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Monday 26 April 2010

SPX Channels, USD, and Cable

We saw a new high on Friday, and it is very likely now that will be followed by further new highs over the next few days. Looking at my SPX channels chart the next upside target is in the 1232 to 1235 area on SPX, if we reach it this week. It will be somewhat higher if we reach it next week as the trendline is rising:

In the very short term though, we may well see some weakness early this week as we appear to have established a new short term rising channel on ES, and we are near the top of it:

That said, it is definitely a day to be cautious on the short side as it is Monday, and as I posted the other day, 26 of the lasted 30 Mondays have closed green. Of the four red closes, two of those closed down less than 2 points and the other closes were only down 12 and 14 points respectively.

Within the last 30 Mondays though, the two longest series of positive closes were of 8 closes in a row, and one of those series is the last eight Mondays. Even by recently bullish standards therefore, we are overdue a red Monday and we may see one of those today.

I'm expecting to see more consolidation in USD during the next few days, but again, that may well not apply today. Over the last few days on the 60 min chart, DX has been forming a broadening ascending wedge that is still holding well, and if it reaches the next upside target, that will be near to a new high. After (and if) the wedge breaks downwards, I am expecting a retracement to the 80.6 area before the next USD wave up begins:

I've been having a look at GBPUSD over the weekend, and it has been very marked how relatively strong Cable has been relative to the Euro in recent weeks. I'm not expecting that to last and after some further upside with a target in the 1.56 area I would expect to see a strong new wave down towards a new low below 136.94. I have put an EW count of where I think we are on the daily chart along with the current rising channel:

There are some other reasons to think that GBPUSD can expect further weakness though in that there is a general election at the end of next week that looks likely to produce another weak and divided government with little or no commitment to putting the UK's fiscal house in order.

That matters a lot as over the last thirteen years the incumbent labour government, which is largely funded by the unions, has gone on  the largest spending spree in UK history. A million new government employees were hired, government spending ballooned from 38% of GDP to 52%, and the budget deficit is 12% of GDP, which on a par with Greece. This has resulted in a situation where over half of the UK population receives over half of their income from the government, either in salary or benefits, and the parties competing for power are largely doing so on the basis of maintaining government spending and increasing taxes on the dwindling number of UK residents with assets in order to do so.

It is hard to see this situation ending well, and unless there is an outright majority for the opposition conservatives next week, which looks very unlikely at the moment, then the situation is likely to get worse until the UK has a currency and debt crisis as it did in 1976 under the last labour government.

Good luck trading today everyone. 

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