The Complete German Election Preview: The Worst Case Scenario

by Tyler Durden

The 2013 German federal elections may bring about pretty complicated results. With Merkel's junior coalition partner's (FDP) support dropping below the mandated 5% to enter parliament (according to polls), as Deutsche Bank notes, there is no point in working through the numerous possible coalition scenarios and options. In that case, the task of governing Germany and providing joint leadership in European affairs will become much more complicated than it used to be in normal times of a clear-cut victory for one camp. All inter-camp coalitions may well have a built-in tendency towards paralysis and require special political tricks that allow the partners to show their true colors in clearly circumscribed policy issues while not rocking the boat. A few years from now, September 22, 2013, might be remembered as the day when German politics finally became normally complicated, as in other countries, too. There are two major political narratives that appear dominant currently.

Via Deutsche Bank,

In normal times, a popular leader, an all-time employment record and the traditional conservatism of the German electorate ought to suffice to keep a conservative chancellor in power. A recent poll by the Institut für Demoskopie Allensbach found that respondents did not think the election would matter much, a big majority expected a victory for Merkel (63%) and only one-third of respondents favoured a change in government. For the Social Democrats to win, it often takes deep-seated dissatisfaction of the electorate with the conservative incumbent, a generally strong desire for substantial policy change and an SPD candidate who possesses most outstanding leadership qualities. In the last century, it usually took a shift of the Liberals to the SPD caucus, too. That has happened every twenty years or so. Staying in power for another term is usually possible.

Yet why are the 2013 elections not a foregone conclusion? What’s wrong with 2013? Why should we bother at all about what some observers call a “non-event”? The answer is much more nuanced than one might think. It is not the impact of the financial crisis that is shaping German politics directly these days, even though different policy responses to the crises dominate the party platforms and the ideas driving them.

Why 2013 is quite special

The 2013 elections might be quite special in that longer perspective, once again. The change in electoral law will make the German system much more like a strict proportional system in which additional mandates of one party due to the first vote being much stronger than the proportional second vote (Überhangmandate) will be fully offset (Ausgleichsmandate). Therefore, the combined second vote of the centre-right political camp is the crucial factor to watch. While this number hovered above 50% from 1953 to 1990, it decreased to 41% in 1998 but recovered to some 45-46% in the 2002 and 2005 elections and to 48.4% in 2009. Based on current polls, some seven to nine per cent of the vote may be for parties which will not likely pass the 5% threshold and thus not be represented in parliament. This implies that 45.5-46.5% of the combined vote may this time suffice for a majority in parliament.

...

Clearly, the trend towards a multi-party system with five/six major parties (counting CDU and CSU as separate parties gives us the number of six) and at least two small new parties – Pirates and the AfD (Alternative for Germany) matters.

Until 1982, there were only three parties, until 1998 the Greens became number four, since 1998 the Left Party has been represented in most parliaments with the exception of the 2002-05 legislature.

...

If the AfD were to enter parliament, it would probably attract voters from the centre-right camp in no small measure. This could directly reduce the Liberal vote to below five per cent or erode enough of the centre-right camp to drive it below the majority threshold. If the AfD enters parliament, any coalition will likely have to come close to a combined vote of 47.5% or more. If the election result of the centre-right camp were to be worse than the current polling by more than two percentage points, the options for forming a new government would dramatically narrow down to one or two mathematically and politically feasible options.

Who will run Germany next?

There is no point in working through the numerous possible coalition scenarios and options. On policy grounds, a CDU/CSU – SPD “Grand Coalition” government would be feasible but it is being very firmly dismissed by the SPD, still. Also, a coalition of CDU/CSU and Greens might be considered. All other options are almost too theoretical to mention. In any case, considering the primary political purpose of the next coalition will be the most important consideration that will take hold after September 22 if a simple continuation of the current coalition or a clear-cut shift to a SPD-Green government is not feasible. There are two major political narratives that might work.

Narrative number one works like this:

Germany must remain the economically strong stabiliser of the euro area, it needs more public investment and some additional targeted transfer payments financed out of budget surpluses if they materialize. The coalition sticks to a balanced budget and does its homework on setting up a new fiscal framework for the federal level and the states which is due in 2020, anyhow. The political climate for deep reforms of either social security systems, labour markets and education does not yet exist – this is politics for the next election. The parties cannot agree on new taxes (apart from a FTT) and will address some shortcomings in the labour market. This narrative could be told by both the CDU/CSU and the SPD. They could bring a collection of seasoned politicians into the cabinet. All truly controversial issues would be shelved, and the energy portfolio would be jointly managed. The real policy alternatives would be tabled in 2017 again. The SPD could once again try proving that it is ready to govern and would look optimistically towards running in 2017 with a new candidate and more luck. The CDU could cope and by and large pursue its objectives, albeit with a lot of compromises.

Another Grand Coalition would have an easier time with the Bundesrat, too, in which the SPD runs states that have a total of 30 votes out of 69 and in which it is the junior party to the CDU in even more states that have a total of another 18 votes. CDU/FDP jointly have 21 votes in the Bundesrat right now. If there are no changes to conservative governments in Bavaria (elections on September 15) and Hesse (on September 22), this would remain the case for quite some time. On European affairs, some pretty significant differences on details of the banking union and growth-promoting policies at the European level would have to be hammered out.

The drawback is insufficient political distinction for both major parties and a potential next round of bad luck for the SPD at statelevel elections and/or the federal level given the greater prominence of the Chancellor in such a government.

The second narrative would be that all politically easy solutions do not work right now, which is why something new has to be tried.

CDU/CSU and Greens agree to bridge the gap between their camps and allow some greening of the economy within the tight constraints of balanced budgets, no new taxes and no significant regulation or deregulation of the economy at large. On European issues, the Greens would try pushing in federalist directions but the conservatives would call the intergovernmental shots. The real difficulty of getting there is the repositioning of the Green Party to the left of the SPD on many classic tax-and-spend and regulatory issues which is upheld by party resolutions. Joining a government with the CDU/CSU would be pretty controversial for the party against that background.

If this coalition were not to work well, then the exercise could be terminated at will early on. Building such a coalition would not be that difficult as the Greens would roughly replace the Liberals, with some reshuffling of portfolios. However, on important issues consensus would have to be sought with the Social Democrats in particular to achieve majorities in the Bundesrat. Of course, the price of “yes” votes from SPD-led governments in the Bundesrat would be predictably higher if the SPD were not part of a federal government. Whether and how the politics of such a split system would work is impossible to predict. It might work in narrowly circumscribed instances such as euro area policies, the energy turnaround or enhanced investment in education and transportation. The drawback would be insufficient transparency and political accountability in such a multi-layered system.

The 2013 federal elections may bring about pretty complicated results. In that case, the task of governing Germany and providing joint leadership in European affairs will become much more complicated than it used to be in normal times of a clear-cut victory for one camp. All inter-camp coalitions may well have a built-in tendency towards paralysis and require special political tricks that allow the partners to show their true colours in clearly circumscribed policy issues while not rocking the boat. A few years from now, September 22, 2013, might be remembered as the day when German politics finally became normally complicated, as in other countries, too. It might, albeit indirectly, be a consequence of small shifts in the party system in response to the euro crisis. Even rock-solid political systems do not live on political islands.

If the current coalition does not have a majority in parliament, building a new government will be quite difficult and depend heavily on the specific outcome. A CDU/CSU-Green coalition or another Grand Coalition of CDU/CSU and SPD might be the only options in town. On many policy issues, difficult compromises would have to be found. On European issues, only slight changes in the policy positions on banking union and other issues would be plausible.

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Syria and September 11

by Aryeh Neier

PARIS – By chance, it appears that the US Congress will decide on or around September 11 whether to endorse President Barack Obama’s proposal to respond militarily to the Syrian government’s use of poison gas against civilians. The shadow of two previous events that took place on September 11 looms over the outcome – indeed, over the fact that the question is even being considered at all.

Illustration by Paul Lachine

Long before September 11 became a day of infamy in the United States, it acquired similar significance in Chile, where 40 years ago, on September 11, 1973, the armed forces, led by General Augusto Pinochet, overthrew the country’s democratically elected government. More than any other event of our era, that violent coup was responsible for launching both the contemporary global movement for human rights and the American movement to promote human rights internationally.

In part, this reflected the new regime’s cruelty. More than three thousand people were murdered or “disappeared” during Pinochet’s rule, thousands more were tortured by his forces, and tens of thousands were forcibly exiled. To an even greater extent, however, the motivation that spurred the human-rights movement was revulsion worldwide, including in the US, against American aid to Pinochet’s forces, a policy directed by President Richard Nixon and Secretary of State Henry Kissinger.

In the US, members of Congress turned the coup into a platform for efforts to promote human rights. They condemned developments in Chile, held hearings about the importance of promoting human rights, and adopted legislation – over President Gerald Ford’s veto – requiring that human-rights standards guide US foreign policy.

A slightly revised version of that legislation remains in force. Obama’s proclamation that the use of chemical weapons in Syria would cross a “red line” – and his implicit threat to use force if that line were crossed – reflects the commitment that the US has made during the past four decades to promote human rights worldwide.

The events of September 11, 2001, are also playing a crucial role in deciding the question of a punitive strike against Syrian President Bashar al-Assad’s regime. One consequence of the terrorist attacks 12 years ago is that Americans and others in the West became aware that developments in the Middle East could affect their own safety and security.

Initially, the attacks unleashed a strong desire to retaliate, which later gave way to caution about intervention, owing to unforeseen consequences. In Britain, continuing intense resentment over the deceptions that led to the country’s engagement in the Iraq war seems to be the main reason for Parliament’s refusal to back a strike against Syria. Wariness of another Middle East war has also underpinned Obama’s unwillingness to go beyond a one-time punitive strike on Syria – with some in Congress opposed to even that.

Though Congress must guard against repeating its disastrous mistake in 2003, when it supported the war in Iraq, the commitment to promote human rights that the US made following September 11, 1973, seems a more appropriate standard for weighing Obama’s proposal for US military action in Syria. Maintaining the international prohibition on the use of chemical weapons is an urgent concern.

The Assad regime’s culpability for using these weapons is not in doubt. If the US Congress deals with Obama’s proposal responsibly, and does not yield to those motivated by a partisan desire to embarrass him at every turn, it will enhance its own claim to recapture the constitutional power to authorize military conflict – a power that has been disregarded more often than not in the past half-century. A critical part of its role must be to consider with care the limits that should be placed on a punitive strike.

The war in Iraq was misconceived from the start, because it was an attempt to avenge the September 11, 2001, terrorist attacks by invading and occupying a country that had no part in them. Obama’s proposal to strike Syria, by contrast, is an attempt to enforce an important human-rights norm by directly punishing – through means that do not involve invasion and occupation – those who committed a gross violation. It restores human rights to the central place in American foreign policy set forth after September 11, 1973.

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Crude Oil’s Relationship with Oil Stocks and Gold

By: Nadia_Simmons

In our previous Oil Update we examined major factors, which previously fueled the price of light crude. Before we move on to the technical part of our Oil Update, let’s take a closer look at the events of the previous week.

At the beginning of the last week President Barack Obama won the backing of key figures in the U.S. Congress, including Republicans, in his call for limited strikes on Syria. Additionally, a missile test by Israeli forces training in the Mediterranean with the U.S. Navy set nerves on edge. These circumstances fueled the oil market and resulted in a sharp pullback to over $108 per barrel. In spite of this growth, in the following days, the price of light crude was trading in the narrow range between the Tuesday’s low and top.

Looking at the chart of crude oil, we can conclude that investors came back to focusing on economic data, because further improvement in the U.S. labor market is the key for the Fed to begin scaling back its $85 billion a month of bond purchase. Friday's data showed that U.S. employers hired fewer workers than expected in August and the jobless rate hit a 4 and a half year low as Americans gave up the search for work.

The weaker-than-expected U.S. payroll numbers for August raised doubts about whether the Federal Reserve will start paring its massive stimulus and resulted in higher prices of light crude.

Another factor, which fueled the price of light crude was the G20 summit in St. Petersburg. According to Reuters, crude oil rose 2% after President Obama told, that failure to act against Syria's use of chemical weapons would embolden "rogue nations" to use them too. The U.S. President has faced growing pressure from Russia, China, the European Union and major emerging market countries not to carry out a strike without support from the U.N. Security Council. Taking the above into account, there are concerns about how the crisis could affect relations between Washington and Russia and China.

In spite of this, the main worry now is that Iran, an ally of Damascus, could get involved if the United States goes ahead with attacking Syria. In this case, the entire region could become inflamed yet further, causing major oil supply problems.

What impact did these circumstances have on light crude? Crude oil climbed above $110 per barrel. This is a largest weekly percentage gain in two months, at 2.7%, the highest since July 5. It is also the largest daily percentage gain since August 27.

Keeping in mind these factors and their impact on the price of light crude, let’s now move on to the technical part of our Oil Update. Just like a week ago, we take a look at the charts from different time perspectives to have a more complete picture of the current situation in the oil market.

Let’s start with a look at the monthly chart of light crude (charts courtesy by http://stockcharts.com).

Looking at the above chart, we see that the situation hasn’t changed much.

Quoting our last Oil Update:

(…) light crude still remains above the two long-term declining resistance lines: one of them (bold red line) is based on the July 2008 and the May 2011 highs, and the second one is based on the September 2012 and March 2013 highs (the upper black line).

From this perspective the picture is bullish and the breakout above these two long-term declining resistance lines hasn’t been invalidated.

Now, let’s zoom in on our picture of the oil market and see the weekly chart. 

On the above chart, we see that the situation has improved recently. Although the price of light crude dropped below $105 per barrel at the beginning of the previous week, oil bulls didn’t give up and pushed it higher in the following  days. In this way crude oil reached the strong resistance zone based on the March 2012 top and the upper border of the rising trend channel once again.

Taking the above into account, we should consider two scenarios. If the buyers manage to break above this strong resistance zone, the first price target will be close to the May 2011 top. However, if they fail, history will likely repeat itself and the price of light crude will come back to the consolidation range. In this case, the first price target for sellers will be around $105 per barrel.

From this point of view, the outlook is still more bullish than not at this time.

Now, let’s check the short-term outlook.

In this daily chart, we see that the situation has improved in the recent days. At the beginning of the previous week the price of light crude dropped below $105 and reached the rising support line based on the August 8 and August 21 lows (marked in black). It’s worth noting that this area was also supported by the 50-day moving average, which stopped the decline in June and, again, at the end of August (it was not even reached). In both previous cases this moving average encouraged buyers to act, which resulted in a sharp rally in the following days.

As you see on the above chart, we had a similar situation in the previous week. Light crude rebounded to over $110 per barrel and climbed above the March 2012 on an intraday basis, however, the breakout was not confirmed.

At this point it’s worth mentioning that the recent correction is shallow and similar to the previous ones, which is a bullish factor. Additionally, when we factor in the Fibonacci price retracements, we clearly see that the recent corrective move has been quite small because it hasn’t even reached the 38.2% level.

When we take a closer look at the above chart, we see that a consolidation has been formed in the recent days. On Friday, buyers managed to break above the Tuesday’s top, which (according to theory) should result in further growth and the price target for the pattern is below the May 2011 top (around $113.45).

Where are the nearest support levels? The first is the 50-day moving average (currently at $105.52). The second one is the rising line based on the August lows (slightly below $105). The third one is the Tuesday low at $104.21. The next one is a zone (between $102.22 and $103.50) based on the bottom of the previous corrective move (the August 21 low) and the August low. As you see, there is also the 38.2% Fibonacci retracement level, which reinforces this support zone.

Summing up, although there was a downward move, which took the price of light crude below $105, technically, the short-term outlook for light crude is still bullish. The uptrend is not threatened at the moment, because the recent decline was shallow and similar to the previous ones.

Once we know the current outlook for crude oil, let’s examine the NYSE Arca Oil Index (XOI) once again to find out what the current outlook for the oil sector is.

Let’s start with the long-term chart.

On the above chart, we see that the situation hasn’t changed much. We’ve been seeing a consolidation in the recent months and the NYSE Arca Oil Index is trading between the July top and the July low.

The XOI remains quite close to the May 2011 top and it’s still above the previously-broken long-term declining resistance line based on the 2008 and the 2011 highs and the breakout hasn’t been invalidated. The oil index also remains in the range of the rising trend channel.

Taking the abovementioned observations into account, the situation is still bullish.

Let’s take a closer look at the weekly chart.

Looking at the above chart, we see that most of what we wrote in our last Oil Update is up-to-date today.

(…) the NYSE Arca Oil Index still remains above the medium-term support lines. Keep in mind that the strong support line (marked in black) stopped the decline in June, which resulted in a rally in the following weeks.

Please note that we should still keep an eye on the above-mentioned support line, because it is also the lower border of the rising wedge. As you know, this is a bearish pattern and if buyers fail, it will likely lead to a decline which may take the oil index at least to the lower medium-term support line (the red one).

The medium-term uptrend is not currently threatened, and the situation remains bullish.

What about the relationship between light crude and the oil stocks?

When we take a look at the above chart and compare weekly closing prices in both cases, it may seem that oil stocks were weaker in the previous week, because they didn’t reach a new local top in terms of weekly closes. As you see, light crude close the whole week above the closing level of February 21, 2012. However, it’s worth noting that the XOI climbed above this level at the end of January. Additionally, light crude still remains below the May 2011 top.

Now, let’s turn to the daily chart.

Quoting our last Oil Update:

(…) it’s worth noting that the XOI closed the previous week at the 50-day moving average, which still serves as support. If it holds, we may see a pullback to the Wednesday high.

As you see on the above chart, the 50-day moving average stopped further declines and encouraged oil bulls to push the oil index higher. In this way, the XOI came back above the 61.8% Fibonacci retracement level (based on the entire July-August decline) and closed the previous week slightly above the July 30 low (in terms of daily closing prices).

Please note that the next resistance level is the declining line based on the May and July highs (currently close to the 1,404 level). If it is broken, the buyers’ next target will be the July peak, and then the May top.

The nearest support is at the 50-day moving average (currently at 1,373.74). The next support zone is based on the August 27 and August 30 lows (1,361-1,364), and a further one is based on the August 21 bottom and the 61.8% retracement level (1,338-1,339).

On a side note, we’ll comment on the relationship between the WTI and the XOI in the short term. Despite the negative divergences at the beginning of the previous week, the second half looked pretty much the same in both cases and we saw increases.

Summing up, from the long and medium-term perspectives the outlook for oil stocks is still bullish and the uptrend is not threatened at the moment. Taking into account the relationship between light crude and the oil stocks, it seems that crude oil is still a step behind the oil index. 

Speaking of relationships, let’s take a closer look at the chart below and check the link between crude oil and gold. Has it changed in the recent days? Let’s examine the daily chart.

In the last week of August we noticed that light crude hit its top a bit earlier and when we saw a downward move in oil, gold was still rising. However, after the yellow metal reached its highest level during Wednesday’s session, light crude accelerated its declines. In the following days both commodities continued to show weakness.

On the above chart we see that in both cases the buyers stopped the downward move on Tuesday. In the days following the sharp pullback, crude oil was trading in the narrow range between the Tuesday’s bottom and top. What’s interesting, at the same time gold declined once again. In other words, the consolidation in light crude triggered another move lower in gold. Despite the negative divergences, the last session of the previous week looked pretty much the same and in both cases we saw growths.

Taking the above into account, it’s worth taking a closer look at the medium-term outlook for gold.

Let’s turn to the weekly chart of the yellow metal.

In our last Oil Update we wrote:

(…) gold (…) reached a strong resistance zone based on three important levels: the first of them is the June’s top; the second one is the April’s bottom (in terms of weekly closes); and the third one is the 38.2% Fibonacci retracement level based on the September 2012 - June 2013 decline.

As you see on the above chart, the yellow metal attempted to move above this resistance zone once again, but this try failed for the second time, and the breakout was invalidated.

The medium-term situation seems quite bearish and if gold drops below the declining resistance line based on the October 2012 and February highs the outlook will be even more bearish.

Summing up, taking the long and medium-term relationship between light crude and the oil stocks into account, it seems that the oil index is a step ahead of crude oil. If this assumption is true, in the nearest future we will likely see an upward move in crude oil to at least the May 2011 top. Looking at the relationship between crude oil and gold, we first noticed the negative divergence. As we previously wrote, the consolidation in light crude triggered a downward move in gold. Additionally, crude oil broke above the Tuesday’s top and approached the September top on Friday. Meanwhile, gold was trading significantly below the Tuesday peak, which is a bearish sign. Taking this into account and combining it with the current situation in the yellow metal, it seems that the acceleration of the downtrend in gold is still ahead of us. Connecting the dots, the short-term link between the yellow metal and crude oil may wane in the coming weeks.

Looking at the chart of crude oil, we can conclude that investors came back to focusing on economic data, because further improvement in the U.S. labor market is the key for the Fed to begin scaling back its $85 billion a month of bond purchase. Friday's data showed that U.S. employers hired fewer workers than expected in August and the jobless rate hit a 4 and a half year low as Americans gave up the search for work.

The weaker-than-expected U.S. payroll numbers for August raised doubts about whether the Federal Reserve will start paring its massive stimulus and resulted in higher prices of light crude.

Another factor, which fueled the price of light crude was the G20 summit in St. Petersburg. According to Reuters, crude oil rose 2% after President Obama told, that failure to act against Syria's use of chemical weapons would embolden "rogue nations" to use them too. The U.S. President has faced growing pressure from Russia, China, the European Union and major emerging market countries not to carry out a strike without support from the U.N. Security Council. Taking the above into account, there are concerns about how the crisis could affect relations between Washington and Russia and China.

In spite of this, the main worry now is that Iran, an ally of Damascus, could get involved if the United States goes ahead with attacking Syria. In this case, the entire region could become inflamed yet further, causing major oil supply problems.

What impact did these circumstances have on light crude? Crude oil climbed above $110 per barrel. This is a largest weekly percentage gain in two months, at 2.7%, the highest since July 5. It is also the largest daily percentage gain since August 27.

Keeping in mind these factors and their impact on the price of light crude, let’s now move on to the technical part of our Oil Update. Just like a week ago, we take a look at the charts from different time perspectives to have a more complete picture of the current situation in the oil market.

Let’s start with a look at the monthly chart of light crude (charts courtesy by http://stockcharts.com).

Looking at the above chart, we see that the situation hasn’t changed much.

Quoting our last Oil Update:

(…) light crude still remains above the two long-term declining resistance lines: one of them (bold red line) is based on the July 2008 and the May 2011 highs, and the second one is based on the September 2012 and March 2013 highs (the upper black line).

From this perspective the picture is bullish and the breakout above these two long-term declining resistance lines hasn’t been invalidated.

Now, let’s zoom in on our picture of the oil market and see the weekly chart. 

On the above chart, we see that the situation has improved recently. Although the price of light crude dropped below $105 per barrel at the beginning of the previous week, oil bulls didn’t give up and pushed it higher in the following  days. In this way crude oil reached the strong resistance zone based on the March 2012 top and the upper border of the rising trend channel once again.

Taking the above into account, we should consider two scenarios. If the buyers manage to break above this strong resistance zone, the first price target will be close to the May 2011 top. However, if they fail, history will likely repeat itself and the price of light crude will come back to the consolidation range. In this case, the first price target for sellers will be around $105 per barrel.

From this point of view, the outlook is still more bullish than not at this time.

Now, let’s check the short-term outlook.

In this daily chart, we see that the situation has improved in the recent days. At the beginning of the previous week the price of light crude dropped below $105 and reached the rising support line based on the August 8 and August 21 lows (marked in black). It’s worth noting that this area was also supported by the 50-day moving average, which stopped the decline in June and, again, at the end of August (it was not even reached). In both previous cases this moving average encouraged buyers to act, which resulted in a sharp rally in the following days.

As you see on the above chart, we had a similar situation in the previous week. Light crude rebounded to over $110 per barrel and climbed above the March 2012 on an intraday basis, however, the breakout was not confirmed.

At this point it’s worth mentioning that the recent correction is shallow and similar to the previous ones, which is a bullish factor. Additionally, when we factor in the Fibonacci price retracements, we clearly see that the recent corrective move has been quite small because it hasn’t even reached the 38.2% level.

When we take a closer look at the above chart, we see that a consolidation has been formed in the recent days. On Friday, buyers managed to break above the Tuesday’s top, which (according to theory) should result in further growth and the price target for the pattern is below the May 2011 top (around $113.45).

Where are the nearest support levels? The first is the 50-day moving average (currently at $105.52). The second one is the rising line based on the August lows (slightly below $105). The third one is the Tuesday low at $104.21. The next one is a zone (between $102.22 and $103.50) based on the bottom of the previous corrective move (the August 21 low) and the August low. As you see, there is also the 38.2% Fibonacci retracement level, which reinforces this support zone.

Summing up, although there was a downward move, which took the price of light crude below $105, technically, the short-term outlook for light crude is still bullish. The uptrend is not threatened at the moment, because the recent decline was shallow and similar to the previous ones.

Once we know the current outlook for crude oil, let’s examine the NYSE Arca Oil Index (XOI) once again to find out what the current outlook for the oil sector is.

Let’s start with the long-term chart.

On the above chart, we see that the situation hasn’t changed much. We’ve been seeing a consolidation in the recent months and the NYSE Arca Oil Index is trading between the July top and the July low.

The XOI remains quite close to the May 2011 top and it’s still above the previously-broken long-term declining resistance line based on the 2008 and the 2011 highs and the breakout hasn’t been invalidated. The oil index also remains in the range of the rising trend channel.

Taking the abovementioned observations into account, the situation is still bullish.

Let’s take a closer look at the weekly chart.

Looking at the above chart, we see that most of what we wrote in our last Oil Update is up-to-date today.

(…) the NYSE Arca Oil Index still remains above the medium-term support lines. Keep in mind that the strong support line (marked in black) stopped the decline in June, which resulted in a rally in the following weeks.

Please note that we should still keep an eye on the above-mentioned support line, because it is also the lower border of the rising wedge. As you know, this is a bearish pattern and if buyers fail, it will likely lead to a decline which may take the oil index at least to the lower medium-term support line (the red one).

The medium-term uptrend is not currently threatened, and the situation remains bullish.

What about the relationship between light crude and the oil stocks?

When we take a look at the above chart and compare weekly closing prices in both cases, it may seem that oil stocks were weaker in the previous week, because they didn’t reach a new local top in terms of weekly closes. As you see, light crude close the whole week above the closing level of February 21, 2012. However, it’s worth noting that the XOI climbed above this level at the end of January. Additionally, light crude still remains below the May 2011 top.

Now, let’s turn to the daily chart.

Quoting our last Oil Update:

(…) it’s worth noting that the XOI closed the previous week at the 50-day moving average, which still serves as support. If it holds, we may see a pullback to the Wednesday high.

As you see on the above chart, the 50-day moving average stopped further declines and encouraged oil bulls to push the oil index higher. In this way, the XOI came back above the 61.8% Fibonacci retracement level (based on the entire July-August decline) and closed the previous week slightly above the July 30 low (in terms of daily closing prices).

Please note that the next resistance level is the declining line based on the May and July highs (currently close to the 1,404 level). If it is broken, the buyers’ next target will be the July peak, and then the May top.

The nearest support is at the 50-day moving average (currently at 1,373.74). The next support zone is based on the August 27 and August 30 lows (1,361-1,364), and a further one is based on the August 21 bottom and the 61.8% retracement level (1,338-1,339).

On a side note, we’ll comment on the relationship between the WTI and the XOI in the short term. Despite the negative divergences at the beginning of the previous week, the second half looked pretty much the same in both cases and we saw increases.

Summing up, from the long and medium-term perspectives the outlook for oil stocks is still bullish and the uptrend is not threatened at the moment. Taking into account the relationship between light crude and the oil stocks, it seems that crude oil is still a step behind the oil index. 

Speaking of relationships, let’s take a closer look at the chart below and check the link between crude oil and gold. Has it changed in the recent days? Let’s examine the daily chart.

In the last week of August we noticed that light crude hit its top a bit earlier and when we saw a downward move in oil, gold was still rising. However, after the yellow metal reached its highest level during Wednesday’s session, light crude accelerated its declines. In the following days both commodities continued to show weakness.

On the above chart we see that in both cases the buyers stopped the downward move on Tuesday. In the days following the sharp pullback, crude oil was trading in the narrow range between the Tuesday’s bottom and top. What’s interesting, at the same time gold declined once again. In other words, the consolidation in light crude triggered another move lower in gold. Despite the negative divergences, the last session of the previous week looked pretty much the same and in both cases we saw growths.

Taking the above into account, it’s worth taking a closer look at the medium-term outlook for gold.

Let’s turn to the weekly chart of the yellow metal.

In our last Oil Update we wrote:

(…) gold (…) reached a strong resistance zone based on three important levels: the first of them is the June’s top; the second one is the April’s bottom (in terms of weekly closes); and the third one is the 38.2% Fibonacci retracement level based on the September 2012 - June 2013 decline.

As you see on the above chart, the yellow metal attempted to move above this resistance zone once again, but this try failed for the second time, and the breakout was invalidated.

The medium-term situation seems quite bearish and if gold drops below the declining resistance line based on the October 2012 and February highs the outlook will be even more bearish.

Summing up, taking the long and medium-term relationship between light crude and the oil stocks into account, it seems that the oil index is a step ahead of crude oil. If this assumption is true, in the nearest future we will likely see an upward move in crude oil to at least the May 2011 top. Looking at the relationship between crude oil and gold, we first noticed the negative divergence. As we previously wrote, the consolidation in light crude triggered a downward move in gold. Additionally, crude oil broke above the Tuesday’s top and approached the September top on Friday. Meanwhile, gold was trading significantly below the Tuesday peak, which is a bearish sign. Taking this into account and combining it with the current situation in the yellow metal, it seems that the acceleration of the downtrend in gold is still ahead of us. Connecting the dots, the short-term link between the yellow metal and crude oil may wane in the coming weeks.

Looking at the chart of crude oil, we can conclude that investors came back to focusing on economic data, because further improvement in the U.S. labor market is the key for the Fed to begin scaling back its $85 billion a month of bond purchase. Friday's data showed that U.S. employers hired fewer workers than expected in August and the jobless rate hit a 4 and a half year low as Americans gave up the search for work.

The weaker-than-expected U.S. payroll numbers for August raised doubts about whether the Federal Reserve will start paring its massive stimulus and resulted in higher prices of light crude.

Another factor, which fueled the price of light crude was the G20 summit in St. Petersburg. According to Reuters, crude oil rose 2% after President Obama told, that failure to act against Syria's use of chemical weapons would embolden "rogue nations" to use them too. The U.S. President has faced growing pressure from Russia, China, the European Union and major emerging market countries not to carry out a strike without support from the U.N. Security Council. Taking the above into account, there are concerns about how the crisis could affect relations between Washington and Russia and China.

In spite of this, the main worry now is that Iran, an ally of Damascus, could get involved if the United States goes ahead with attacking Syria. In this case, the entire region could become inflamed yet further, causing major oil supply problems.

What impact did these circumstances have on light crude? Crude oil climbed above $110 per barrel. This is a largest weekly percentage gain in two months, at 2.7%, the highest since July 5. It is also the largest daily percentage gain since August 27.

Keeping in mind these factors and their impact on the price of light crude, let’s now move on to the technical part of our Oil Update. Just like a week ago, we take a look at the charts from different time perspectives to have a more complete picture of the current situation in the oil market.

Let’s start with a look at the monthly chart of light crude (charts courtesy by http://stockcharts.com).

Looking at the above chart, we see that the situation hasn’t changed much.

Quoting our last Oil Update:

(…) light crude still remains above the two long-term declining resistance lines: one of them (bold red line) is based on the July 2008 and the May 2011 highs, and the second one is based on the September 2012 and March 2013 highs (the upper black line).

From this perspective the picture is bullish and the breakout above these two long-term declining resistance lines hasn’t been invalidated.

Now, let’s zoom in on our picture of the oil market and see the weekly chart. 

On the above chart, we see that the situation has improved recently. Although the price of light crude dropped below $105 per barrel at the beginning of the previous week, oil bulls didn’t give up and pushed it higher in the following  days. In this way crude oil reached the strong resistance zone based on the March 2012 top and the upper border of the rising trend channel once again.

Taking the above into account, we should consider two scenarios. If the buyers manage to break above this strong resistance zone, the first price target will be close to the May 2011 top. However, if they fail, history will likely repeat itself and the price of light crude will come back to the consolidation range. In this case, the first price target for sellers will be around $105 per barrel.

From this point of view, the outlook is still more bullish than not at this time.

Now, let’s check the short-term outlook.

In this daily chart, we see that the situation has improved in the recent days. At the beginning of the previous week the price of light crude dropped below $105 and reached the rising support line based on the August 8 and August 21 lows (marked in black). It’s worth noting that this area was also supported by the 50-day moving average, which stopped the decline in June and, again, at the end of August (it was not even reached). In both previous cases this moving average encouraged buyers to act, which resulted in a sharp rally in the following days.

As you see on the above chart, we had a similar situation in the previous week. Light crude rebounded to over $110 per barrel and climbed above the March 2012 on an intraday basis, however, the breakout was not confirmed.

At this point it’s worth mentioning that the recent correction is shallow and similar to the previous ones, which is a bullish factor. Additionally, when we factor in the Fibonacci price retracements, we clearly see that the recent corrective move has been quite small because it hasn’t even reached the 38.2% level.

When we take a closer look at the above chart, we see that a consolidation has been formed in the recent days. On Friday, buyers managed to break above the Tuesday’s top, which (according to theory) should result in further growth and the price target for the pattern is below the May 2011 top (around $113.45).

Where are the nearest support levels? The first is the 50-day moving average (currently at $105.52). The second one is the rising line based on the August lows (slightly below $105). The third one is the Tuesday low at $104.21. The next one is a zone (between $102.22 and $103.50) based on the bottom of the previous corrective move (the August 21 low) and the August low. As you see, there is also the 38.2% Fibonacci retracement level, which reinforces this support zone.

Summing up, although there was a downward move, which took the price of light crude below $105, technically, the short-term outlook for light crude is still bullish. The uptrend is not threatened at the moment, because the recent decline was shallow and similar to the previous ones.

Once we know the current outlook for crude oil, let’s examine the NYSE Arca Oil Index (XOI) once again to find out what the current outlook for the oil sector is.

Let’s start with the long-term chart.

On the above chart, we see that the situation hasn’t changed much. We’ve been seeing a consolidation in the recent months and the NYSE Arca Oil Index is trading between the July top and the July low.

The XOI remains quite close to the May 2011 top and it’s still above the previously-broken long-term declining resistance line based on the 2008 and the 2011 highs and the breakout hasn’t been invalidated. The oil index also remains in the range of the rising trend channel.

Taking the abovementioned observations into account, the situation is still bullish.

Let’s take a closer look at the weekly chart.

Looking at the above chart, we see that most of what we wrote in our last Oil Update is up-to-date today.

(…) the NYSE Arca Oil Index still remains above the medium-term support lines. Keep in mind that the strong support line (marked in black) stopped the decline in June, which resulted in a rally in the following weeks.

Please note that we should still keep an eye on the above-mentioned support line, because it is also the lower border of the rising wedge. As you know, this is a bearish pattern and if buyers fail, it will likely lead to a decline which may take the oil index at least to the lower medium-term support line (the red one).

The medium-term uptrend is not currently threatened, and the situation remains bullish.

What about the relationship between light crude and the oil stocks?

When we take a look at the above chart and compare weekly closing prices in both cases, it may seem that oil stocks were weaker in the previous week, because they didn’t reach a new local top in terms of weekly closes. As you see, light crude close the whole week above the closing level of February 21, 2012. However, it’s worth noting that the XOI climbed above this level at the end of January. Additionally, light crude still remains below the May 2011 top.

Now, let’s turn to the daily chart.

Quoting our last Oil Update:

(…) it’s worth noting that the XOI closed the previous week at the 50-day moving average, which still serves as support. If it holds, we may see a pullback to the Wednesday high.

As you see on the above chart, the 50-day moving average stopped further declines and encouraged oil bulls to push the oil index higher. In this way, the XOI came back above the 61.8% Fibonacci retracement level (based on the entire July-August decline) and closed the previous week slightly above the July 30 low (in terms of daily closing prices).

Please note that the next resistance level is the declining line based on the May and July highs (currently close to the 1,404 level). If it is broken, the buyers’ next target will be the July peak, and then the May top.

The nearest support is at the 50-day moving average (currently at 1,373.74). The next support zone is based on the August 27 and August 30 lows (1,361-1,364), and a further one is based on the August 21 bottom and the 61.8% retracement level (1,338-1,339).

On a side note, we’ll comment on the relationship between the WTI and the XOI in the short term. Despite the negative divergences at the beginning of the previous week, the second half looked pretty much the same in both cases and we saw increases.

Summing up, from the long and medium-term perspectives the outlook for oil stocks is still bullish and the uptrend is not threatened at the moment. Taking into account the relationship between light crude and the oil stocks, it seems that crude oil is still a step behind the oil index. 

Speaking of relationships, let’s take a closer look at the chart below and check the link between crude oil and gold. Has it changed in the recent days? Let’s examine the daily chart.

In the last week of August we noticed that light crude hit its top a bit earlier and when we saw a downward move in oil, gold was still rising. However, after the yellow metal reached its highest level during Wednesday’s session, light crude accelerated its declines. In the following days both commodities continued to show weakness.

On the above chart we see that in both cases the buyers stopped the downward move on Tuesday. In the days following the sharp pullback, crude oil was trading in the narrow range between the Tuesday’s bottom and top. What’s interesting, at the same time gold declined once again. In other words, the consolidation in light crude triggered another move lower in gold. Despite the negative divergences, the last session of the previous week looked pretty much the same and in both cases we saw growths.

Taking the above into account, it’s worth taking a closer look at the medium-term outlook for gold.

Let’s turn to the weekly chart of the yellow metal.

In our last Oil Update we wrote:

(…) gold (…) reached a strong resistance zone based on three important levels: the first of them is the June’s top; the second one is the April’s bottom (in terms of weekly closes); and the third one is the 38.2% Fibonacci retracement level based on the September 2012 - June 2013 decline.

As you see on the above chart, the yellow metal attempted to move above this resistance zone once again, but this try failed for the second time, and the breakout was invalidated.

The medium-term situation seems quite bearish and if gold drops below the declining resistance line based on the October 2012 and February highs the outlook will be even more bearish.

Summing up, taking the long and medium-term relationship between light crude and the oil stocks into account, it seems that the oil index is a step ahead of crude oil. If this assumption is true, in the nearest future we will likely see an upward move in crude oil to at least the May 2011 top. Looking at the relationship between crude oil and gold, we first noticed the negative divergence. As we previously wrote, the consolidation in light crude triggered a downward move in gold. Additionally, crude oil broke above the Tuesday’s top and approached the September top on Friday. Meanwhile, gold was trading significantly below the Tuesday peak, which is a bearish sign. Taking this into account and combining it with the current situation in the yellow metal, it seems that the acceleration of the downtrend in gold is still ahead of us. Connecting the dots, the short-term link between the yellow metal and crude oil may wane in the coming weeks.

Looking at the chart of crude oil, we can conclude that investors came back to focusing on economic data, because further improvement in the U.S. labor market is the key for the Fed to begin scaling back its $85 billion a month of bond purchase. Friday's data showed that U.S. employers hired fewer workers than expected in August and the jobless rate hit a 4 and a half year low as Americans gave up the search for work.

The weaker-than-expected U.S. payroll numbers for August raised doubts about whether the Federal Reserve will start paring its massive stimulus and resulted in higher prices of light crude.

Another factor, which fueled the price of light crude was the G20 summit in St. Petersburg. According to Reuters, crude oil rose 2% after President Obama told, that failure to act against Syria's use of chemical weapons would embolden "rogue nations" to use them too. The U.S. President has faced growing pressure from Russia, China, the European Union and major emerging market countries not to carry out a strike without support from the U.N. Security Council. Taking the above into account, there are concerns about how the crisis could affect relations between Washington and Russia and China.

In spite of this, the main worry now is that Iran, an ally of Damascus, could get involved if the United States goes ahead with attacking Syria. In this case, the entire region could become inflamed yet further, causing major oil supply problems.

What impact did these circumstances have on light crude? Crude oil climbed above $110 per barrel. This is a largest weekly percentage gain in two months, at 2.7%, the highest since July 5. It is also the largest daily percentage gain since August 27.

Keeping in mind these factors and their impact on the price of light crude, let’s now move on to the technical part of our Oil Update. Just like a week ago, we take a look at the charts from different time perspectives to have a more complete picture of the current situation in the oil market.

Let’s start with a look at the monthly chart of light crude (charts courtesy by http://stockcharts.com).

Looking at the above chart, we see that the situation hasn’t changed much.

Quoting our last Oil Update:

(…) light crude still remains above the two long-term declining resistance lines: one of them (bold red line) is based on the July 2008 and the May 2011 highs, and the second one is based on the September 2012 and March 2013 highs (the upper black line).

From this perspective the picture is bullish and the breakout above these two long-term declining resistance lines hasn’t been invalidated.

Now, let’s zoom in on our picture of the oil market and see the weekly chart. 

On the above chart, we see that the situation has improved recently. Although the price of light crude dropped below $105 per barrel at the beginning of the previous week, oil bulls didn’t give up and pushed it higher in the following  days. In this way crude oil reached the strong resistance zone based on the March 2012 top and the upper border of the rising trend channel once again.

Taking the above into account, we should consider two scenarios. If the buyers manage to break above this strong resistance zone, the first price target will be close to the May 2011 top. However, if they fail, history will likely repeat itself and the price of light crude will come back to the consolidation range. In this case, the first price target for sellers will be around $105 per barrel.

From this point of view, the outlook is still more bullish than not at this time.

Now, let’s check the short-term outlook.

In this daily chart, we see that the situation has improved in the recent days. At the beginning of the previous week the price of light crude dropped below $105 and reached the rising support line based on the August 8 and August 21 lows (marked in black). It’s worth noting that this area was also supported by the 50-day moving average, which stopped the decline in June and, again, at the end of August (it was not even reached). In both previous cases this moving average encouraged buyers to act, which resulted in a sharp rally in the following days.

As you see on the above chart, we had a similar situation in the previous week. Light crude rebounded to over $110 per barrel and climbed above the March 2012 on an intraday basis, however, the breakout was not confirmed.

At this point it’s worth mentioning that the recent correction is shallow and similar to the previous ones, which is a bullish factor. Additionally, when we factor in the Fibonacci price retracements, we clearly see that the recent corrective move has been quite small because it hasn’t even reached the 38.2% level.

When we take a closer look at the above chart, we see that a consolidation has been formed in the recent days. On Friday, buyers managed to break above the Tuesday’s top, which (according to theory) should result in further growth and the price target for the pattern is below the May 2011 top (around $113.45).

Where are the nearest support levels? The first is the 50-day moving average (currently at $105.52). The second one is the rising line based on the August lows (slightly below $105). The third one is the Tuesday low at $104.21. The next one is a zone (between $102.22 and $103.50) based on the bottom of the previous corrective move (the August 21 low) and the August low. As you see, there is also the 38.2% Fibonacci retracement level, which reinforces this support zone.

Summing up, although there was a downward move, which took the price of light crude below $105, technically, the short-term outlook for light crude is still bullish. The uptrend is not threatened at the moment, because the recent decline was shallow and similar to the previous ones.

Once we know the current outlook for crude oil, let’s examine the NYSE Arca Oil Index (XOI) once again to find out what the current outlook for the oil sector is.

Let’s start with the long-term chart.

On the above chart, we see that the situation hasn’t changed much. We’ve been seeing a consolidation in the recent months and the NYSE Arca Oil Index is trading between the July top and the July low.

The XOI remains quite close to the May 2011 top and it’s still above the previously-broken long-term declining resistance line based on the 2008 and the 2011 highs and the breakout hasn’t been invalidated. The oil index also remains in the range of the rising trend channel.

Taking the abovementioned observations into account, the situation is still bullish.

Let’s take a closer look at the weekly chart.

Looking at the above chart, we see that most of what we wrote in our last Oil Update is up-to-date today.

(…) the NYSE Arca Oil Index still remains above the medium-term support lines. Keep in mind that the strong support line (marked in black) stopped the decline in June, which resulted in a rally in the following weeks.

Please note that we should still keep an eye on the above-mentioned support line, because it is also the lower border of the rising wedge. As you know, this is a bearish pattern and if buyers fail, it will likely lead to a decline which may take the oil index at least to the lower medium-term support line (the red one).

The medium-term uptrend is not currently threatened, and the situation remains bullish.

What about the relationship between light crude and the oil stocks?

When we take a look at the above chart and compare weekly closing prices in both cases, it may seem that oil stocks were weaker in the previous week, because they didn’t reach a new local top in terms of weekly closes. As you see, light crude close the whole week above the closing level of February 21, 2012. However, it’s worth noting that the XOI climbed above this level at the end of January. Additionally, light crude still remains below the May 2011 top.

Now, let’s turn to the daily chart.

Quoting our last Oil Update:

(…) it’s worth noting that the XOI closed the previous week at the 50-day moving average, which still serves as support. If it holds, we may see a pullback to the Wednesday high.

As you see on the above chart, the 50-day moving average stopped further declines and encouraged oil bulls to push the oil index higher. In this way, the XOI came back above the 61.8% Fibonacci retracement level (based on the entire July-August decline) and closed the previous week slightly above the July 30 low (in terms of daily closing prices).

Please note that the next resistance level is the declining line based on the May and July highs (currently close to the 1,404 level). If it is broken, the buyers’ next target will be the July peak, and then the May top.

The nearest support is at the 50-day moving average (currently at 1,373.74). The next support zone is based on the August 27 and August 30 lows (1,361-1,364), and a further one is based on the August 21 bottom and the 61.8% retracement level (1,338-1,339).

On a side note, we’ll comment on the relationship between the WTI and the XOI in the short term. Despite the negative divergences at the beginning of the previous week, the second half looked pretty much the same in both cases and we saw increases.

Summing up, from the long and medium-term perspectives the outlook for oil stocks is still bullish and the uptrend is not threatened at the moment. Taking into account the relationship between light crude and the oil stocks, it seems that crude oil is still a step behind the oil index. 

Speaking of relationships, let’s take a closer look at the chart below and check the link between crude oil and gold. Has it changed in the recent days? Let’s examine the daily chart.

In the last week of August we noticed that light crude hit its top a bit earlier and when we saw a downward move in oil, gold was still rising. However, after the yellow metal reached its highest level during Wednesday’s session, light crude accelerated its declines. In the following days both commodities continued to show weakness.

On the above chart we see that in both cases the buyers stopped the downward move on Tuesday. In the days following the sharp pullback, crude oil was trading in the narrow range between the Tuesday’s bottom and top. What’s interesting, at the same time gold declined once again. In other words, the consolidation in light crude triggered another move lower in gold. Despite the negative divergences, the last session of the previous week looked pretty much the same and in both cases we saw growths.

Taking the above into account, it’s worth taking a closer look at the medium-term outlook for gold.

Let’s turn to the weekly chart of the yellow metal.

In our last Oil Update we wrote:

(…) gold (…) reached a strong resistance zone based on three important levels: the first of them is the June’s top; the second one is the April’s bottom (in terms of weekly closes); and the third one is the 38.2% Fibonacci retracement level based on the September 2012 - June 2013 decline.

As you see on the above chart, the yellow metal attempted to move above this resistance zone once again, but this try failed for the second time, and the breakout was invalidated.

The medium-term situation seems quite bearish and if gold drops below the declining resistance line based on the October 2012 and February highs the outlook will be even more bearish.

Summing up, taking the long and medium-term relationship between light crude and the oil stocks into account, it seems that the oil index is a step ahead of crude oil. If this assumption is true, in the nearest future we will likely see an upward move in crude oil to at least the May 2011 top. Looking at the relationship between crude oil and gold, we first noticed the negative divergence. As we previously wrote, the consolidation in light crude triggered a downward move in gold. Additionally, crude oil broke above the Tuesday’s top and approached the September top on Friday. Meanwhile, gold was trading significantly below the Tuesday peak, which is a bearish sign. Taking this into account and combining it with the current situation in the yellow metal, it seems that the acceleration of the downtrend in gold is still ahead of us. Connecting the dots, the short-term link between the yellow metal and crude oil may wane in the coming weeks.

Looking at the chart of crude oil, we can conclude that investors came back to focusing on economic data, because further improvement in the U.S. labor market is the key for the Fed to begin scaling back its $85 billion a month of bond purchase. Friday's data showed that U.S. employers hired fewer workers than expected in August and the jobless rate hit a 4 and a half year low as Americans gave up the search for work.

The weaker-than-expected U.S. payroll numbers for August raised doubts about whether the Federal Reserve will start paring its massive stimulus and resulted in higher prices of light crude.

Another factor, which fueled the price of light crude was the G20 summit in St. Petersburg. According to Reuters, crude oil rose 2% after President Obama told, that failure to act against Syria's use of chemical weapons would embolden "rogue nations" to use them too. The U.S. President has faced growing pressure from Russia, China, the European Union and major emerging market countries not to carry out a strike without support from the U.N. Security Council. Taking the above into account, there are concerns about how the crisis could affect relations between Washington and Russia and China.

In spite of this, the main worry now is that Iran, an ally of Damascus, could get involved if the United States goes ahead with attacking Syria. In this case, the entire region could become inflamed yet further, causing major oil supply problems.

What impact did these circumstances have on light crude? Crude oil climbed above $110 per barrel. This is a largest weekly percentage gain in two months, at 2.7%, the highest since July 5. It is also the largest daily percentage gain since August 27.

Keeping in mind these factors and their impact on the price of light crude, let’s now move on to the technical part of our Oil Update. Just like a week ago, we take a look at the charts from different time perspectives to have a more complete picture of the current situation in the oil market.

Let’s start with a look at the monthly chart of light crude (charts courtesy by http://stockcharts.com).

Looking at the above chart, we see that the situation hasn’t changed much.

Quoting our last Oil Update:

(…) light crude still remains above the two long-term declining resistance lines: one of them (bold red line) is based on the July 2008 and the May 2011 highs, and the second one is based on the September 2012 and March 2013 highs (the upper black line).

From this perspective the picture is bullish and the breakout above these two long-term declining resistance lines hasn’t been invalidated.

Now, let’s zoom in on our picture of the oil market and see the weekly chart. 

On the above chart, we see that the situation has improved recently. Although the price of light crude dropped below $105 per barrel at the beginning of the previous week, oil bulls didn’t give up and pushed it higher in the following  days. In this way crude oil reached the strong resistance zone based on the March 2012 top and the upper border of the rising trend channel once again.

Taking the above into account, we should consider two scenarios. If the buyers manage to break above this strong resistance zone, the first price target will be close to the May 2011 top. However, if they fail, history will likely repeat itself and the price of light crude will come back to the consolidation range. In this case, the first price target for sellers will be around $105 per barrel.

From this point of view, the outlook is still more bullish than not at this time.

Now, let’s check the short-term outlook.

In this daily chart, we see that the situation has improved in the recent days. At the beginning of the previous week the price of light crude dropped below $105 and reached the rising support line based on the August 8 and August 21 lows (marked in black). It’s worth noting that this area was also supported by the 50-day moving average, which stopped the decline in June and, again, at the end of August (it was not even reached). In both previous cases this moving average encouraged buyers to act, which resulted in a sharp rally in the following days.

As you see on the above chart, we had a similar situation in the previous week. Light crude rebounded to over $110 per barrel and climbed above the March 2012 on an intraday basis, however, the breakout was not confirmed.

At this point it’s worth mentioning that the recent correction is shallow and similar to the previous ones, which is a bullish factor. Additionally, when we factor in the Fibonacci price retracements, we clearly see that the recent corrective move has been quite small because it hasn’t even reached the 38.2% level.

When we take a closer look at the above chart, we see that a consolidation has been formed in the recent days. On Friday, buyers managed to break above the Tuesday’s top, which (according to theory) should result in further growth and the price target for the pattern is below the May 2011 top (around $113.45).

Where are the nearest support levels? The first is the 50-day moving average (currently at $105.52). The second one is the rising line based on the August lows (slightly below $105). The third one is the Tuesday low at $104.21. The next one is a zone (between $102.22 and $103.50) based on the bottom of the previous corrective move (the August 21 low) and the August low. As you see, there is also the 38.2% Fibonacci retracement level, which reinforces this support zone.

Summing up, although there was a downward move, which took the price of light crude below $105, technically, the short-term outlook for light crude is still bullish. The uptrend is not threatened at the moment, because the recent decline was shallow and similar to the previous ones.

Once we know the current outlook for crude oil, let’s examine the NYSE Arca Oil Index (XOI) once again to find out what the current outlook for the oil sector is.

Let’s start with the long-term chart.

On the above chart, we see that the situation hasn’t changed much. We’ve been seeing a consolidation in the recent months and the NYSE Arca Oil Index is trading between the July top and the July low.

The XOI remains quite close to the May 2011 top and it’s still above the previously-broken long-term declining resistance line based on the 2008 and the 2011 highs and the breakout hasn’t been invalidated. The oil index also remains in the range of the rising trend channel.

Taking the abovementioned observations into account, the situation is still bullish.

Let’s take a closer look at the weekly chart.

Looking at the above chart, we see that most of what we wrote in our last Oil Update is up-to-date today.

(…) the NYSE Arca Oil Index still remains above the medium-term support lines. Keep in mind that the strong support line (marked in black) stopped the decline in June, which resulted in a rally in the following weeks.

Please note that we should still keep an eye on the above-mentioned support line, because it is also the lower border of the rising wedge. As you know, this is a bearish pattern and if buyers fail, it will likely lead to a decline which may take the oil index at least to the lower medium-term support line (the red one).

The medium-term uptrend is not currently threatened, and the situation remains bullish.

What about the relationship between light crude and the oil stocks?

When we take a look at the above chart and compare weekly closing prices in both cases, it may seem that oil stocks were weaker in the previous week, because they didn’t reach a new local top in terms of weekly closes. As you see, light crude close the whole week above the closing level of February 21, 2012. However, it’s worth noting that the XOI climbed above this level at the end of January. Additionally, light crude still remains below the May 2011 top.

Now, let’s turn to the daily chart.

Quoting our last Oil Update:

(…) it’s worth noting that the XOI closed the previous week at the 50-day moving average, which still serves as support. If it holds, we may see a pullback to the Wednesday high.

As you see on the above chart, the 50-day moving average stopped further declines and encouraged oil bulls to push the oil index higher. In this way, the XOI came back above the 61.8% Fibonacci retracement level (based on the entire July-August decline) and closed the previous week slightly above the July 30 low (in terms of daily closing prices).

Please note that the next resistance level is the declining line based on the May and July highs (currently close to the 1,404 level). If it is broken, the buyers’ next target will be the July peak, and then the May top.

The nearest support is at the 50-day moving average (currently at 1,373.74). The next support zone is based on the August 27 and August 30 lows (1,361-1,364), and a further one is based on the August 21 bottom and the 61.8% retracement level (1,338-1,339).

On a side note, we’ll comment on the relationship between the WTI and the XOI in the short term. Despite the negative divergences at the beginning of the previous week, the second half looked pretty much the same in both cases and we saw increases.

Summing up, from the long and medium-term perspectives the outlook for oil stocks is still bullish and the uptrend is not threatened at the moment. Taking into account the relationship between light crude and the oil stocks, it seems that crude oil is still a step behind the oil index. 

Speaking of relationships, let’s take a closer look at the chart below and check the link between crude oil and gold. Has it changed in the recent days? Let’s examine the daily chart.

In the last week of August we noticed that light crude hit its top a bit earlier and when we saw a downward move in oil, gold was still rising. However, after the yellow metal reached its highest level during Wednesday’s session, light crude accelerated its declines. In the following days both commodities continued to show weakness.

On the above chart we see that in both cases the buyers stopped the downward move on Tuesday. In the days following the sharp pullback, crude oil was trading in the narrow range between the Tuesday’s bottom and top. What’s interesting, at the same time gold declined once again. In other words, the consolidation in light crude triggered another move lower in gold. Despite the negative divergences, the last session of the previous week looked pretty much the same and in both cases we saw growths.

Taking the above into account, it’s worth taking a closer look at the medium-term outlook for gold.

Let’s turn to the weekly chart of the yellow metal.

In our last Oil Update we wrote:

(…) gold (…) reached a strong resistance zone based on three important levels: the first of them is the June’s top; the second one is the April’s bottom (in terms of weekly closes); and the third one is the 38.2% Fibonacci retracement level based on the September 2012 - June 2013 decline.

As you see on the above chart, the yellow metal attempted to move above this resistance zone once again, but this try failed for the second time, and the breakout was invalidated.

The medium-term situation seems quite bearish and if gold drops below the declining resistance line based on the October 2012 and February highs the outlook will be even more bearish.

Summing up, taking the long and medium-term relationship between light crude and the oil stocks into account, it seems that the oil index is a step ahead of crude oil. If this assumption is true, in the nearest future we will likely see an upward move in crude oil to at least the May 2011 top. Looking at the relationship between crude oil and gold, we first noticed the negative divergence. As we previously wrote, the consolidation in light crude triggered a downward move in gold. Additionally, crude oil broke above the Tuesday’s top and approached the September top on Friday. Meanwhile, gold was trading significantly below the Tuesday peak, which is a bearish sign. Taking this into account and combining it with the current situation in the yellow metal, it seems that the acceleration of the downtrend in gold is still ahead of us. Connecting the dots, the short-term link between the yellow metal and crude oil may wane in the coming weeks.

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Euro and pound see bearish forecast ahead on Elliott Wave

By Gregor Horvat

EUR/USD (FOREX:EURUSD) found support on Friday after the nonfarm payrolls report around 1.3100 area, from which we have seen a more than 80-pip rally back to the wave 2-wave 4 trendline. Usually when this occurs it means that a five wave decline is complete and that the market reversed into a temporary correction. As such, we are now tracking an A-B-C retracement back to 1.3225-1.3250 region before we may turn bearish again. In that zone, we can also see a former wave four that may react as a reversal level and cause a new sell-off for the pair.

EUR/USD 4h Elliott Wave Analysis

Meanwhile, we also are tracking GBP/USD (FOREX:GBPUSD), which is stronger than EUR/USD lately, but it also has a bearish wave structure. Rally from March low on GBP/USD is a complex pattern most likely a flat in wave 2 where we may see test of 1.5750 this week after recent bounce from the lower side of a current upward channel. However, this new high will be just a final leg, fifth wave within wave (C), so larger bearish trend remains in view but GBP/USD just needs more time to turn down when compared to EUR/USD, but we think that sooner or later pound will also turn south and catch the euro weakness.

GBPUSD Daily Elliott Wave Analysis

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Salinas-Price On the Changing Tempo and Tenor of the Growth of International Reserves

by Jesse

My friend Hugo Salinas-Price has shared some uniquely interesting observations on the growth of international paper reserves, which have been largely constituted of claims on debt, often pinned to the US dollar because of its international reach. And with all such fertile and insightful thinking it provokes more thought in others.
In this article he observes that the appetite for sovereign Treasury debt, and other forms of private debt such as mortgages and consumer credit, may not be keeping pace with the issuance of these forms of debt.
I think that with respect to price that this is a foregone conclusion in light of the Fed's QE III. The whole point of this exercise is to ensure that the current pricing is not sustainable without a non-market priced subsidy from the Fed, hopefully until some point that the markets reach some sort of self-sustaining equilibrium.
One of my key theses has long been that this equilibrium cannot occur without major systemic reforms.  The factors that created the problem were not incidental, but fundamental to changes that occurred during the 1990's in particular, with deeper roots back to 1980.  There was a decade long effort to overturn the New Deal Reforms that had allowed for the long stability that the financial world largely enjoyed in the post-WW II era.  These reforms were overturned by greed and corruption of power, and so here we are today.  We cannot go forward without returning to more transparent, honest markets that operate with a bias towards justice, and not bowing to right as defined and sanctified by might.
Modern monetary theorists would postulate that none of this is a problem, because the issuance of money based on debt is not necessary in the first place. All the debt can be repurchased through the direct issuance of money by a sovereign at any time. The proposal of the 'trillion dollar platinum coin' illustrates that principle in action.
But while technically true, there are two important facts that impinge on the wonders of such a brave new monetary world, besides the obvious problem of the ability of concentrated power to corrupt such Utopian arrangements from their inception.  I keep asking, 'where is the flywheel' meaning where is the check and balance on the monetary issuance?
The first obstacle is that such money issuance system of almost unrestrained fiat works best where all the market participants are forced to operate according to the centralized rules. They will accept the money at stated value because they simply have no other choice, no other options.  Given Gresham's Law, if you think about this for a while, it becomes very apparent that this is the case. Fiat of this level of discretion must have the absolute force of law, without viable competition or substitute.

Money is what we say it is, and is worth our stated official price.
I think we have enough historical examples of how well this works in practice. I saw it up close in both Russia and Czechoslovakia before and during the final collapse of the Soviet System.
In the world as it is, there is really no one world currency, issued by a centralized all-powerful entity, that essentially creates money from nothing, distributes it as it pleases, and dictates its value to all.  At least there is no such system yet, although it is certainly the objective of more groups than you might care to imagine.
In the case of a non-self-sufficient economy, there is the inescapable issue of trade and travel with other economies, that are not under the control of the central authority.
So the second great problem is that in the world as we have it today, oil and natural gas and certain essential commodities are significant factors when considering the international currency regime. In quite a literal sense, the US dollar is the petro-dollar, and control of the world's currency regime requires a strong influence over the world's oil and gas supply first and foremost.
If the US was truly energy self-sufficient, then the issue of trade and tariffs and money would be much simpler.  This would not be the case for some other entities without its geographic reach and the rich variety of its resources.
The other imported products are much more discretionary, and the domestic economy would most likely even prosper under a greater emphasis on self-sufficient production. Although the issue of reform would still remain because of the broken system of wealth distribution along lines of unequal power and influence over law.
It would have repercussions on international relations no doubt, but that is economic power by other means and would be dealt with through the usual alliances and cooperative ventures that could be denominated in other than a domestic currency.   This arrangement calls for the growth of large areas of common interest, or spheres of interest if you will,  that are able to achieve resource self-sufficiency. 
The sophists will seek to dismiss what I am saying here as a paean to the gold standard. I wish to state again, categorically, that it is not. I am not proposing any solution, merely attempting to draw up some outlines around the problem, what might be termed a systems analysis.
Gold does have some remarkable qualities that make it quite suitable for use as money. No one can create it, it is enduring, and relatively stable in terms of growth. As an external standard it is almost ideal. And yet it does have some drawbacks, in that gold cannot enforce honesty on a corrupt system.
If there is any key point I wish you to take and hold in your minds and hearts it is that there is no such thing as a perfect, self-regulating monetary system. There could only be such an ideal model if men and women were angels, perfectly rational and reliably virtuous.
And like wealth the distribution of reason and virtue is very uneven, and so all systems must rely on a continuing effort and bias towards justice for all. And this has inescapable requirements for the design of the system.  Among these are transparency and the rule of law.   And the assumption that there will always be those who will be actively attempting to subvert the system, some bluntly, and some quite cleverly.
Money is power, and power corrupts.  So no system can succeed by its own design if it's reins are held in the hands of people, with all their weaknesses and failings.
It will be fascinating to see how this evolves. Will we see the creation of an SDR like monetary instrument based on a basket of items and currencies not under the control of a single power bloc?

Will the world evolve into three or four powerful trading blocs, each with their own currency arrangements? Will the current dollar hegemony continue on until the collapses, and the what could have been an evolution will be a more sudden monetary revolution in which great wealth is destroyed, transferred and created anew?
We do live in interesting times.  And inescapably, these questions are now being addressed in what some have called the currency wars.

06 September 2013

Stalling growth of international reserves

Hugo Salinas Price

I have kept track of International Reserves (excluding gold) for many years, with data helpfully provided every week by Doug Noland, at prudentbear.com, who obtained the information from Bloomberg.
Here is the graph I have elaborated with data since 1948, when there was still a modicum of reason operating in the financial world.

Lately, I worked out a graph showing in more detail the growth of these reserves in the period from August 2005 to August 30, 2013.

I draw your attention to the slump in reserves which took place during the year 2008-2009. It was an ugly period, financially.
Then, notice the slowdown in growth of reserves during the past two years (24 months).
Finally, notice that growth in reserves has stalled in the last few months of this year. Growth appears to be topping-out. Since April 13, when reserves passed the $11 Trillion mark at $11.082 Trillion, in the four months to August 30, they have only increased by $86 billion – 0.78%
If the growth in reserves registered from August 2009 to August 2011, which averaged $1.5 Trillion yearly, had continued from August 2011 to August 2013, international reserves would now be over $13 Trillion; as it is, they are stalled at just over $11 Trillion. $2 Trillion are missing!
International reserves have two sources of growth:

1. Accumulation of Bonds (mainly Euro and Dollar Bonds) in central banks of the exporting nations, which come about due to export surpluses with which the exporters purchase bonds issued by the importing countries.
2. Accumulation of interest earned on the bonds, re-invested in bonds.

The international reserves are thus a measure of the credit which the exporters are willing and able to grant the purchasers of their exports.
If international reserves are not growing, but stalling out, this means that the exporting countries are not extending further credit, for whatever reasons, to the importing countries, mainly the US and the Euro Zone.
Born of the liberation of the world’s money from the shackles which tied it to gold under Bretton Woods, the world’s great credit-expanding machine is slowing down. $2 Trillion in international reserves have not been generated in the last 24 months. The cause must be a decline in international trade, through which enormous export surpluses of the East were sold to the West on credit, and the East received bonds for the extended credit. The market for government bonds of the West has been the eastern exporting countries, which have used their vast export surpluses to invest in western bonds.
If the exporting countries – the East – are slowing down on bond purchases, it most likely means they have less surplus left with which to purchase the bonds. Of course, they might have generated surpluses and used them to invest in the “Emerging Markets” – another name for what used to be called the Third World. Perhaps they are buying up the underdeveloped and chronically deficit-ridden Third World? That may be, but such a policy could hardly account for a $2 Trillion slow-down in growth of international reserves.
A $2 Trillion market for bonds has not materialized in the last two years; it is no wonder that the Fed has stepped in with QE to purchase the bonds which must be sold to keep the US Government in operation, not to mention to stave off utter collapse if the word were to spread that “There is no market for US and Euro Bonds at the volumes that the sellers require!”
The US and the Euro Zone are finding that they cannot float further credit in the exporting countries. This is a serious condition; the West depends on a market which will accommodate its expansion of credit – a market for its government bonds – for without that continual expansion the whole house of financial cards comes crashing down.
There appears to be no further market where the US and the Euro Zone can float their bonds. The only recourse is to monetize their government debt (QE) and that means monetary inflation.
The consequence of monetizing debt will have to be rising interest rates.
If the government debt were not monetized, US and Euro Zone bonds would have to be thrown on the world market, but – who would purchase them? Interest rates would skyrocket, even if there were possible buyers, which is doubtful.
As it is, the US can only continue to monetize government debt. Higher dollar interest rates are inevitable and will cause further government deficits; the debt overhang in both the US and Euro Zone is so great that a rise of a few points in interest rates will explode the deficits, and so on and so forth.
Bottom line: Stalling growth in International Reserves tells me that a world financial collapse is in the offing.
Please draw your own conclusions.

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