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Wednesday 31 March 2010

USD Uptrend Intact So Far

I was concerned by the EURUSD action yesterday, so I reviewed the USD and primary USD currency pair channels and patterns after hours to see whether any technical damage has been done to the USD uptrend.

So far at least, the answer is no, and USD looks to have been establishing a broad uptrend channel for the current wave up. I have provisionally drawn in the most likely current wave channel which suggests that the recent pullback has probably bottomed:

On EURUSD we have seen a return to near the top of the declining channel.The next downtrend target is now 1.29 if hit the week after Easter and 1.28 if hit two weeks later:

GBPUSD has returned to retest broken fan resistance for a second time. If this retest fails then the next target downwards is in the 1.40 area, where there is very serious long term support. There is a lot of uncertainty over a possible hung parliament in the imminent UK election, and the chance that the current entirely worthless and spendthrift socialist government may stay in power despite their appalling track record. The time looks right for a 1.40 retest here:

The Swiss Franc was one USD currency pair that I was a bit concerned about when I last did a full update a couple of weeks ago, as it had failed to hit the top of the declining channel by a wide margin. It has come close enough this week to count as a hit, and may yet exactly hit the top of the channel on Thursday:

Of all the main USD currency pairs, the Yen has looked the weakest in the last two weeks, with a break of strong fanline support that is also the neckline on a nice looking sloping head and shoulders pattern. This is a correction that is well overdue for the currency of the most profligate and indebted government in the developed world. There has always been an unreal air to me about the Yen as a 'safe haven' currency. The next fanline support is at 105 on JPYUSD and the H&S target is 100:

The two main commodity currency pairs have held up best in this upswing. Of the two the Canadian Dollar is the easy winner, with an intact uptrend channel. The top of that channel is now in the 105 area and it looks likely to get that far, though we may not see much upside until the current USD wave up has peaked:

The Australian Dollar has looked considerably weaker and has formed a broadening descending wedge since USD bottomed. The next target is in the 83 area, but of all the possible shorts here, this looks the weakest to me. Both commodity USD currency pairs look much stronger than all of the others:

There are a couple of things worth adding at the end of this review. Firstly this USD uptrend now clearly appears to be a five wave uptrend sequence, which means that after it ends we should see an abc correction and then in all probability another five wave sequence up. This may only be a rally on USD in the big picture, but it doesn't look ready to finish soon, and it could yet go a lot higher than the 83.5 to 84 that this current wave up should reach.

Secondly, in terms of equities I was predicting a couple of weeks ago that this USD wave up would see either a sharp retracement in equities or sideways chop while it is ongoing. Obviously we've been seeing the sideways chop and it seems likely to me that this will continue for another week or two until the USD peaks. As USD then settles into the likely subsequent abc correction of the move from 74.23 to the 83.5 to 84 area, we should then see the completion of the fifth wave (or extended third wave) in equities of which we are now in a sideways fourth wave. That will bring us close or into the traditionally weak period for equities May to October, and should be the start of the first extended weak period for equities in over a year.

Friday 26 March 2010

It appears that Hamlet has finally left the building

We finally got a break down from the wave 3 channel on SPX yesterday:

About time too really, as making this interim top has taken way too long, and this has unfortunately wasted much of the period when it could have coincided with the strong wave up in USD.

The USD wave has been so fast and so strong that it looks unlikely to last too much longer. We could reach the top of the USD channel in the 83.5 area if we get there next week, and at the rate USD has been rising, it isn't impossible that we could reach it in the next two trading days:

That's bad news for the retracement in equities, as there is a very distinct possibility that the retracement will end when USD hits the top of that channel, just as the bottom on Feb 5th was hit on the same day and at about the same time as EURUSD hit the bottom of the declining channel.

That makes the EURUSD target here of very considerable interest, and the clearest picture of that channel target  is on the weekly, where the highest the target could be is 1.30. Next week it should be at about 1.295. However we could get as far as 1.285 as the previous two bottom channel hits both pinocchioed through before bouncing.

In the very short term though, EURUSD has been bouncing overnight, and I'm expecting that it may well rise a little further to hit the bottom of the current short-term declining channel just above 1.34. Given the greater targets on this, EURUSD looks like a very nice short indeed from there:

One chart I've been checking very regularly for a while now is the XLF chart, where a beautiful rectangle top pattern has been building for several months on the weekly chart. Last week it was trading above the rectangle for much of the week, but returned to close within it last Friday, and I'm expecting to see the same thing happen today, which would mean a return to 15.75 or lower. As and when this does break, and assuming it breaks to the upside which is likely, the pattern target is 18. Rectangle tops of course, despite the name, break upwards 69% of the time:

I don't trade gold much, but this head and shoulders pattern, which could well play out over the next couple of days, also looks very inviting:

Overall I'm expecting to see sharp drops in both equities and EURUSD today. I think that we're in a subwave 4 abc correction, and that we probably saw the a wave down yesterday and have been seeing the b wave retracement overnight.

I've marked in the fib retracement targets on the SPX 60 minute chart at the top, though it doesn't include the 23.6% target which would be 1158 SPX. I'm expecting to see 1144.5 SPX for the 38.2% fib target, and am hoping that we will see 1133 SPX for the 50% retracement, though I'm less optimistic about that now that we have wasted so much time making this top.

If we see anything lower than 1112.42 SPX then this wave count is wrong and the main wave up from March 2009 will most likely be finished already.

Until and unless we see that though, this is just a short but pleasant interlude for the bears before another wave up, and is primarily a good opportunity to get good long entries.

Wednesday 24 March 2010

Are we there yet? Yes!

Well we blew right through the resistance that I was really expecting to hold on the SPX yesterday. Fortunately I was given some warning because I had been playing a classic broadening top pattern both short and long on the ES all day. I saw a partial decline and return to the top trendline which was an early warning signal for the upside breakout that followed shortly afterwards:

I really had expected the resistance to hold though, so I went back to my SPX charts to see what I had missed. I came up with the following SPX 60min chart which at first glance at least made very depressing
viewing for the short side:

There were a number of interesting things to note about this chart.

Firstly it is now obvious that what at first appeared to be a rising wedge on SPX was in fact merely the top diagonal half of a channel which only later became apparent. This is of course exactly what happened in the broader SPX uptrend since last March, where the main rising channel also appeared to be a rising wedge until the bottom was made on Feb 5th, and the perfect rising channel was then revealed.

Secondly we closed at my last significant internal line of resistance yesterday, and if we broke through it today then I could see no significant resistance until we reached the top of the current channel in the 1190 SPX area. That target was reinforced by the slightly dubious quality IHS that has formed in the last few days, with the neckline broken in the last hour of trading yesterday.

Thirdly the SPX wave structure since the bottom on Feb 5th looks very obvious from the chart, with a first, second, and ongoing third wave structure apparent. That would make the imminent interim top and retracement a wave four of course, and I saw a very nice count at PUGridiron's blog after I had depressed myself completely by doing my SPX chart. Here's his take on the current wave count:

Now with the greatest respect to EWI enthusiasts, Occam's razor tells us that the simplest explanation is generally the correct one, and on that basis the primary count for the market we see before us has to be that we are now in the fifth wave up of a bull market wave up since March 2009, and that we are currently in the third sub-wave of that 5th wave. Looking at the wave structure of that third sub-wave, I would agree also with Pug that we appear to have been playing out the fifth subwave of that 3 of 5, and that the interim top and correction that I have been expecting would therefore be the end of that wave and the fourth wave retracement after it.

The bad news is of course that after the fourth wave retracement, there will be a fifth subwave up to take us to the final top of this bull market wave sequence, and the good news is that we should then see a deep abc correction of the full move since the March 2009 bear market bottom.

USD is important here. I've been writing over the last few days about how a new USD wave up is likely to coincide with sideways or negative equities action in the next couple of weeks, and I was remarking to Anna yesterday that a good confirmation signal that an equities interim top was in would be a new high in USD and new low in EURUSD. That is exactly what we have seen overnight. Here's the USD 60min chart at the time of writing:

We're seeing the same picture in mirror image on EURUSD overnight with the strong support from the previous low broken with an impulsive wave down:

The USD target for this wave up is the rising channel top in the 83 area, and the EURUSD target for this wave down is the declining channel bottom in the 1.29 area.

So what does this mean for equities?

Well USD hasn't been a particularly reliable guide lately but it is now likely that we have seen the short term top in equities at the close yesterday, though a rise a little further to the wave 3 channel top and Pug's target at 1189ish is not yet completely off the table.

In my view though, we have seen the wave three top, or are about to slightly higher than yesterday's close, and that view is strongly reinforced by the following SPX daily chart, where we are right at the top of a six month internal channel within the main SPX rising channel:

What are the targets for this retracement then? Well if Pug's wave count is correct then it cannot be lower than the top of the first wave at SPX 1112.42, and I still favor the 61.8% retracement of wave 3 at 1120 SPX, which is also the mid channel line of the six month internal channel on the last chart above.

We may not get that far though, and the other likely targets are the 38.2% and 50% fib retracements at 1140 and 1130 SPX respectively.

This will be a pleasant interlude for the bears before the next wave up. Everyone have fun trading it!

Tuesday 23 March 2010

Chopping around uncertainly

SPX bounced back into the ES rising channel yesterday and is just below resistance. We may well be making a triple top. The action in recent days has a disturbing look of an IHS being made though, and that is something to watch this week, though the left shoulder has too much sideways trading for a good H&S pattern:
We should correct here. We have hit the top of the current internal SPX channel within the main rising channel and I'm still expecting to see a correction this week to the 1120 level as the obvious target:
USD has broken up from the declining channel of recent weeks and looks set to rise further. That should at least slow rises in equities while it is ongoing on past performance:
EURUSD bounced from strong support yesterday for what looks like a technical retracement only, and a break down through it would be confirmation that a major new wave down has started:
Oil has broken down from a rising wedge and has established a gently declining channel:
Gold has also broken down from a rising wedge and has also established a gently declining channel:
My feeling is still strongly that equities will correct this week, but I'm starting to lose confidence. We will need EURUSD to break support in the next day or so to back up my view, and a break with confidence through resistance at 1165 on ES would undermine the case for a correction badly.

One thing that I will be watching very carefully this week in terms of a longer term signal is the longstanding rectangle on XLF. It traded above the rectangle intra-week last week but closed back within it. A weekly close above or below it would be a strong signal for equities in the weeks afterwards. If we fail to correct this week then a close above it would signal that we will rise strongly in the weeks afterwards:

Sunday 21 March 2010

Good news and bad news

Well the ES rising channel was broken on Friday, and the chances are that we will see some kind of retracement this week:
USD has bounced on the bottom of the rising channel and looks likely to have started the next wave up:
Other indicators are encouraging too. $BPNYA is at a likely turning point, even if the declining channel now looks more like a broadening descending wedge:
$NYMO looks likely to turn here having reached a good level to turn, with an H&S pattern and negative divergence on RSI and the ultimate oscillator. The larger patterns are hit and miss on $NYMO, but the smaller patterns generally play out for a significant interim top.
CPCE has also reached a significant trough level and then turned back up, which it generally does before retracement begins in earnest:

The real question is how significant an interim top this is likely to be though, and for that I would turn to the GS chart, which I think might well be a good proxy for the broader market.

The GS monthly chart has some encouraging features to it, and GS has been closing on a monthly basis within this long term declining channel since the peak in 2007. It is trading above it for the moment but as long as it closes within the channel by the end of the month that channel is holding. If that channel holds this would be a natural point for the rally to end, and a break on a monthly closing basis of the rising trendline just below might give us the signal that the rally was over. :
Unfortunately though, there is much more to the GS chart than the declining channel. On the weekly chart I have marked up the huge potential IHS on the chart together with the second IHS building in what would be the RS for the larger pattern:

Now the good news is that this also backs up the thesis that there is a short-term retracement that has just started. If the smaller IHS continues to build then GS should pull back to the main support trendline just over $160, which makes it a good short in the short term.

The bad news is that unless GS breaks that rising trendline, that is one very bullish chart. The smaller IHS indicates to $210, which would confirm the larger IHS indicating to $335. If GS were to get to the smaller target, that would be fairly bullish for the general market over the next two or three months. If the larger pattern were to play out, and we have seen a lot of huge IHS patterns play out over the last year, then it is difficult to see that not being very bullish indeed for the equities market generally.

It could well happen. We are already in a valuations bubble inflated by huge government borrowing and stimulus. Bubbles can inflate for quite a while and I can't see much sign at the moment that the supply of either mindless optimism or government credit is becoming too strained to continue.

I'll be taking a spec long on GS at $162,50 with a stop just below the year's low, because that is where the IHS would be invalidated.

Hope for the best, but plan for the worst!

Friday 19 March 2010

Is USD starting a new wave up?

Possibly the most important question for market direction in the next few weeks is whether the USD is going to start a new wave up and when exactly that might happen.

Now the inverse correlation with equities isn't what it used to be, but while weakened it certainly isn't altogether dead as yet. During the first USD wave up in December equities stayed flat with a slight upward bias but during the second wave up in mid January to early February there was a very significant correction in equities.

During both periods of USD consolidation after those waves, equities rallied significantly, but there is every reason to expect that if another USD wave up gets going, then we will see at least see equities trading sideways over the likely three to four weeks that wave up would take.

It is difficult to get a reliable channel on USD that looks the same between the USD indices and the USD futures, and on my futures chart the bottom trendline of the channel was not touched, though we came within 0.20 of doing so. On the $USD index and UUP charts though it does look as though USD has now bottomed and turned back up.

The lower trendline of the rising lower channel trendline on the UUP weekly chart has been (thoroughly) tested and has held. I have put the SPX in the background of the chart to illustrate my point about equities during the last two USD waves up:

The picture looks similar on the $USD daily chart with the lower channel trendline tested and holding:

So what does this mean for the USD currency pairs? Well, on the XEU weekly chart EURUSD looks as though it has hit the top of the declining channel and started a new wave down, with a likely target in the 1.30 area:

I drew a fan on the GBPUSD weekly chart in December which is still looking very good. Cable broke fan support three weeks ago and has returned to retest the broken fanline. If it holds, and it has held so far, then the next target for it is at the bottom of the fan channel in the 1.40 area:

The Swiss Franc tends to track EURUSD fairly closely, but that relationship seems to have been breaking down lately for the obvious reasons. Like EURUSD though it is in a strong declining channel, but unlike it CHF hasn't yet hit the top of the declining channel. It may not of course, and if it starts a new wave down the obvious target is at the lower declining channel trendline at 91.

The Japanese Yen has risen with USD during the last two USD waves up, and there is every reason to think that it will do so again this time. JPYUSD is fairly close to very solid support in the 109.5 area and the obvious next target would be at 114.

Of the commodities currencies The Australian Dollar looks very vulnerable here. It recently broke down from a rising wedge targeting a very large retracement, but more immediately it has since been trading in a broadening descending wedge and is near the top trendline of that wedge, where there is very solid resistance at 92.5. A break downwards from here would target the lower trendline of that wedge in the 83.5 area:

The most bullish USD currency pair chart that I have looked at this morning though is definitely the Canadian Dollar. It is still in a strong rising channel and the obvious next target is the top of that channel at 104 and rising. It has just hit the middle of the channel though, and may retrace from there for a while in the event that USD has another wave up.

On balance it does look likely that USD has started a new wave up, and we've had strong confirmation of that this morning with a definite break of the recent EURUSD rising channel on the spot forex hourly chart:

If so, what does this mean for equities? It means that we are very likely to be starting a period of either consolidation or correction for the next few weeks. We would all probably be better off playing the forex opportunities here rather than shorting equities though, as the inverse correlation of equities with USD is obviously much weakened in recent months.

Thursday 18 March 2010

While we're waiting for the turn - The ES rising channel

The ES rising channel is very strong, and has resisted all attempts so far to force it to break down with the sheer power of persuasive charts suggesting that it must, but while we're waiting for the inevitable break, whenever that might be, this ES rising channel is extremely tradeable, particularly for futures and CFD traders, as there are multiple useful good support and resistance levels within it:
The first set of support and resistance trendlines are the internal parallel diagonal trendlines within the channel. These have been important as you can easily see. 

The second set of trendlines have been even more important so far however, and they are the horizontal trendlines that I have marked in red within the channel. These give very useful entry and exit levels for short term trades as they have been extremely good in establishing horizontal trading channels within the main rising channel. 

Once a new horizontal support/resistance channel has been established, it is rarely broken. You can see that only one level has been broken so far, and that was at the touch of the bottom channel trendline on Monday. Once broken on the way up, these then act as an effective support floor until the next horizontal support/resistance level up has been broken. 

As for the current channel, it was established yesterday with a ceiling at 1165.5, having risen straight through an intermediate channel on the way, which has happened once before lower down. The floor of the new horizontal trading channel was therefore unconfirmed until we had a spike down near the close to confirm it, and I drew the new floor level then and posted it in various places. You can see that the floor was tested again overnight and was effective support. 

A couple of further points about the main rising ES channel are worth noting. 

Firstly, the bottom trendline of the channel is now at 1153. If that is broken with confidence then the rising channel will finally be broken, and a significant interim top is likely to have been made. That breach would have to be sustained until the end of the trading hour, as this is an hourly chart, and both the top and bottom trendlines on the channel has been breached for short periods before within a trading hour, so a break below that was not sustained would not be a definitive break until the end of the trading hour. 

Secondly, the last touch of an outer trendline on this channel was at the bottom trendline, and we should not expect that the bottom trendline will be touched again before the top trendline, currently at 1176, is touched first. A touch of the bottom trendline again before that happens would be a part-rise and a strong signal that the channel is likely to break downwards. By no means would that be a certainty until it does break, but that will give a useful signal that it is time to consider repositioning short. 

That said, the obvious short term trade there would still be to go long, as the risk/reward for a long there with with a stop four points below would be so high that it would be a good trade in any case. Definitely a trade to use a tight stop though. 

Wednesday 17 March 2010

A fork in the road?

$BPNYA hit the top trendline of the declining channel yesterday:

USD is almost at the bottom of the 60min rising channel on DXM0:

CPCE has spiked below 0.5 in recent days, which has been a good indicator of an interim topping process for some years now:

I've identified an internal rising channel within the main ES rising channel that should cap any ES hourly close today at about ES 1162:

This is the moment of truth for the interim top scenario IMO. As long as these levels are not broken with any confidence then this leg of the equities rally is at or very near the top now.

If they don't hold then the next major resistance that I can see is at the 1200 level as you can see on this SPX daily chart, which also shows the main SPX rising channel:

If equities do keep rising without a correction here, then this declining channel on the Vix weekly chart also makes bleak reading for the bear side with the next target near the 14 level:

They say that it looks darkest just before the dawn and that's true enough. Equity bulls and USD bears were becoming hard to find at the last significant turn on Feb 5th as you can see from the BPNYA, CPCE and Vix charts. Until we see the BPNYA and USD channels broken, the case for a significant interim top for equities here remains strong.

If they fall though then the next significant interim top may well be over 1200.

There is a significant Gann turn date on Friday 19th March and Terry Laundry is looking at a significant turn date on Monday 22nd March. There are a number of lines in the sand drawn here. We'll see if they hold.

Tuesday 16 March 2010

Meltdown Mondays are just a fond but distant memory

Well, it really did seem as though the expected interim top was in and that the correction was starting on Monday morning. My ES channel broke downwards overnight and it seemed we were away.

I wasn't too happy from an indicators perspective, as I had expected a bullish Monday, and Mondays have almost all been bullish in recent months. In the afternoon after the decline stalled I ran a line parallel to the channel up from the 1085 low and it fit very well where we had retraced to on Monday morning.

Looking at it now, it seems clear that the larger channel is the correct one, so here is the updated ES channel, which has most definitely not yet been broken:

One of the indicators that I have been looking at carefully is the bullish percent index $BPNYA. That made some progress today and is near, or possibly even at, a level which should signal an important interim top:

I was surprised to see USD push up sharply from Friday's close. I had found an in-channel H&S pattern on USD indicating to the bottom of the USD rising channel, and have found those very reliable in the past. However it does seem to have turned back up with some conviction now:

There is some good reason to think that USD may have turned back up now. EURUSD broke through its channel late last week, but that may just have been an overthrow, it has returned today and may now start another wave down:

Gold and oil seem to have made interim tops already, which is a good indicator that we may well see an interim top made soon. Oil has broken out of its rising wedge and is making good progress down towards the wedge target in the 72 area:

Gold has also broken out of its rising wedge, but presents a more intriguing picture as over a longer timeframe we may have a large head and shoulder top on gold indicating to the 950 area, which is something to think about.

It may not play out, there was a more recent IHS on gold that didn't play out, but H&S patterns on gold form often and generally play out. There are three smaller ones within the large H&S pattern that all played out:

I think that we're very close to an important interim top now, and I'm fairly certain we'll see that this week.It is obviously quadruple witching opex this week though, so we can expect some more surprises on the way.