 Hello and welcome to this monthly Analyst Debates webinar between me, Michael Houston, and my colleague in Canada who's joining us from Toronto. Just quickly get the disclaimer out of the way, have to do that for compliance and regulatory purposes, but once we get that out of the way and we can digest all of the various risk warnings and what have you, we can basically get cracking on this webinar and have a look at the reasons why we're suddenly deciding to see this massive correction, we're not massive, this significant correction, it's all relative, this significant correction in equity markets that we've seen over the past two or three days. You know and I think what we need to do while Colin's still trying to sort himself out, I'll sort of ramble on a little bit, but we've got a whole host of charts that we want to show you, basically looking at US markets, the Russell 2000 or the Small Cap 2000 as we call it. Also look at some of the European markets, the Euro 50 which is in front of you right now, which is the Euro stocks 50 and which has broken a very key long-term uptrend line from Lowe's that we saw in 2013, I can just zoom the chart out there. And look at some key support levels, not only on this particular chart, but also have a look at the FTSE 100, UK 100, the S&P, the Dow and really I think establish whether or not this is going to be the beginning of a significant correction or whether this is just one of many dips that we've seen over the course of the last two to three years. I certainly think that you know there's been an expectation that we haven't had a correction for such a long time and really what's the catalyst going to be for a correction? And again last week we saw really good payrolls number out of the US, really good, I mean 280,000 not only on the non-farms but also on the ADP. But overall you know I've had significant misgivings about the fact that you know markets are looking at what I would call, I don't know it's an overused cliche, the Goldilocks scenario, but you know how much higher can these markets go against the background of a retreating Fed and the fact that in January at the beginning of this year we were looking at potential growth in the first quarter for the US economy of 1.1% and in the space of six weeks that growth target went from plus 1.1% to minus 2.9% and yet we're seeing a bounce back in jobs growth in the US. A good part of those jobs are part time but all of the other indicators that we've been seeing so far, durable goods, retail sales, and other data haven't really sort of been impressing you know and I think that for me I think is the main concern. Anyway I mean I know Colin wanted to talk to you about a number of different charts, I don't know whether he can see my desktop now, I mean I'm hoping that he can. Can you see it Colin? I can Michael, I'm logged in as a participant so I can't control it but I can see everything. You wanted to start with the US small cap 2000 didn't you? Yes please. I will show you that chart which is the daily chart, a very significant chart and excellent. Okay so this is a daily chart, it's over the course of the last 12 months and what it's showing you is basically the performance over the course since November and to me that looks a little bit like a potential double top if we actually blow it out from there. Absolutely it looks like an absolutely huge double top here and if we're looking on a weekly look at this down candle we've got and we're breaking a shorter trend support line and so what's important here is I was looking overnight and we saw down about half a percent but the Russell down 2% it's a huge decline the small cap stocks have fallen out of bed and this suggests that we started to see a sell off this week well this has shown a major increase in breadth in selling maybe the more limited the small only 30 stocks in the Dow rallied up to touch 17,000 but look at this we're seeing this is suggesting broad-based selling in the US market and there's something significant to note here which is number one you're seeing a huge double top so technically this is looking very vulnerable here when we went back to the short-term charts could you just put up the go back to a daily chart for sec Michael. Something else we're looking at here if you look at the stochastics we had a very over an overbought stochastics and the RSI looks quite similar we're now seeing a major roll down in the momentum indicators not just the stochastics also the RSI both of them have broken the 50 line today and and if we look at the RSI's across the US indices whether it's the Dow the the S&P 500 and the Russell they've all gone under 50 today that shows a serious downturn in momentum in US markets it looks like we're heading into a into a fairly significant correction and what's important here on a seasonal basis is that it historically May and June you often see a correction get a rebound in turning season in July and then beginning of August through to the middle of October are the weakest time of the year historically for stock markets and we're heading into a point where we didn't get a correction in May and June because we had this continued inflow of liquidity and not just from the Fed but also the prospects for for money in the future from the ECB but not now just money later and and now we're starting to see indices roll over and then what's important here is that we if you look at the action from this week could we put the the US 30 on a on a 15 minute chart please Michael we can date and maybe we could take that out to max save of four or five days there's been a lot of talk lately about about complacency in the in the stock market and and things have been fairly quiet even even through the end of June but in the last few days we're starting to see intraday volatility pick up we're starting to we see we look at at Monday things were fairly quiet and then a big drop in yesterday we had a bit of a small rebound and then a bigger rebound later and that wasn't able to hold overnight we had the markets going down so we're starting to see markets going back and forth more of a battle between the bulls and the bears the bulls are in complete control of the market anymore their hold is slipping the bears are starting to get control but they don't have they haven't been able to fully take over either we're starting to see more trading opportunities increase and and more significantly yes we did get a positive response to Alcoa's earnings beat but if with the way that inflate that valuations have have expanded any kind of disappointment you could just as easily see an individual stock could get soundly hammered over the next few weeks we've got a lot of earnings reports coming out so there's a potential for a number of swings and moves as traders try to get a feeling for are the earnings now enough to justify the price if you think about the PE ratio the price has gone way up now the earnings need to go up to justify the price and if they don't markets look really vulnerable and even if they do do earnings go up enough to justify the increase in valuation so it looks like we could be heading into a correction the other thing I wanted to mention was that the Fed minutes yesterday yes you had a rally on the fact that the Fed said they're not going to shrink their balance sheet before they start raising interest rates they're going to do it at the same time or after they start raising interest rates so a few people jumped on that as a positive but the one they completely missed was that the Fed also said they plan on wrapping up their tapering program and at the end of October in October originally most people had figured that they would spread out the last 15 billion over the October and December meetings now it's October they're going to do it also they're actually moving up the end of tapering the last time the the US had a the last two QE programs QE 1 and 2 within three months of the end of it the US markets fell by 15% that's the the over inflation from the easy money that that inflates stock prices coming back out so you're at a risk that you could have a fairly we didn't get that this time around with with QE 3 they've done this tapering thing which has just helped to support the stock markets yet we're now heading towards the a serious hard end to QE 3 and that suggests at some point you could be heading for a significant correction because you haven't had one yet instead of during tapering markets going sideways or down they've continued to go up stocks have continued to be inflated by the money coming in and at some point with the Fed when the Fed starts to take away the punch bowl the the markets could be in fairly significant trouble as we're seeing volatility increase we are starting to see people also look back to havens can we bring up the gold chart please Michael we can indeed it's interesting that S&P chart bouncing off that support line but we'll look at that in a minute let's look at gold quite a few lines on there but overall we can see that is that the one you want the daily chart that's perfect moment that's absolutely perfect so what I wanted to talk about here is the the gold chart and in particular we have a huge breakout in gold today so gold had been in a downtrend for quite a while it's been trying to base build over say the last six to nine months and and it started to work its way higher in June we had an initial rally when that when the ECB started to talk about bringing a bringing back the the LTO's which are coming this fall gold over the last historically used to trade against the US dollar as gold being the the the leading hard asset and the US dollar being the leading paper currency now what's happened in the last five years is that instead of trading against the US dollar gold has been trading against the euro so as euro may be in money supply went up gold went gold went up as the as the European money supply went down over the last 18 months gold went down now the Europeans are talking about putting more money back into the system gold's been going back up again so that's that's one thing you've got potentially pushing gold higher you're starting to see increases in commodity prices again although crude oil is coming back off but copper is starting to build if you do see inflation pressures start to come in as we've seen the inflation in the US coming back up towards 2% that's potentially bullish for gold gold is historically a long-term inflation hedge plus if we start to see the corrections in the stock market and and increased volatility and increased uncertainty and risk whether it's in in Europe in the in the banking system where or the economy or or in the US with the what's going to happen the stocks when the when the Fed starts normalizing monetary policy and raising interest rates things are starting to come around again and it looks like are starting to come around and the prospects are looking a brighter for gold here so what's encouraging you had a big spike-up rally initial initial in in June where you broke out of a three-month downtrend you've consolidated here just above the the $1300 level is very well bid very well supported through a three-week consolidation now it's starting to go up again this is a classic staircase pattern rally consolidated higher levels and break out again so looking at some pretty solid accumulation for gold and and the prospects for gold are looking for pretty positive through the rest of the year so you would think that if we see a say a pullback we probably find support around about $1,320 an ounce or maybe a little bit above that or below that it looks right around there right around that breakout point where you have the line drawn this one here or the one the other one yes so that would be your first line of support and then and then the second one here at well that's better so your first line of support would be here around what 1330 and then your second line of support down here around 1310 where you had those last few tails of the candles bottoming out 1300 to say 1308 to 1310 where those tails were yeah I mean that's one of the things about candles ladies and gentlemen when you have very long tails either on the top side or the downside and they they occur at fairly regular intervals that generally suggests that the market even though it's trying to push it lower and it's not able and it closes near the highs or near near where it opens that normally suggests that the market's getting a little bit short and you know long long tails on the downside suggests that there's not really any appetite to push it lower because every time the market tries to push lower it actually closes pretty much where it opens and we can see that from here we've got one two three four four attempts the markets gone down but it's actually not been able to follow through on any occasion that it's tried to move lower now it's broken higher it's likely to be the case that will find support between 1325 and 1330 it's a little bit disappointing we haven't closed above 1340 but overall if what Colin's saying is right and you know that there is a distinct possibility that he is given the given what's happening with US inflation the feds say they're not concerned about it but I certainly think there is some inflation building up in the US economy it's certainly borne out in the CPI numbers and it's certainly being borne out in the PC numbers which you know are closing in or around and moving above the 2% level so 1340 we really need to move beyond that but even if we do we're going to run into this resistance line from the August highs last year which currently comes in around about the 1360 area so it's certainly worth keeping an eye on that now obviously we've seen a significant decline in stock markets over the course of the last week or so despite those very very good payrolls numbers I think Christine Lagarde's comments at the weekend and I tend to I tend to take with a little bit of a pinch of salt what the IMF say with respect to growth forecasts but I certainly think on this occasion she probably does have a point I think expectations for growth and economic growth over the course of the next six months are probably slightly inflated if that is the case then certainly valuations probably are a little bit stretched out these levels and we are due a correction now we've got the S&P the S&P has been pretty much one of the massive outperformers when it comes to US stock markets it's made new all-time highs on a fairly regular basis throughout June and July the key support level for it for me we tested it today it's around about 1950 1950 but ideally what I'd like to see it do is take out these twin lows through here around about 1945 1945 through there if we can get through there then I certainly think there's a potential for a significant correction or lower and that's certainly worth something keeping an eye on and it does sort of tie in with a small cap because I don't say something to that before we move on Michael if we take a look at the stochastics between May and July you've got a head and shoulders top forming in the stochastics you've got that first overbought range back at the beginning of May as a left shoulder you've got a head with this huge overbought situation here at the beginning of June and you've got a right shoulder here at and a rising neckline on top of it which Michael has just drawn in and you look like you're starting to break that and as you roll back down from overbought so the rolling back down from overbought is a bearish technical signal the head and shoulders top you can get head and shoulders patterns in stochastics and RSI in MACD they're very rare but when they show up they're very powerful and it's really important for traders to pay attention to them because they're a signal of the of a pretty significant change in momentum but they also do need to be confirmed by the price action absolutely yeah so we've talked about this support line here let's also look at the Euro stocks 50 because that's actually broken a very key support line today and again there's a potential reversal pattern forming here on the daily charts now there is a slight there is this neckline here is not ideal because for me it's sloping the wrong way but it does seem to suggest that we are forming a potential top here but what we need to do with respect to this is take out the twin may lows through here around about 3,125 now at the moment we've seen a strong move lower let's zoom that out we can see that the June lows last year were significant in in the context of this particular up move now what we're looking to see is whether or not we can break down through this support line and test the 200 day moving average now let's also look and test whether or not the slow stochastic is showing the similar sort of divergence that we saw on the S&P and I would hazard a guess it probably is to a certain extent but probably not to the same extent and certainly in the context of the rally that we saw last week with respect to US markets I think it was very very significant but even though US markets made new all-time highs the DAX didn't the Euro 50 didn't the Euro 50 wouldn't have a have anyway because it's not recovered it's 2006 2007 highs but it didn't make fresh highs from the June highs and that for me I think was was very significant in the context of the risk trade you know so why have why have we started to roll over today of all days I think there's a number of reasons for that I think if you look at what bond yields have done over the course of the last few months specifically in Spain Italy Greece and Portugal they've hit all-time lows they've hit the lowest levels even since before the financial crisis now don't know about you ladies and gentlemen but if anyone is suggesting to me that Portugal Greece Spain and Italy are now more credit worthy than they were before the financial crisis then really I think someone must be living in an alternative reality because the fact that Spanish bond yields 10-year bond yields were trading below US bond yields really doesn't come across as economically sound but I think there's one reason behind that and I think that's why there's been an awful lot of concern about this Portuguese bank of spirit who sent to and the solvency issues a lot of the reason why these bond yields have fallen so low is because essentially people have been playing the carry trade they've been looking for yield so they've been putting a lot of these European banks have been basically putting their money into sovereign bonds sovereign bonds that yields that are yielding three four five percent in an environment in Europe which is potentially disinflationary if not deflationary and that in itself and the fact that it's pretty something may go bust then shines a light on the rest of the European banking sector namely Portuguese Spanish and Italian banks and their solvency and given the fact that there are concerns about solvency anyone who has money in sovereign bonds is going to rotate the money out which is why we've seen Portuguese bond yields spike today they've gone up 13 basis points Spanish bond yields have gone up two or three basis points and I think that's why you're seeing a sell-off particularly in the financials either the Spanish banks the Italian banks and the Portuguese banks so that's why you're seeing sell-off in the financials because of the contagion risk if you like and that's a very old phrase but it's still as relevant now as it was two or three years ago when people were worried about the euro breaking apart so for me this this is a lot of what's behind this particular sell-off so if this Portuguese bank gets bailed out or it manages to assuage investor concerns we could get a rebound in stock markets however when you've got the ECB looking at banks balance sheets between now and the end of September and looking to stress test them and looking to stress test their sovereign bond holdings as well then I think it's reasonable to assume that it's going to be I think investors are going to be very very careful about where they put their money going forward which I think means that you could see a little bit of leakage out of Portuguese Spanish Greek and Italian banking stocks as well as see yields start to age higher and that is probably going to have a negative effect on Spanish Italian and Portuguese stock markets who have and which have outperformed since the beginning of 2014 and I think that's also why you're seeing German bond yields hit their lowest levels since 2013 and we can see that borne out by this particular chart here now this is this is the wrong one I'm looking at these I'm looking at the DAX should be looking at the Eurobund here it is now we'll know prices move inversely to yield so we can see here look at the bonds trading almost at 149 and if we now go out to on week we can see that it's more or less back at the levels we saw in 2013 and 2012 if anything it's slightly above there but that suggests to me that there people are investors are putting their money in German bonds they're putting them in UK girls they're putting them in US treasuries which is why we've also seen today US bond yields start to edge lower and treasury prices start edging higher again you can see this is a one-day chart for the US 10-year note and we can see straight away prices are moving higher yields are moving down and that's why the dollar is actually as weak as it is against the yen because it's very very susceptible the dollar yen to what US yields do so when the price moves up the yields move down that depresses and pushes dolly end down and over the past four days we've gone from around about 2.65% to pretty much where we are now which I think is around about 2.54 2.55 I'll have to check my Bloomberg just to make sure that is doubly accurate and then I can drag that over and we can see that here yep 2.5% if I just pull my Bloomberg over we can see that there 2.5% dropping yields rise in prices so the moment ties in gold hire US treasuries up yields down all you're seeing is a classic risk-off trade going on right now I would I would say ladies and gentlemen feel free to fire questions always our way even that's why we're here we want your feedback we want if you want us to look at a particular market you have a particular interest in you know basically please feel free to use the chat facility and let us know that way and a couple of other significant trading opportunities I'd like to share with you and I move on to currencies now unless you want to expand upon anything that I've just been talking about Colin I just want to tell you if you could you bring up the chart for the DAX for one second yeah so we talked about about typing patterns in the in the US market and we're also seeing it in Europe as well look at this chart here in the DAX and this is a classic triple top over the last four or five weeks and on top of that not only you have this triple top coming in at a huge psychological barrier this big 10,000 round number here you tried three times to get through it you couldn't hold it you've actually there's an uptrend here that's actually been broken you're starting to roll over on the DAX it's not just the US markets you're heading into what could be a fairly significant correction for markets around the world and that's important to again I talked about the the Russell and Brett if you start to see more countries and more indices rolling over is indicative that we're heading into what looks to be a long overdue correction let me just redraw that line I just missed that slightly so there's a nice little line coming in there yeah through those lows in March and April it's probably probably not going to actually might extend back to there which the black line underneath is the 200 day moving average so again you know we can see from this particular chart the overall uptrend 200 day moving average is generally a good a good benchmark for overall trends up or down so I certainly think in the context of the DAX now that we've broken below this 9,790 level quite significantly by the looks of it what we really need to see now is for the market to get back above it because we can see from here that it's actually just support on a fairly regular basis okay it's a bit messy around here certainly since May it's actually there's a good support level we've now broken below it it actually is resistance yesterday and today and there's a good chance we could actually test this lower line here from the lows in March and April may get a little bit of buying interest a brief rebound but until such times as we get back above 9,800 then I think there's a good chance that we could go and push lower towards that 200 day moving average and there certainly seems to be the case with respect to the FTSE 100 as well if we look at this chart we've again tested a key trend line support level this particular line I drew earlier today it's on the chart forums if you want to have a look at it on the right hand side if there's a little bubble where you can basically click on the chart and you can look at the analysis that are drawn in but if I zoom this out from the lows that we saw last year we've tested trend line support there on the FTSE 100 we are trading below the 200 day moving average but we've done that on a number of occasions over the course of the last 12 months before breaking back above it for me I think what's more significant is this particular trend line here we've got one two three four this is the fifth touch if we break below it then I think if we break it out and blow it out even further this is a big big long-term trend line here from 2011 that that comes in round about 6500 so if we break below there then we could then in turn push even lower towards that overall trend line there and when you actually look at the gains that we've seen over the course of the last two to three years the correction that we're seeing at the moment isn't you know that's significant what's significant is I think we've seen breakouts not only on the FTSE 100 we've seen them on the DAX and if we also see them on the S&P and the small caps the US small caps in particular then we could well see a ripple through effect on other related equity markets as well and just to reinforce that point we looked at the Euro 50 earlier again look that's the key support level for me 3129 moving on go on sorry could you show the I wanted to go back to one more thing on the DAX please and then move on something to know when we're using momentum indicators is it's important also not just to look at things on where are they overbought or oversold or what line are they crossing but kind of what's the trend and actually could you go back to longer term Michael thanks I wanted to know something here with the stochastics when you've been in the long-term uptrend with the DAX and what do you keep seeing in this in here every time you hit a peak pushes way up into overbought way up into overbought every every month or so every significant top you're seeing the stochastics consistently going up above 80% and what are we seeing all of a sudden in the last two the last two peaks peaking out at 60 rather than as rather than 80 or more that's indicative that your upward pulses are getting weaker your upward momentum is getting weaker and technically you're looking more vulnerable here so there's a lot of ways to look at momentum indicators they're very powerful tools you look to the price action for confirmation but that's another thing to note here there's these lower significantly all of a sudden lower highs the last two rounds on the on the stochastics is also bearish technically I'm sorry Michael now now we can move on to the currency market okay or I'm half hours or well our half hour is up let's look at let's look at dollar Canada because I was looking at this the other day and you've got your own employment report later this week and for me this this this chart here is a daily chart dollar Canada and again this is something that I put on the chart forums now we've broken below the long-term 200 day moving average and I think you know the Canadian employment report tomorrow could be the key catalyst as to where dollar CAD goes next let's pull this out and keep pulling it out and let's keep pulling it out and keep pulling it out the 2012 lows that we saw in dollar Canada are a significant inflection point for this current move higher now we look as if we're going to be running into a little bit of support level and look how many touches there are on this line this is a weekly chart that I'm showing you here but if I just drill it back into a daily you know I think it gives you an indication at how extremely important this particular line is and look at the look at the sideways price action that we're getting at the moment we've got good resistance just above or just below 107 you've got that peak there you've got that peak there so you've got potentially a little top there you've got a number of a number of support areas around about 106 20 106 30 around about there so for me I think the key driver for dollar Canada over the next couple of days is going to be first and foremost whether or not you think the US dollar is going to either significantly weaken or significantly strengthen and certainly the part of the FOMC minutes don't really give us too much in the way of clues with respect to that but also how good or bad is tomorrow's Canadian employment report going to be and given the fact that we're so very very close to this long term trend line now there's certainly a potential trading opportunity in play on that particular currency pair college absolutely it looks like we're headed for a very active time we also had found because we had a fairly sizable down draft here in June this pair had gotten oversold and a lot of what we're seeing in the in the last few weeks is the basically what I call working off an oversold RSI as an example if you want to bring or this got either one and basically what you think is US dollar CAD had become pretty oversold here so it was due for a pause we're getting a pause but to me so far when I when this pattern first started to form I was looking at anything oh this looks like a saucer bottom above a trend line but in fact is as it started to continue to play out it really does now look just look more like a sidewise rectangle consolidation basically working off this oversold condition but still within a larger uptrend if you get a a soft report in the Canadian dollar weekends the first test is as Michael know right here around this 107 if not you're looking at that Fibonacci level a bit above it that's closer to 108 and but if it breaks you've got some pretty significant downside on the on the downside going below 106 there's not really much support a little bit there around the 105 80 but really the first significant support range is back down here in this 104 to 105 channel where it had been had some congestion before so you still have room for a significant another down like here in the in the in the market particularly if you take out that big trend line there and the next Fibonacci level is not till under 103 so you've got quite some room to work with absolutely I mean this is a this this line here is obviously what I've done with 2009 and the rally back so we rallied back 50 percent of the 2009 to 2011 down move the 38.2 was resistance over here and you can see that it all broke out when now we've broken below that so now the real the real asset test I think going forward is you know where do we go from here now I mean I could actually draw some Fibonacci retracements from there to there I'm not going to because I'll do that on a completely separate chart it's one of the nice little things about this I can open a separate chart with with no lines on it at all go to one week go and zoom that out get rid of that moving average spawn resistance moving average line and then what we can do is by using the draw tools look at the Fibonacci retracements and basically do this here okay so we've got the 23.6 that's worked quite nicely there but again the 38.2 look is around 105.60 so that's all 105.60 105.80 we talked about it earlier you know if we do break below 106 all that trend line support that I've drawn in and let's get rid of the 23.6 we don't need that for now drawing the trend line from there sorry from there there it is you know and I think that gives what that gives you is is quite a nice little look into the the overall price dynamics of this particular currency pair moving on to the pound quickly I did something about that earlier this week again what we've got here is a little bit of a rectangle as Colin highlighted earlier me this time it's in the pound we are finding a little bit of a top of 170.80 now I think that for me is quite significant level I think if we break 170.80 then there's a good chance we could go all the way to 170.30 but overall what I'm looking for is a slow decline back to around about 170.40 and maybe even a little bit lower overall simply because I think expectations about a rate hike in the UK are still I think more more suited to the downside than the upside people are speculating that we may get a rate hike this year I'm probably in the skeptics camp where that comes in what I'm looking at is the relationship between average earnings growth and we're in inflation and at the moment average earnings are lagging way behind that and I think it's unlikely that the Bank of England will move on rates while that ratio is as wide as it is therefore I think expectations are further sterling strength in the short to medium term will be probably dictated more by what the dollar does than what the pound does finally finishing off with Euro dollar unless you have anything to add Colin we're in a range with that and I see no reason for us to change that range looking again long-term trend lines it's amazing how similar these charts are the 2012 lows that's basically when Mr. Draghi said he'd do whatever it takes to save the euro since then we've gone slowly ratcheted higher we're now finding up we've got a massive support line around about 135 that that was the B meeting in June which saw us move sharply lower on the negative deposit rate and the announcements of the TL TRO and of course he said well actually we're not going to do it until September October and we went all the way back up again before trading sideways for the moment or 135 137 that is pretty much the range of it and until such times we take out that 135 low or that trend line support on Euro dollar I don't think we're going to see much downside I think there's more risk of upside than downside anything else you want to add ask us ladies and gentlemen if not we'll leave this as it is and in the process what we will then do is we will post the recording on YouTube if you want to listen to any of it back any questions ladies and gents all good okay well thanks very much for attending I'd like to thank you and I'm sure Colin would like to thank you as well don't forget we have a weekly webinar that we do every Monday afternoon at 12 15 if you want to sign up for that you can do so from our website otherwise I'd like to thank you all for attending and hopefully join us at the same time next month for this once a month chat between myself and Colin about what the markets are doing and what's looking on what the outlook is going forward