above $80

Crude Oil (LS NYMEX) - $78.95 // -$0.03 // -0.04%

There was neither volatility nor direction to crude’s price action Monday. After carving out a range that was only slightly wider than this past Friday’s anemic girth, the Nymex-based futures contract would end the day essentially unchanged. Typically, heavy activity can be interpreted as a significant sign of the market’s health; but a lack of activity can be just as meaningful to a skilled traders. The first point of interest is that this congestion persists despite a troublesome proximity to the even $80-mark. Technical trader or not, an even level that has stood as support and resistance successfully in the recent past will draw significant enough attention that it effectively herds the investors to either a breakout or reversal.

The real question, however, is not why this level encourages price action but rather how the market will resolve its attachment to the meaningful figure. For an answer to this perpetual trading question, we look at the fundamental elements to today’s price action. Notably, risk appetite was on the advance across the board. Equities followed the lines of yield demand and troubled European government bonds bounced; but it was the 1.1 percent advance from the S&P 500 that truly defined colored the speculative crowd. That being said, oil traders seemed to ignore the bidding effort by those investors in other asset classes. This divergence can be traced back to the foundation for today’s positive sentiment. The advance in equities was largely based on a neutral (perhaps slightly positive) stance on this past Friday’s EU Stress Tests. The clean bill of health officials gave to the region’s financial system leaves many skeptics; and there is clear doubt over how far buying interest will continue as the holes in the report are exposed. That is a question that only the herd can answer.

If we were to go by the economic listings for the day, we would be left with a very different impression of fundamental health. The US new home sales report for June would seem a sign of astounding strength at first glance. The 23.6 percent increase in the annual sales report was the biggest jump in sales since 1980. Alone a remarkable statistic, when we take into account that the previous month’s 36.7 percent tumble was the biggest on record and the 330,000 pace of annual sales is still the second lowest since the series began back in 1963; we better see the scope of the data. The housing sector in the US is still far from contributing to robust expansion. Far more interesting and objective for energy traders was the Chicago Fed’s National Activity Index for June. A measure of growth three to six months in the future, the -0.63 reading was the weakest in six months and raises concern that the world’s largest economy could cool more than expected into the second half of the year.

For US-based futures traders, today’s quiet activity was reflected in turnover on the Nymex. Volume on the active September contract cooled for a second day with 208,995 contracts traded while open interest has leveled off as investors have rolled forward from the expired August contract. For a broader view of activity, delayed aggregate volume data dropped to its lowest level since June 28th and net open interest is just off its low for the year. With Tropical Storm Bonnie dissipating and allowing the 27 percent idled oil productive in the Gulf of Mexico to come back on line, it will be interesting to see how the differential between US and UK oil contracts reacts going forward.

Crude Futures Chart (Daily)

COM726_body_Picture_1.png, A Positive Bearing on Equities and Tumble for the Dollar Wouldn’t Leverage Crude above $80

Chart generated usingFXCM Strategy Trader

Commodities - Metals

Skepticism Over Financial, Fiscal Stability Keeps Gold to Congestion

Spot Gold - $1,183.45 // -$5.75 // -0.48%

Another day and another session where gold has maintained a narrow band of congestion. Gold has deferred to periods of congestion interspersed by quick breakouts for more than two months now. With the precious metal holding to its $20 range below $1,200 for a full week now, we await the breakout effort. Which way the market breaks and the intensity of that move are the key questions for traders now. Not only is this period of inflexible boundaries ripe for a break; but the precarious pattern has developed just above a trendline that many would identify as the backbone of gold’s long-term advance. Clearly, an unfavorable break could hold significant consequences when it comes to follow through.

The ultimate catalyst for such a break will lie with investor sentiment. The volatile swings in risk appetite are not the primary concern for traders; rather, the general confidence in the capital markets and financial system are critical to defining gold’s bearings. Though it may have passed, the market’s interpretation of this past Friday’s EU Stress Test results is still the primary concern. A long weekend proved beneficial to speculative endeavors; but an objective review of the Euro-area’s financial review leaves much to be desired. Not only was the worst-case-scenario weak and different regions come under different criteria; but loose accounting allowed for significant bond exposure to be left out of the assessment, counterparty risk was virtually ignored and the sovereign default risk was completely ignored. This is by no means a stringent or even realistic assessment. However, the market often follows the speculative crowd. While risky positions can be built up through doubt over this narrative; all that it takes is a critical bond failure or some other unforeseen roadblock for the European financial system for fear to return. And, if uncertainty seizes the crowd, the demand for an alternative investment like gold will quickly roar back to life.

For futures traders, activity actually increased notably for the day. Volume on the active Comex futures contract for August rose to its highest level this month at 107,301. That being said open interest on this particular security has slipped significantly (to a low of May 25th). At the same time, aggregate open interest (the total exposure across various expiration months) is actually holding relatively firm. This divergence is more indicative of congestion in the underlying and repositioning in deferred months.

Spot Silver - $18.17 // $0.06 // 0.30%

Without heavy influence from speculators or spilled over safe haven interest from gold, silver would be left to its own congstion Monday. The metal is carving a tight range; but recent price action has not held firm to its more precious counterpart. A close eye should be kept on price action around $18.50 and $17. As for activity in the futures market, the July 2010 contract expires on Wednesday and interest has already seemingly rolled forward to September. As for this soon to be active contract, open interest is nonetheless falling and volume is at its lowest level since July 12th – a significant reflection of today’s stagnation.

Spot Gold Chart (Daily)

COM726_body_Picture_4.png, A Positive Bearing on Equities and Tumble for the Dollar Wouldn’t Leverage Crude above $80

Chart generated usingFXCM Strategy Trader

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Written by John Kicklighter, Strategist

To receive John’s reports via email or to send Questions or Comments about an article; email jkicklighter@dailyfx.com

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