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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!

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