Gold outperforms as more bad news from EU emerges

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The market digested some negative news today with the release of the initial claims data coming in at 484k. On the European front, news came out that the Eurozone CBs are buying Irish bonds, while Greek GDP came out at a horrendous -1.5% in Q2, well below the -1% consensus and the -0.8% in Q1.

Gold outperformed today, gaining about a percent, as sovereign debt worries come back into the picture, as well as potential reactionary policy from central banks to fight off economic contraction. Though I don’t see any convincing technicals in precious metals charts developing yet (beyond the long-term uptrend I’ve been playing on the long side on swings), there may very well be some buy (or short) triggers develop in the charts soon.

However, risk did not react altogether that poorly, and after the gap-down in equities this morning (tied to news of Cisco’s earnings report, which included very cautious comments), stocks were bid all day long and finished well off session lows, touching the 50d.

The euro had a choppy session, but is trading about 60 pips off its recent lows, bouncing off its 38.2% retracement level from its August cycle highs. The potential of a head & shoulders pattern to be developed around this level as the neckline is significant. If the EURUSD can rally to the 1.30-1.31 level, I would be inclined to add to my short position, and would consider a likely candidate for the level defining the right shoulder of the pattern. At this point this is speculation, but there are a variety of confluencing support levels around current exchange rates (the Fibo level, 100d, etc) and the EURUSD could find a short-term bid before it sets up its next wave down. Again, I’m short and expecting eventual parity; this is a short-term bullish possibility.

The AUDUSD found some buying interest around its 0.89 support level today and I’m expecting it to rally to around mid-July highs at about 0.9050. A subsequent selloff from that level (and piercing back through its 200d) would define it as a head & shoulders reversal, as well. These pervasive support levels in risk right now, regardless of if they develop into necklines of head & shoulders patterns, are very significant and should be watched carefully. Breakdowns through these levels should trigger further selling and really bring the new downtrend in full motion.

In yesterday’s piece, I noted, “I still expect the important 85 level to eventually be broken, even as early as this fall, but a bounce up to about 87.50 or its 200d may be in the cards for USDJPY and going long this cross presents an attractive risk/reward at these levels.” Today, the USDJPY bounced about 100 pips and is sitting just above 86.00 right now and is following my analysis so far. Lots of tenors of Tsy prices are at or near resistance levels, especially the 7- & 10-yrs, and as US yields see short-term oversold bounces (and as 10s30s flatten from overbought 10yrs retracing some gains), USDJPY should respond with a short-term rally. Again, I expect 85.00 to be broken eventually and on that occurrence I expect big selling in this cross.

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