http://www.forexnews.com/na/default.asp?f=N20040524B.mgnDollar Little Changed, Oil Falls Back Below $40 The dollar remains in a tight consolidation pattern, falling back below key resistance at 1.2050 on Friday after a brief rise above its 3-month long downtrend line. Since we first wrote 5 weeks ago that the euro would find a “trio of support” at 1.1750, the euro has chopped sideways giving no hint of its intended direction. But this week converging trendlines will likely force a breakout, which will force the market’s hand. So far, initial indications are that a multi-week rally may be in store if the euro can rise back above 1.2050. Only a move below 1.1890 would put the 1.1750 lows in focus, indicating that a further decline was underway.
Stock futures bounced back to last Friday’s highs, holding
important trendline support from lows made two weeks ago at 9850 and 1076 in the Dow and S&P 500. 10-year yields were also up 10 basis points after reaching a 2-week low on Friday at 4.68%.
Oil Shows First Technical Signs of Toppingsnip>
Oil prices also fell back below the psychological $40 per barrel level on Friday, but not before recording a new record high of $41.85 before this weekend’s meeting and an output pledge from Saudi Arabia. While we believe that commodities are in the beginning stages of a long term bull market, we had warned three weeks ago that oil prices could top out in the $42 to $45 area this year as interest rates rise. While the fundamentals certainly exist to support further gains in oil prices this summer, the large amount of long speculative contracts in oil has a reminiscence of the record long positioning of speculators in the bond market back in March.
In fact, speculative long positions reached 167,232 in the week ending May 11, the highest since the bull market began. But speculative short positions have nearly doubled in the past two months, rising to 100798 in the week ending May 11, thereby actually seeing a deterioration in net long positioning by speculators even as prices rose above the psychological $40 level. The latest CoT report shows a continued deterioration in net speculative positioning, having topped out at 80k in March when oil was trading at $37.50. The past three weeks have seen net longs level off at 65k.
Waning enthusiasm by traders despite strong fundamental bullish backdrop was confirmed last week by the first technical signs of a potential top, as new record highs were not confirmed by new highs in momentum measures such as RSI or the MACD on the daily or weekly charts. This is usually the first indication that a top may be in. Moreover, RSI reached an overbought level above 70 then crossed back below it and has broken its uptrend line, which adds to the bearish outlook. Given that oil prices also recorded a weekly reversal by reaching a new high but lower close on the week, a break below trendline support from the April lows crossing at $39.50 today could see further selling pressure targeting previous resistance band at $38. But only a sustained move below $38 would likely see a larger correction of the entire 9-month rally from $26.75.
Dollar Speculative Positioning Little ChangedDollar shorts rose marginally in the week ending May 18, as the greenback continues to trade along its 2-year downtrend, giving little hint of its overall direction. EUR longs rose 1k to 13,422. GBP longs fell 2k to 3219. CHF shorts fell 4k to 2598. JPY shorts rose 2k to 12682. CAD shorts rose 3k to 28734. AUD shorts fell 1k to 1775.