Colour of Money
____________________________________________________________________________________________________________________________________________________________________________________
11-16th January 2008
Nymex Crude, Feb Futures: $92.69
Crude Oil futures have been in a bull market for the last 9 years, rising 867% from a low of $10.35 (Dec-98) to a high of
$100.09 (Jan-08). In such a situation, it is imperative that one does proper risk-reward analysis. We try to anticipate
Crude’s behavior in 2008, especially since USA, the world’s largest consumer of Crude, stands on the cusp of a
recession. Take a look at the continuous monthly chart of the near-month Nymex Crude Futures:
115
110
105
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
Crude Monthly - 5 Wave Upmove
$100.09
5
3
$70.8
4
1
$39.99
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Trend Line Analysis
The RED trendline on the chart above, joining the highs
of $39.99 (Feb-2003), $70.85 (Aug-2005) and $99.29
(Nov-2007), provides resistance near $100.00-102.00.
This trendline might not break in the first few months of
2008. As such, Crude can target $85.00 in the next 6months and $75.00 further out, as shown by the BLUE
arrow above. The target of $75 falls on the GREEN
trendline, drawn from the low of $26.65 in Sep-2003.
Elliot Wave Analysis
The chart above shows a remarkable 5-wave pattern
over the last 9 years. Wave-1 is traced from a low of
$10.35 (Dec-98) to a high of $37.79 (Sep-00), a rise of
270% in just 21 months. The corrective Wave-2
extended from the high of $37.79 (Sep-00) to a low of
$17.12 (Nov-01). This was a 54% decline, in a period of
14 months. Importantly, this decline occurred after the
“dot-com” bubble burst in early 2000 and the US went
Jun-08
Jan-08
Aug-07
Mar-07
Oct-06
May-06
Dec-05
Jul-05
Feb-05
Sep-04
Apr-04
Nov-03
Jun-03
Jan-03
Aug-02
Mar-02
Oct-01
May-01
Dec-00
Jul-00
Feb-00
Sep-99
Apr-99
Nov-98
Jun-98
Jan-98
2
into a recession in 2001, emphasising the importance of
US demand for Crude prices.
Wave-3 lived up to its reputation of being the biggest
friend of bulls. Prices rose from the low of $17.12 in Nov01 (post 11-Sep-01) to $77.95 by Jul-06, a whopping
355% rally in 57 months. This bull run even overcame
the massive hurricanes, Katrina and Rita, of 2005.
The 4th Wave was the shortest in terms of time, but the
most brutal in terms of price. From a high of $77.95 in
Jul-06, Crude fell sharply to a low of $49.90 in Jan-06, a
decline of 36% in just 6 months. From there, the final
Wave-5 has extended to a high of $100.09, see on 03Jan-08.
However, Wave-5 has run into the RED trendline shown
above. As such, we may now see an ABC correction,
targeting $75, as depicted by the BLUE arrow above.
The chances of a US recession could work to further
support the Bear case.
Contd…Pg 2
Colour of Money
11-16-Jan-08
Page 2
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108
Crude Oil Weekly Candles
104
$99.29
100
96
92
88
84
$77.45
80
76
$ 75.35
72
68
64
60
56
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52
02-May-08
28-Mar-08
22-Feb-08
18-Jan-08
14-Dec-07
09-Nov-07
05-Oct-07
31-Aug-07
27-Jul-07
22-Jun-07
18-May-07
13-Apr-07
09-Mar-07
02-Feb-07
29-Dec-06
24-Nov-06
20-Oct-06
15-Sep-06
11-Aug-06
07-Jul-06
02-Jun-06
28-Apr-06
24-Mar-06
17-Feb-06
13-Jan-06
09-Dec-05
04-Nov-05
30-Sep-05
26-Aug-05
48
We now magnify the period from May-05, by looking at the Weekly chart.
The RED trendline on the chart above, joining the highs at $75.35 (Apr-06), $77.45 (June-06) and $99.29 (Dec-07) ,
provides resistance in the $100–$102 region. Note, however, the GREEN trendline on the downside. This has been
coming up since Aug-2007, and now provides support near $92.00. Thus, while $92.00 holds on the downside, there
could be a final dash in Crude towards $100.00-102.00 in the next 4-5 weeks, where the trendlines are converging
(circled area above) in the chart above. Alternatively, should $92.00 break immediately, Crude may trade within
$96.00 - $86.00 for the next several weeks.
DOLLAR-YEN @ 106.00… A small bounce to 110?
5.0 USDJPY v/s 10 TBond/ 10 JGB Diff since 1995 (Weekly)
150
4.5
140
4.0
w w w .fxthoughts.com
US10-Y10
USD-YEN
130
120
3.5
110
3.0
100
2.5
90
2.0
80
7-Jul-95
1-Dec-95
26-Apr-96
20-Sep-96
14-Feb-97
11-Jul-97
5-Dec-97
1-May-98
25-Sep-98
19-Feb-99
16-Jul-99
17-Dec-99
12-May6-Oct-00
2-Mar-01
30-Jul-01
21-Dec-01
17-May11-Oct-02
7-Mar-03
1-Aug-03
26-Dec-03
21-May15-Oct-04
11-Mar-05
5-Aug-05
30-Dec-05
26-May20-Oct-06
16-Mar-07
10-Aug4-Jan-08
Dollar-Yen is trading at its lowest level
since 2004, threatening to test the 2004
Low near 101.68. What are Interest rates
saying about the currency rates?
The chart alongside shows the USDJPY
exchange rate (RHS) juxtaposed on the
10-Yr Bond-JGB yield differential (LHS).
The differential (currently 2.31%) is close
to the lowest level it has seen several
times since 1995. This suggests that the
differential could increase (bounce back) in
the weeks/ months ahead. But, is this
possible in the current environment where
the US is facing recesssion and the market
is factoring in a 75bp cut in January and
possibly more in the months ahead?
Colour of Money
11-16-Jan-08
Page 3
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USD T-Bond Yields since 2002
USD T-Bond 10-5 Yr Yld Differentials since 2002
5.5
5 yr
10 yr
1.1
4.5
0.9
4
0.7
3.5
0.5
3
0.3
w w w .fxthoughts.com
2.5
w w w .fxthoughts.com
02-Jan-02
03-Apr-02
03-Jul-02
02-Oct-02
01-Jan-03
02-Apr-03
02-Jul-03
02-Oct-03
02-Jan-04
02-Apr-04
02-Jul-04
01-Oct-04
31-Dec-04
01-Apr-05
01-Jul-05
30-Sep-05
02-Jan-06
03-Apr-06
04-Jul-06
03-Oct-06
05-Jan-07
06-Apr-07
06-Jul-07
05-Oct-07
04-Jan-08
The “curve steepening” can be seen in the chart above.
The 10-5 Yr Bond Differential has chances of rising further
towards 0.85% as against the current differential of 0.70%.
Note that the US-10 Yr Bond Yield is near 3.75%. It could
dip by maybe 20bp in the foreseeable future, even if the
Fed rate falls by 75 bps. This is consistent with the overall
curve steepening that we are seeing in the USA right now.
3.0
2.8
2.6
2.4
2.2
2.0
1.8
1.6
1.4
1.2
1.0
0.8
Now let us take a look at the JGB Yields. The 10-Yr
JGB Yield, currently near 1.43%, can dip to 1.251.20%, to touch the RED trendline in the chart
alongside.
150
Little reason, therefore, to sell the USDJPY
aggressively near current levels. Admittedly, the
long-term trendline joining the lows of June 1995,
Jan 2005 and Nov 2007, as seen in the chart
alongside, has been broken today. However, we
need to wait through this week, possibly the next
also, to assess whether or not it is a false break.
JGB Yields since mid-2003
4-Nov-05
13-Jan-06
24-Mar-06
2-Jun-06
11-Aug-06
20-Oct-06
29-Dec-06
9-Mar-07
18-May-07
27-Jul-07
5-Oct-07
14-Dec-07
EoF()
18-Jul-03
26-Sep-03
5-Dec-03
13-Feb-04
23-Apr-04
2-Jul-04
10-Sep-04
19-Nov-04
28-Jan-05
8-Apr-05
17-Jun-05
26-Aug-05
w w w .fxthoughts.com
USD-JPY Weekly
140
130
120
110
100
90
w w w .fxthoughts.com
7-Dec-07
15-Sep-06
27-Apr-07
24-Jun-05
3-Feb-06
2-Apr-04
12-Nov-04
31-May-02
10-Jan-03
22-Aug-03
9-Mar-01
19-Oct-01
17-Dec-99
28-Jul-00
25-Sep-98
7-May-99
22-Nov-96
4-Jul-97
13-Feb-98
1-Sep-95
12-Apr-96
80
20-Jan-95
0.1
-0.1
19-Oct-07
1-Jun-07
12-Jan-07
25-Aug-06
7-Apr-06
18-Nov-05
1-Jul-05
11-Feb-05
24-Sep-04
7-May-04
19-Dec-03
1-Aug-03
14-Mar-03
25-Oct-02
7-Jun-02
18-Jan-02
2
30 yr
10 yr
1.3
5
Thus, even if the US 10-Yr dips to 3.55% and the
JGB 10Yr dips to 1.25%, the Bond-JGB Differential
will remain steady around the current 2.30. Please
refer again to the chart of the US Bond-JGB Yield
Differential versus the USD-JPY rate, shown on the
previous page. It may be noticed that the USDJPY
rate has recovered/ bounced whenever the Yield
Differential has come down to the 2.37-35% region,
as depicted by the Red Trendline in that chart.
History and evidence suggests that there could
be a small bounce in Dollar-Yen to about 110
over the next 1-6 months. However, a subsequent
fall, even past 106 cannot be ruled out.
_________________________________________________________________________________________________________________________
Copyright, Kshitij Consultancy Services, Suite 2G, 2nd Floor, Tower “C”, Hastings Court, 96 Garden Reach Road, Kolkata - 700 023, INDIA
Phone: 00-91-33-24892010 / 12
E-mail: mail@kshitij.com
Website: http://www.kshitij.com
Disclaimer: The above views are based on the latest available information. Though the information sources are believed to be reliable, the information
is not guaranteed for accuracy. While the views are proffered with the best of intentions, neither the author, nor the firm are liable for any losses that
may occur as a result of any action based on the above. Global commodity and currencies markets are inherently risky and it is assumed that those who
trade these markets are fully aware of the risk of real loss involved.