Manufacturing. It doesn't sound sexy. It doesn't seem like part of the New Economy of high-tech services and information technology. But manufacturing plays a crucial role in every industrialized nation's economic success. Lose your manufacturing edge in any industry, and you risk losing the skilled-labor manufacturing jobs, income and experience that produce the highest value-added products. You also lose a hefty portion of the income from services that support manufacturing and that create, market and sell products. That's why this morning's surge in durable goods is significant. Manufacturing is the turbine that drives economic growth, extending to sectors far beyond the mere production of goods. Following June's 4.5% drop in orders placed with manufacturers for goods expected to last more than three years, July's report soared 8.7%, a nine-month high. The expectation was for an increase of just 1.5%. Providing a potentially more realistic view of the uptick in manufacturing activity, the less volatile orders for nondefense capital goods excluding aircraft rose 8.1%, the largest increase since the Commerce Department started keeping equivalent records in 1992. If July's report turns out to be more than a one-month aberration, this is a clear sign that we won't slip into a double-dip recession, and it portends a healthy economic advance by the first quarter of 2003.
Trading Durable Goods
Copper, stock and dollar index futures are likely to benefit if this turnaround in manufacturing is for real. T-bonds and foreign currencies would likely fall. In mid-August, I pointed out that September copper (HGU2:COMEX) appeared to find support at its 78.6% retracement line and looked poised for a countertrend move. Copper has held that line and inched up to a three-week closing high, tracing a constructive rounded bottom in the process. Shifting to the December contract (HGZ2:COMEX), you'd expect this market to hold support at 68.90 on a pullback from the current high. If you do get a long pattern entry in this vicinity, the next overhead weigh point where the metal is likely to encounter resistance is at 70.70. More significant resistance -- and the next upside target -- resides at 71.50, as designated by the confluence of Fibonacci retracement levels on the following chart.
One constraint to a bigger copper rally is the logjam in commercial real estate projects. Developers are waiting until Congress hammers out a bill on terrorism insurance . September T-bonds (USU2:CBOT) were capped Monday by tweezers tops (side-by-side candlesticks with the same high) on the 60-minute chart that coincided with the 50% retracement of the Aug. 14 peak and the 61.8% retracement of a lower swing high. In order for the timing signal from Aug. 14 to work out, you'd ideally expect the island top formation etched on that date on the hourly chart (following) to not be closed. Switching to the December T-bond contract (USZ2:CBOT), this means 109 3/32 and then 109 13/32 are upside resistance areas that this contract shouldn't violate in order for the timing signal to remain valid. Levels to be on the lookout for in Wednesday's session are 109 12/32 and 109 20/32.
September Swiss francs (SFU2:CME) have been struggling under the weight of their head-and-shoulders top pattern. The franc hit a two-month low last Thursday and is pulling back for a third-straight session. As pullback trades often occur after a three-bar pullback, look for the franc to trade below the low of the high bar in the pullback beginning Wednesday. A more aggressive approach is to look for short pattern setups in the 0.6796 and then 0.6727 areas, with the view that the European manufacturing sector will not perform as well as its American counterpart and that the franc will proceed to fresh multi-month lows. The September Japanese yen's (JYU2:CME) advance is also being harnessed intraday at a confluence of Fibonacci resistance levels on the 60-minute chart. Despite lingering terrorist threats, corporate scandals and a popped stock market bubble, American manufacturing and the service sectors that support it remain the most vibrant, flexible and creative in the world.
If you doubt this, try getting a loan to start a business in Japan.