Global Economy

On the back of insurgent activity in Iraq, crude oil prices have popped up above recent highs. This isn’t something yet which breaks the long-running trading range I noted previously, but it is a development we need to keep an eye on moving forward. We can see why by first taking a look at the weekly chart below.

Crude Oil weekly chart

Notice how narrow the Bollinger Bands have become thanks to the relatively narrow range either side of about 102 seen over the months before the recent rally. As indicated by the lower plot on the graph, the Band Width reached its narrowest point in years, which by itself tells us to be on the lookout for a volatility expansion – most likely as part of a new trend. The oil rally above 105 is seeing the Bands start to widen out, which suggests that a volatility/range expansion has begun. The range being resolved positively is supported by the clear pattern of rising lows we can see going back to 2012.

That said, there’s definitely some resistance overtop at this stage. The market hasn’t been able to sustain moves above 108 at all since it peaked near 115 in 2011. And even if the market is able to overcome that resistance, the precipitous way oil sold off after making its 2008 high indicates the potential for resistance remaining a factor above 115.

Still, in the monthly time frame the Bollingers have turned higher and are very narrow. That paints a pretty positive picture for prices. A monthly close above 110 or so would probably get the Bands starting to widen out – a positive trend indication. If the Bands weren’t so narrow I’d suggest that we could actually see the kind of low volatility grind higher bullish trend that develops sometimes. With recent volatility so low, however, the odds would tend to favour at least some kind of short-term rapid range expansion before a trend settles in.

Asian bourses were mixed with the Hang Seng Index retreating from the five month high registered on Tuesday while the Nikkei and Shanghai Composite gained 0.5% and 0.1% respectively.  Chinese stocks, especially utilities advanced on speculation that the government could announce measures to tackle water pollution.

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On Seeking Alpha, Dean Popplewell writes, "With little new data to chew on the forex investor continues to wander in 'no man's land' of tight contained range trading." Markets have been hoping for a breakout, but it has yet to materialize. After the European Central Bank got aggressive against potential deflation, there was hope of action in the EUR, but the Bears remain caged for now.

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1 Comment

Gold got rather uppity a short while back. After an uneventful couple of months trading in an increasingly narrow range either side of about 1295, the market broke down sharply and eventually got to near 1240. As you can see in the daily chart below, that move came out of a very narrow Bollinger Band set-up, which is quite often the precursor to high volatility moves.


As much as the move in narrow Bands to start expanding can signal the beginnings of a new trend, in a case where the Bands have become exceedingly narrow the dynamic can change a bit. In those cases the market has been so tightly controlled that the eventual break is quite violent, as we’ve seen in gold. And as is the case here, a major initial move quickly peters out as the initial impetus fades.

This is not to say further movement in the direction of the break can’t or won’t come. A continuation of the break can indeed eventually develop to create a more lasting trend. A lot depends on the bigger picture, however.

This would certainly seem to be the case where gold is concerned. A look to the weekly chart provides us some perspective. You’ll quickly observe that here too we have a situation involving narrow Bollinger Bands, which could be setting the stage for a new trend in that time frame.


The proximity of the market to the lower Band is enough reason to suspect that we might yet see a period of consolidation and maybe a bounce in gold from the shorter time frame perspective. There is also reason to look for the Bands to narrow a bit further in the weekly time frame as they are not quite as tight as they were before previous major expansions. A bit more time in the current range would facilitate that.

That said, we could see a Band expansion from here. It would certainly happen if the market were to break through the 1240 support zone and head for 1200. The market repeatedly rejected attempts to break below that latter level in the last year or so, however, so it likely won’t be one easily taken out. That’s another reason to be cautious about playing gold from the short side at this juncture. The risk/reward profile is a bit better for long plays, even if the bigger perspective view probably favors the bears a bit more. - The dollar was broadly higher against the other major currencies on Wednesday, as investors eyed the release of a string of U.S. economic reports later in the day, while caution ahead of the European Central Bank's policy meeting supported safe-haven demand. Dollar rises broadly vs. counterparts, eyes on data

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