A New Bubble?
The week opened on a euphoric note following the stunning announcement that after nearly a decade, Osama Bin Laden was finally tracked down and killed inside Pakistan. For the markets though, the elation was short lived.
The recent meteoric rise in oil, gold, and especially silver prices came to an abrupt end. July silver lost more than 30% of its value in just a few sessions, the price of gold slid 7%, moving back below $1500, and crude oil plunged 16% through $100.
A few weeks ago we moved to the sidelines noting that the rally against the US dollar appeared a little ”long-in-the-tooth.” As it turns out, a remarkably prescient call if we say so ourselves. This week witnessed a substantial rebound in the US dollar – and a concommitant collapse in the Euro – as buyers emerged emboldened by the reversal in commodity markets and by the carry trade unwinding.
Earlier in the week the euro hit a 12-month peak at 1.4940. By the end of the week the euro reversed course and suffered a 600 pip loss – in just two trading sessions. The primary catalyst for the reverse in sentiment stemmed from what were ultimately unwarranted policy tightening expectations by the ECB. In leaving rates unchanged and by omitting the word “vigilance”, Trichet disappointed speculators that were betting the ECB was on the verge of commencing a tightening cycle.
In the US, the largest rise in private payrolls since February of 2006 overshadowed an uptick in the unemployment rate back to 9%.
Has the Bubble Burst?
The confluence of soft economic data and over-heated markets in several asset categories convinced investors around the globe to begin deleveraging risk aggressively, and as the week wore on the momentum accelerated. Nowhere was that more evident than in the commodity markets, which were also forced to digest rapidly escalating margin requirements.
The striking similarities in price action across-the-board is depicted by the Daily charts (see below) of the Euro vs. USD, Silver, Crude-Oil and the Great British-pound vs. USD. All of these markets have been in extended rallies for several months. Last week, most if not all of the gains in these markets over the past several months were erased in just a few short trading sessions. Ah, aint speculation grand?!!
Interestingly, from a technical analysis point of view all of the referenced markets share a common price pattern – the reverse ascending wedge triangle. We have drawn the axis lines on the charts to demonstrate what this pattern looks like. A triangle is formed between converging support and resistance lines. Once the support or resistance line is broken, pressure that has built up as a result of uncertainty is released and a certain amount of momentum is added to the price change in the direction of the breakout.
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