global technical outlook fall 2012 canada

Global Technical Outlook – Fall 2012From Risk to a Fiscal Cliff

George Davis, CMT Managing Director and Chief Technical AnalystRBC Dominion Securities Inc. (416) [email protected]

November, 2012

This report was priced between November 13-14, 2012 unless otherwise stated.

Please see page 31 for Required Disclosures.

FIC TECHNICAL STRATEGY I RESEARCH

Intermarket Focus: Key Relationships to Monitor SECTION I

The risk trade may encounter headwinds in 2013 due to the US fiscal cliff.

We present some of our most preferred intermarket metrics to monitor the risk environment in this regard.

Relative asset class performance is discussed based on our intermarket framework, with stocks leading the way and the USD lagging.

3

S&P 500 Expected to Peak into Year End

S&P 500 Index: Key Support & Resistance Levels:

Support: 1359 1317 1267Resistance: 1396 1450 1475

Source: Bloomberg, RBC Capital Markets

Strong resistance at 1524 and against 2007 secular high @ 1576

200-dma now in play, with close below 1359 adding to bearish sentiment. Close below the ascending channel base at 1317 would signal

an end to the long-term uptrend; signal resumption of bear market

Stock rally losing momentum as bearish study divergence forms; diminishing

marginal returns from stimulus

Past rallies peak with stochastics in the

86-94 regionStudies move to overbought levels

200-dma

BASE CASE: Stock rally falters into year end as

fiscal cliff concerns grow; risk pendulum shifts QE 1

QE 2

QE 3

LTRO 1 & 2

4

ADXY is a Good FX Proxy for Risk in Current Environment

ADXY: Key Support & Resistance Levels:

Support: 116.87 116.16 115.43Resistance: 117.98 118.68 119.81


ADXY has initial support @ 117.39. A close below the trendline @ 116.87 would trigger a bearish trend reversal and flag a breakdown in risk sentiment; would corroborate

recent breakdown in S&P 500

Bearish trend reversal for S&P 500 introduces downside risks for ADXY

Correlation between ADXY and S&P 500 has been declining since early September

5

AUD/JPY Diverges From Recent “Risk Off” Backdrop

AUD/JPY: Key Support & Resistance Levels:



Recent trend reversal for stocks has yet to be corroborated via AUD/JPY, but introduces

downside risks for the cross

Close below trendline @ 80.85 would flag erosion in risk sentiment and expose a key quadruple bottom near 79.31 in AUD/JPY

AUD/JPY has higher correlation with S&P 500 (0.61) than does EUR/JPY (0.53)

6

Stocks and Bonds Comfortable With “QEternity”

Breakdown in tight overlay relationship between S&P 500 and US 10-year yields

Widening in overlay suggests that the market is moving into “acceptance mode” on QE

Source: Bloomberg

7

EUR/USD Tracks Ratio of Fed/ECB Balance Sheet

QE 2

Currency of country implementing stimulus tends to weaken initially

Overlay relationship suggests that EUR/USD rally may have gone too far; leads to correction

Source: Bloomberg

LTRO 1 & 2

QE 3 and ECB bond buying programme

8

Italian Bond Futures & EUR: Proxies for Eurozone Risk

BTP Futures: Key Support & Resistance Levels:



Intermarket rallies for BTP futures and EUR/USD tend to signal positive risk sentiment and vice versa

Recent breakdowns for BTP futures and EUR/USD suggest a more cautious

attitude toward risk

Correlation between BTP futures and EUR increasing

9

Key Risk: Chinese Growth Slowdown to Weigh on AUD?AUD/USD forms double top as downtrend in

Shanghai Composite continues

Downtrend in the Shanghai Composite may be weighing on AUD/USD

Shanghai Composite: Key Support & Resistance Levels:



Close below 2012 low at 1999 in SHCOMP would reignite Chinese growth concerns; watch AUD/USD breakdown in this context

10

DXY and Bund Futures Reinforce Improvement in Eurozone

Bund Futures: Key Support & Resistance Levels:



Moves in DXY and Bund futures have mirrored tone in risk sentiment: rally = risk off, selloff = risk on

Recent bullish trend reversals signal a shift to more of a risk off backdrop. Historical spread between these two instruments suggests that narrowing may

take place into the New Year

11

Watch Inverse Relationship Between Copper/Gold & CDX

Copper/Gold Ratio: Key Support & Resistance Levels:



Close above resistance @ 108.32 for CDX IG Index would produce bullish trend reversal and corroborate a deterioration in the risk backdrop

CDX Investment Grade Index is testing resistance after the copper/gold ratio pierces support. This inverse relationship

underscores a more negative risk backdrop

Recent bearish trend reversal in copper/gold ratio is a bad omen for risk sentiment

12

Copper/Gold Ratio: Intermarket Implications for Asset ClassesBearish breakouts for S&P 500

and copper/gold ratio ...

... accompanied by bullish trend reversal in DXY ...

... and a rally in US 10- year yields

Source: Bloomberg

13

Monetization of Gold and the Debasement of Money

Gold/DXY Ratio: Key Support & Resistance Levels:

Sup: 20.6 19.9 18.9Res: 22.9 23.4 25.6Source: Bloomberg, RBC Capital Markets

Negative intermarket relationship between gold and DXY: bullish breakout for gold

accompanied by bearish trend reversal in DXY

Gold: Key Support & Resistance Levels:

Sup: 1697 1667 1617Res: 1752 1797 1811Source: Bloomberg, RBC Capital Markets

Bullish triangle/pennant breakout for gold/DXY ratio targets resistance levels @ 22.9 and 23.4, followed by the 2011 high @ 25.6.

Pattern objective is ~26.2

Rally in gold/DXY ratio illustrates debasement of money

Past triangle breakouts have led to gains

Negative correlation between gold and DXY

14

Relative Asset Class Performance: Pause in Recent Trends

Stocks have been the big winners in the “risk sweepstakes”; USD the “biggest loser”

Source: Bloomberg

Stocks outperforming

bonds

Commodities start to outperform bonds again

Commodities break out versus USD

Stocks outperforming USD

Stock outperformance vs commodities reaches

multi-year high

Downtrend depicts USD underperformance versus

bonds

Foreign Exchange Overview SECTION II

The USD posted bearish trend reversals against most major currencies in September.

The “risk off” trade remains a threat to USD weakness.

Equities remain a key variable for directional bias in USD/CAD.

16

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

World equities Crude oil Base metals 2yr CA-US swap spreads

USD/CAD: Equities Still Hold the Key

Equities remain “the” variable to watch for directional bias in USD/CAD; crude

oil less significant

1-year weekly rolling change


Note that equities are also a key intermarket variable in the “risk

on/risk off” theme

17

USD/CAD: Trapped in a Triangular Consolidation

Resistance @ 1.0101 and 1.0359 (triangle top) expected to attract

selling interest. Place stop for bearish view above 1.0658

Symmetrical triangle pattern is expected to resolve itself

to the downside

USD/CAD: Key Support & Resistance Levels:



Close below 0.9535 would confirm bearish implications of triangle pattern; open up double bottom near 0.9407, followed by

2007 low @ 0.9058

Studies oversold

200-dma

18

USD/CAD – Hedging Strategies for H1 2013

The risk theme (via equities) is “the” key driver of directional bias in USD/CADSymmetrical triangle pattern presents downside risks in conjunction with long-term downtrend Argues to fade rallies in USD/CAD – and monitor triangle base at 0.9535 closely

Key Themes:

Moves to 0.9633, 0.9535 and 0.9407 are viewed as a buying opportunityReduce exposure on a monthly close above 1.0658 (stop loss level)Monitor equity markets (risk aversion) for directional bias and possible trend changes

Buyers of USD/CAD:

Use rallies to resistance at 1.0101, 1.0359 and 1.0524 as a selling opportunityReduce exposure on a break below support at 0.9535 (stop loss level)Long-term downtrend in place drives hedging behavior

Sellers of USD/CAD:

19

Correction in DXY Comes to an End in September

Resistance @ 82.48 and 83.50 expected to attract selling pressure. Use channel/triangle top @ 86.09

as a stop for bearish view

Studies approach oversold levels

DXY: Key Support & Resistance Levels:



Break below 200-dma and bearish trend reversal reasserts long-term downtrend in USD. Support located @ 80.25 and 78.87, followed by 76.44

Correction fails to reach 61.8% retracement level

200-dma

20

EUR/USD Fails to Pierce Key Resistance at 1.3097EUR/USD must pierce key resistance trendline @

1.3097 in order to trigger a bullish long-term trend reversal; would expose 1.3172 and 1.3386 ahead of

50% retracement level @ 1.3491

Studies nearly overbought

EUR/USD: Key Support & Resistance Levels:



Support located @ 1.2444 and 1.2254. Close below the 7-year trendline @ 1.2011 is required for new bearish phase

200-dma

21

Watch Falling Wedge Top at 1.2924 in EUR/CADNote the recent failed test of the falling wedge top. This level – at 1.2924 - must be pierced in

order to trigger a bullish long-term trend reversal. Would expose 1.3351/1.3481 area next

Support located @ 1.2576 and 1.2353. Close below the latter level would nullify the topside potential and expose the low @ 1.2129 ahead of the wedge base at 1.1888

EUR/CAD: Key Support & Resistance Levels:



Neutral valuations

200-dma

22

EUR/JPY Features Downtrend Pivot at 106.78

Close above resistance at 103.47 would shift focus up to key falling wedge top @ 106.78. A close above this level would end the downtrend and favour a sharp acceleration

higher (would highlight 108.00 and 111.44 next)

Support located @ 99.64 and 97.34. Must pierce recent secular low @ 94.12 to re-engage downtrend

(would expose wedge base @ 92.91)

EUR/JPY: Key Support & Resistance Levels:



Neutral valuations

200-dma

Fixed Income Market Overview SECTION III

10-year yields in the US and Canada remain in intermediate downtrends.

Back-ups in yields are expected to be limited in the current environment.

A flattening bias is in place for various Canadian curve spreads.

24

CAN 10-Year Yield Remains in a Downtrend via Channel Initial yield resistance located @ 1.87. Must pierce channel top @ 1.95 in order to produce a bearish

trend reversal and signal a shift in sentiment

Double top @ 2.00 halts recent back-up in yields

CAN 10-Year Yield: Key Support & Resistance Levels:



Resolution of divergence

Close below support @ 1.69 would add to bullish momentum, expose 2012 secular low at

1.57 again. Channel base is @ 1.36

200-dma

25

US 10-Year Yields Fail to Break Substantially Higher

Double top @ 2.42 expected to cap the topside in yields in current environment

US 10-Year Yield: Key Support & Resistance Levels:



Close below support @ 1.54 would add to bullish momentum, exposing 1.44 and cyclical low @ 1.38 again

Must close above redrawn resistance @ 1.78 in order to reaffirm bearish implications of falling wedge pattern; would expose secondary

yield resistance @ 1.89/1.94 ahead of 2.29 (38.2% Fibonacci retracement of 2011-2012 rally)

Resolution of divergence

Commodity Market Overview SECTION IV

Crude oil looks vulnerable to the downside based on the formation of a descending triangle pattern.

Natural gas prices have entered a corrective phase, creating downside risks for the crude/nat gas ratio.

Gold looks appealing after the bullish breakout from a symmetrical triangle pattern.

27

Crude Oil: Descending Triangle Pattern Calls for Caution

Support located @ 84.05, followed by key quintuple bottom @ 78.30. Close below 78.30 would resolve triangle pattern to the downside

Descending triangle pattern favours downside resolution. Suggests that resistance @ 96.74 and 102.37 should

attract selling interest

Crude Oil: Key Support & Resistance Levels:



Neutral valuations

Close above 106.08 would nullify bearish implications of the triangle pattern

200-dma

28

Natural Gas Enters a Corrective Phase

Support located @ 3.32 and 3.11. Close below channel base @ 3.11 would produce bearish trend

reversal and effectively end correction

Natural Gas: Key Support & Resistance Levels:



Studies losing upward momentum?

Trend reversal leads to development of ascending channel pattern as part of

corrective phase

200-dma

Must pierce channel top @ 4.04 in order to extend corrective phase. Would expose 4.56 and 4.96 as next topside targets

29

Crude/Nat Gas Ratio Poised to Move Lower

Trend reversal below 25.2 sustains descending channel

pattern in crude/nat gas ratio

Close below initial support @ 22.4 would add to downside momentum in ratio, expose 20.5/21.0 region next

Crude/Nat Gas Ratio: Key Support & Resistance Levels:



Resistance located @ 24.6 and 25.9. Close above channel top @ 25.9

required to reverse current downtrend

200-dma

30

Gold Regains its Shine After Triangle Breakout

Bullish breakout from symmetrical triangle pattern features resistance between 1796/1809 (a triple top), followed by 1928. The pattern has a measured move

objective of ~ 2089

Support @ 1668 and 1624 expected to attract buying interest. Additional support located @ 1564, with a close below the triangle base @

1556 required to nullify the bullish view

Gold: Key Support & Resistance Levels:



Overbought valuations

200-dma

31

Required Disclosures

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32

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global technical outlook fall 2012 canada

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