The Overall Fundamentals

The Market awaits the FOMC

The EuroZone had the most market focus last week. Sentiment vacillated as players were torn between fears of a Greek default and the dry-up of European banking system, and finance leaders' commitments to resolve the problems.

Early last week, credit risk in the European banking system rose to all time high as the market priced in more than 90% chance that Greek debts will default.

Risk aversion was intensified by Moody's downgrade of French banks Societe General and Credit Agricole, as well as ECB's announcement that 2 more banks has borrowed money from the 7-day USD funding operation.

But, the Market Sentiment reversed after the ECB said than it would, in co-ordination with the ECB, the BOE, the BOJ and the SNB, conduct 3-month USD liquidity operations for 3 times through the year, aiming to provide adequate liquidity to the banking system.

Speculations of Chinese buying of peripheral bonds and EC President Jose Barroso's comments that the commission will 'soon present options for the introduction of euro bonds' and 'some of these options could be implemented within the terms of the current treaty' only added to investors' optimism.

During the NY session or late European session Friday, Sentiment changed again as the informal ECOFIN meeting in Poland appeared to be a non-event.

Precious metals got hammered as market Sentiment improved generally. Gold trade chopped around during the week.

The Gold price broke below 1800 on occasion but managed to finish the week at 1814.7, down -2.39%.

Silver followed Gold and got sold off. The benchmark Comex contract lost -1.91% on the week.

PGMs also softened with Platinum and Palladium slipping -1.31% and -0.76% respectively. The Tug of War between potential supply disruption due to wage negotiations in South Africa, and concerns over the demand outlook indicates prices will remain confined within their recent 5-15% range.

The major event next week is the 2-day FOMC meeting on September 20-21. According to Fed Chairman Ben Bernanke stated at Jackson Hold Symposium, it was originally a 1-day meeting but was rescheduled to 2 days for discussing 'the possible costs and benefits of various potential tools' to stimulate the economy.

After pledging to keep the federal funds rate at exceptionally low levels for at least through mid Y 2013, the remaining options the Fed can take include: lowering interest rates paid on excess reserve, shifting the composition of the balance sheet to longer maturity, formalizing an inflation target, indicating explicit interest rate ceilings for longer-term Treasury debts (with an ingredient of asset buying) and outright bond purchases (QE-3).

Notwithstanding oppositions from several hawks, the US Fed will likely announce something called 'Operation Twist' increasing the average maturity of securities holdings by swapping holdings of lower maturities Treasuries with longer ones.

While it is questionable on how much the economy can benefit, the Fed is not likely to pursue an outright bond purchases given rising inflationary pressures.

The IEA said last week that it terminated the joint release of strategic Crude Oil reserve announced on June 23.

The agency stated that its 28 member countries 'concluded that the interrupted Libyan supplies have been successfully addressed by a combination of the IEA collective action and increased production from producer countries' and the action can be ended as expectations for Global Crude Oil demand growth has weakened.

According to the IEA, of the 60 mmb SPR, some 38 mmb were released from public stocks and 22 mmb via a relaxation of obligatory industry stockholding.

Public stocks were taken up by the market over the course of July and August. Uptake of public stocks has been 97%, compared with 73% at the time of the Y 2005 collective action.

In its monthly energy report, IEA revised lower its Global Crude Oil demand forecasts. The IEA projected Crude Oil demand will rise +1.36% to 89.3M bpd this year and then +1.57% to 90.7M bpd in 2012, compared with previous forecasts of 89.5M bpd and +91.1M bpd respectively.

The revisions were anticipated due to the economic turmoil, and the IEA's forecasts have been the more optimistic among the 3 major agencies.

Note: the downgrades came just 4 months after the agency had revised up its Global demand outlook in June. The change indicated something critical has happened in Global economic developments in these 2 months.
The Overall Technicals

Comex Gold (GC)

Gold's fall from 1923.7 extended to 1765.4 last week, and there is no sign of completion yet. This decline is either consolidation to the rise from 1705.4 or the 3rd leg of the consolidation pattern from 1917.9.

In either case, more choppy trading will be seen in range of 1705.4/1923.7. But in case of deeper fall, I do expect Strong support above 1705.4 to contain the downside, and bring up-trend resumption. A break above 1923.7 should send Gold towards 61.8% projection of 1478.3 to 1917.9 from 1705.4 at 1977.1.

The Big Picture: Gold's long term up trend is intact and there is no reversal signal yet. Another record high should still be seen. But, it is prudent to be alert for another near term reversal near to 2000, the psych mark, and finally bring some lengthier consolidation. A clear break of 1705.4 argues that Gold has Topped out with a Double Top reversal pattern at 1917.9/1923.7, and in that case, deeper pull back could be seen back towards 1577.4 the Key resistance turned Key support.

The Long Term Picture: Gold's rise from 681 is treated as resumption of the long term up-trend from the Y 1999 low of 253 and there is no sign of topping inn here. This up-trend may now be targeting 161.8% projection of 253 to 1033.9 from 681 at 1945.6, and sustained trading above 2000, the psych mark, should show the way to 261.8% projection at 2727.2. Stay tuned...

Comex Silver (SI)

Silver traded in the range of 38.76/44.275 last week as consolidations continue, it also managed to hold its 55-Days EMA so far. The rise from 33.20 is still in favor to continue and a move above 43.50 will be taken as signal of the rise resumption target 44.275 and higher, but a break of 38.76 will turn bias to the Southside for a test of 37.025, the Key near term support.

The Big Picture: Silver's price action from 49.82 is treated as consolidation pattern in the long term up- trend. The 1st leg from 49.82 has completed at 32.30. The rise from 32.30 is treated as the 2nd leg and could extend further. But I am looking for reversal signal as it approaches 49.82, and a break of 37.025, the Key support, will turn my outlook Bearish for another falling leg to extend the consolidation. Barring that I am cautiously Bullish Silver near term.

The Long Term Picture: the deep selloff from 49.82 raises the possibility that the long term up-trend from 4.01 is near completion as it faced strong resistance from 261.8% projection of 4.01 to 21.44 from 8.4 at 54.032. It is too early to confirm long term reversal yet, but an important Top should be near, if not already in at 49.82 IMO. Upon confirmation of reversal, Silver is likely fall towards its 55 months EMA at 21.4. Stay tuned...

Nymex Crude Oil (CL)

Crude Oil's rise from 75.71 extended last week but struggled to take out 55-Days EMA. Also there is Strong resistance around 90, the psych mark. While such correction might extend, current development suggests that it should be finished and attempts to move higher should be limited by near term falling trend line resistance now at 92.3. A clear break of 85.00, the minor support, will be the first signal of resumption of fall from 114.83 and should turn bias to the Southside for a retest of the 75.71 low first.

The Big Picture: medium term rebound from 33.2 is treated as the 2nd leg of consolidation pattern from 147.24 and should have finished at 114.83. The current decline should target the Key cluster support at 64.23; 61.8% retracement of 33.2 to 114.83 at 64.38 next. A clear break there will show the way to retest 33.2, the low. But a clear break of 100.62, Key resistance, will say that the fall from 114.83 has completed after meeting missing 100% projection target. The corrective structure of such decline in turn augurs that the rise from 33.2 is still in progress and targets another high above 114.83.

The Long Term Picture: Crude Oil is in a long term consolidation pattern from 147.27, with the 1st wave completed at 33.2, the 2nd wave may be finished. Upon confirmation of medium term reversal, the 3rd wave of the pattern should have started for a retest on 33.2 low.

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Paul A. Ebeling, Jnr

Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster's Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.

Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.