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Friday, 30 April 2010

Declining Channel or Broadening Top?

The overnight action has been very interesting on equities. We may be near the top of a large declining channel which looks best on Dow and Nasdaq this morning. The ES equivalenr has broken through the top slightly and is testing the strong resistance level at 1207.50. Here is the possible declining channel on the Dow:

This could still go either way but in my view a break above current levels would open the way towards likely new highs, and I have an alternate scenario for that.

That alternate scenario is that we may be forming a broadening top and here that is shown on the SPX daily chart:


Despite the name, broadening tops are a neutral pattern, breaking down 50.3% of the time and upwards 49.7% of the time. They are also a weak pattern and frequently fail to make the target, which is the distance between the highest and lowest peaks within the pattern, subtracted or added to the breakout point depending on the direction of the breakout.

Like quite a few patterns, that just means that they are most profitably traded within the pattern, going short at the top and long at the bottom, with a cautious long or short in the direction of the breakout when it occurs.

As the top trendline is also the very strong resistance trendline on SPX that has now been hit six times without breaking, this pattern does look much more likely to break downwards though.

At the same time that we have reached a critical point between bullish and bearish scenarios on equities, we have also reached a critical support level on USD. I posted a broadening ascending wedge on the DX 60min chart the other day, and while I redrew the top trendline after it fell short of my target then, the lower trendline remains the same, and we have reached it overnight. I have also drawn in the short term declining channel that has brought us to the lower wedge trendline:


Either the declining channel or the wedge will break today. If the wedge holds then the next target for DX is in the 83.25 to 83.5 area, depending on the time taken to get there. If the wedge breaks then DX should reach 81.5 as the next declining channel target within the next 24 hours.

As ever, if the USD breaks down, equities should break up, and vice-versa. 

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