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Friday 28 May 2010

SPX Retracement Targets

I got the reversal confirmation that I was looking for yesterday, albeit not by much. We broke the declining channel I posted yesterday, cleared the neckline of the IHS comfortably enough, though getting much past it was a slow and painful business. The Vix closed under my channel trendlines on the 60 min chart, just a little bit but enough, and the RSI on the SPX daily chart broke up from the declining resistance trendline of recent weeks. For my money, we're there, and the interim low is in.

Even EURUSD has risen from the deathbed it has been occupying in recent weeks and is showing some signs of life. I have a retracement target if reached within two weeks of slightly over 1.30 for EURUSD, and of slightly over 1.50 for GBPUSD over the same period. 

My $SPX:$VIX indicator on the 60 min chart, one of my favorites as it tends to trend and pattern well, broke up from the recent broadening descending wedge, retested the broken trendline and broke upwards again. Normally this wedge would indicate a return back to the highs and lows of SPX and Vix respectively, but I don't tend to regard such targets as firm for this sort of derived indicator:

Now some of the more bullish EW analysts have regarded this fall from the high as an ABC correction and are regarding wave C as completed. If so, we can expect that we would make a new high within the right angled and ascending broadening formation on SPX in the 1250 area.

Possible, but unlikely I think. If they are right though, we'll find out when EURUSD and GBPUSD reach their retracement targets and then break upwards from their respective declining wedges. In the event that happens, this will be worth another look.

In the interim however, I'm sticking with my primary EW count, which is that we have just finished wave 1 down, and have now started wave 2. That is important, as wave 2 retracements are often very deep, and can retrace almost all of the preceding wave down in some cases, as we saw with the first two waves after EURUSD peaked a few months ago. I don't think that's likely, but it could happen, and I'll be looking for some indicator and forex confirmations before I short the top of this too heavily.

On the SPX 15min chart the IHS still looks pretty good, which is reassuring as the right shoulder was beginning to look a bit of a mess on ES yesterday afternoon. I'm expecting that the neckline at 1090 SPX should be a firm floor for SPX in the next few days, and that any drops below it will weaken or even invalidate the IHS, which has a target of 1140 SPX. I have marked in a rising support trendline on the chart, and a very tentative rising channel line above as a possible immediate target area. That only has one touch so far though, and until we see the next short term reversal it is only an educated guess:

I've marked in possible fib retracement targets on the SPX 60min chart. The main ones are the 50% retracement at 1130.29, which seems low for me, and my preferred target of 1151.41 at the 61.8% fib. That would be a typical wave 2 retracement, and I have two important trendlines that will be near that level within two weeks. I have also marked in a declining channel trendline from the top in early May that looks compelling, and that I am seeing as the first serious resistance in the 1120 - 1125 area:

On the SPX daily chart I am seeing two key broken trendlines that look interesting as potential resistance and they are the broken lower trendline of the main SPX rising wedge, which will be in the 1150 area within two weeks, and the broken lower trendline of the main SPX rising channel from the March 2009 low, which will be in the 1170 area within two weeks.

The main declining trendline from the SPX high will intersect the broken rising wedge trendline in the 1150 area in two weeks as well, and that too is likely to prove significant resistance and is another reason why I like 1150 as the retracement target from the low this week:

In terms of timeframe no doubt you'll have noticed that I'm using a working timeframe of two more weeks for this retracement, specifically with a speculative working target of Friday 11th June. That is a workable contender for a turn date, and I don't think that the USD currency pairs leave room for a much longer retracement period unless they break up from their declining wedges. In practical terms I am assuming that we have at least another week of retracement and perhaps as many as three.

Thursday 27 May 2010

Just waiting for confirmation now

I was becoming seriously alarmed at the close yesterday about the possibility that my beautiful topping patterns might be broken. The close was very weak and strongly reminiscent of Monday's close, when we continued falling overnight to new lows. The contrast with the action last night however couldn't be stronger, with a very strong recovery to resistance at 1190, and with my support trendline from the low intact, albeit slightly tweaked.

Yesterday I posted an IHS on ES and described it as sloppy, as the neckline wasn't regular and the shoulders looked poorly formed. No longer. Here it is now on the ES 60 min chart:. I have also marked in the declining channel from 1173, which will break with the neckline to reinforce confirmation that an interim low would be in:

Here it is on the SPX 15 minute chart with a rising support trendline as part of a tentative rising channel marked as well:

Now these head and shoulder patterns are just lines on a chart until the neckline has broken with conviction, and there was quite a while after the low in July last year when talking about head and shoulders patterns was an invitation to be pelted with rotten eggs by angry bears, but these patterns are generally very good performers, and I've lost count of the number of these patterns I've seen play out at the end of significant trends over the last year. That this pattern has formed is at the least extremely encouraging, and if the neckline is broken, and with it the downtrend channel from the 1173 high, then I'm convinced that we will see a very serious rally.

Other indicators are just waiting for breakout too. Here's the Vix 60 min chart with a beautiful uptrend support line. A break of that on an hourly close should give confirmation that the major interim low is definitely in.While we're waiting for that, the strong negative divergence on the RSI and MACD are a very encouraging signal that we've made it already:

CPC has reached a major high and has been trending within a broadening ascending wedge. A downward breakout from that wedge will also provide strong confirmation that the interim low is in:

I was looking at the SPX daily chart yesterday & was considering John Murphy's SPX fib retracement targets that he posted on Tuesday night. The interim low that I think we've made this week doesn't fit well with those, but then again, I'm not seeing this as a final low. As an interim low with a final target of 870, that would fit very well with a 61.8% fib retracement of the rise since March 2009:

Short term this morning, the overnight rise is looking tired, and if overnight uptrend support at 1085 ES can be broken, then we may well see a significant retracement before the open and continuing into it. I'd be very surprised to see the overnight gap filled today, though in the market we've seen over the last few weeks, almost anything now looks possible.

Wednesday 26 May 2010

Swing low made, so now what?

Well, another amazing day or ES, with a picture perfect swing low made for my main SPX scenario for the summer. We've since started a strong rally which I'm expecting to last for a couple of weeks at least.

We haven't really seen enough action since the low for me to identify any emerging channels or patterns, but we still have falling wedge targets from before the low for EURUSD and GBPUSD of 1.25 and 1.45 respectively, and that fits with my expectation that we're likely to trend upwards for the rest of the week on SPX.

There are still a couple of interesting things to note in the short term on the ES chart however. Firstly, the sideways overnight action since yesterday's meteoric rise very much has the look of a bull flag to my eye, and it may also be that we have been putting the right shoulder in on a fairly sloppy looking IHS pattern.

To make really serious headway in the next few days though, we need to break declining resistance from the 1170 high, currently in the 1096 area, and I have that as the top trendline of a broad declining channel on my ES 60min chart:

In the longer term, we did make a perfect low at the lower trendline for my right angled and ascending broadening formation on the SPX daily chart, and also to finish the head on a flat neckline for the huge potential head and shoulders pattern within that broadening formation:

Both patterns would target the 870 area on a break of the neckline, and if we can put in a good right shoulder before doing so, that would become a very high probability target, not least because that level was such an important support and resistance level in the nine months leading to the July low last year, and key areas like that do exert a certain magnetic attraction when approached.

If we do form the right shoulder on that potential H&S pattern, I'd expect to see us rise to the 1130 - 1180 area, and to take two to six weeks to get there. The right shoulder would be unlikely to take as long to form as the left shoulder, and need not be as high, though it could easily go higher.

The broadening formation itself gives us no interim targets, other than the downside target of 870 on a break of the lower trendline, and of course the top resistance trendline in the 1250 SPX area if we should make new highs from here. I think that's unlikely, but I'll be watching USD and the USD currency pairs to help judge where the next high might be, so I'll turn to those next.

EURUSD has been in a broadening descending wedge since the high in November, and hit the lower trendline of that wedge last week. The next upside target , if we take at least a couple of weeks to reach it, should be in the 1.29 to 1.32 area at the upper trendline.

By the time we reach that target, I'm expecting to see renewed complacency among the equity bulls, with the Vix back near 20, and SPX at a minimum of 1130. The outlook will still look very bearish for equities to me though unless we see EURUSD break through that upper trendline on a weekly close, which would be an extremely bullish development, and would open the door for new highs on equities, as the track record of wedges on EURUSD is very impressive. I'll be watching this develop carefully:

The GBPUSD chart is much less important for USD, but still a significant indicator for me, and there we have a falling wedge on the daily chart with an upside target on the same basis in the 1.48 to 1.50 area. If that breaks upwards it would be less significant, but might well signal that this upswing in equities will be stronger, and last longer, than I am currently expecting:

I've got some personal stuff to do today, so I'm taking most of the rest of the day off. Everyone have fun today. :-)

Tuesday 25 May 2010

Looking for an interim low soon

A very interesting last day on ES. I was writing yesterday that I didn't think we had yet seen subwave 5 of this move down, and we have definitely been seeing that from the high yesterday. The question for today is where it is likely to bottom out:

I have yet to find an EW blogger who agrees with my main count from the top of course, but in practical terms most agree that this is the final subwave down of a major wave down, and that after this completes we should see a significant retracement at the least. In the main the bullish EW analysts have this as subwave 5 of an ABC correction. The bearish EW analysts have this as subwave 5 of wave 3 of a 12345 bear wave downwards.

Looking just at this latest wave, I was concerned when I first looked this morning that I could see no fourth wave within this fifth wave down. Since then we have seen enough to qualify as a minimal wave 4 and here is the wave structure as I see it:

Within this fifth wave down I am also seeing a potential (mainly) bullish pattern:

The broadening ascending wedge that I posted yesterday on EURUSD has played out to target and I can see a falling wedge on it now:

I'm also seeing a falling wedge on GBPUSD within the recent trading range:

As I have mentioned before, USD currency pairs mainly reached target last Wednesday and we are seeing significant amounts of positive divergence on ES RSI and MACD on various timeframes now. If we are going to see an interim bottom soon it should really be today and that is still what I think we will see.

I'm expecting that we may well see it lower than the 1037 ES that was reached overnight though, as I've not yet seen an identifiable subwave 5 in this wave 5 down. That isn't good news as we are testing the acceptable downside limits on SPX of my main patterns scenario for recent months. Here it is again on the SPX daily chart:

The problem with calling any bottom here is that if a wave 3 is longer than wave 1, which it is, then the fifth wave can be longer than both. Most bullish patterns also break downwards some of the time, including all wedges. The other patterns that I've posted over the last few days mainly depend on finding some support near here, otherwise their targets get a lot lower. There are no certainties in technical analysis, only probabilities.

That said, if there is an interim low coming soon, the chances are strong that we are very close to it. If we go much lower then patterns on various equity indices will be breaking down with downside targets a lot lower than here, and on the USD currency pairs, if we go much lower then we might expect to see many of these collapse over the summer, with USD parity on the cards for EURUSD and GBPUSD particularly.

That seems unlikely in the immediate future. Obviously the market is wildly overvalued by historical standards and likely to fall much further before the end of this secular bear market cycle, but that isn't a crisis, and that wasn't bothering many people on the way up over the last year. We haven't yet seen a crisis that would suggest a general meltdown here. Trouble in Greece doesn't really seem significant enough to qualify.

I'm expecting that w've either put in a low at 1037 ES this morning, or that we put in a slightly lower low that is higher than 1030 SPX (1028 ES) later today. If we see that then there is a good chance that we see a serious rally taking us back well over 1100 SPX and lasting at least a couple of weeks to put in the right shoulder on the huge head and shoulder pattern that is forming on SPX.

If we go lower than that then we should expect to go a lot lower soon, and any rallies may be short and modest. If strong support at 1044 SPX is broken with enough confidence to transform it into strong overhead resistance, then it may well become the upside target for any rally after the next interim low is made.

Monday 24 May 2010

Just a little further I think

As I mentioned the other day, I'm no EW expert, but I've read Elliot Wave Principle and I'm happy enough looking at counts and doing them myself to an extent.

From a patterns perspective I'm expecting to see a retest of the February low in the 1044.5 SPX area before this wave down bottoms and my count for what seems likely to me to be this wave 5 down backs that up:

There is a significant caveat on this 15min chart though, and that is the IHS that formed over the last couple of days last week. If that plays out it would take us above my wave (i) bottom at 1114 and invalidate my count.

I don't think so though. The EURUSD action over the weekend was bearish and the IHS I posted on Friday morning has failed and the broadening ascending wedge has broken downwards with a target in the 1.22 area. If we had bottomed last week I would expect that EURUSD IHS to be playing out now:

GBPUSD is trading within a range / rectangle and seems to be heading back to the bottom of that range at the moment:

What I'm expecting to see is that ES will bottom near the Feb low today or tomorrow and then we will see a sharp rally in all of the above.

We are due a rally soon and we have been seeing some simply amazing readings on some of the indicators that I watch. NYMO just made a three year low which was surprising. The three year high was in January 2009 just as a major rally was peaking:

The $NYDNV: $NYUPV spike is almost at a three year high too. That has been a good indicator for interim bottoms over the last year, though it was less reliable during the strong bear moves over the previous few months as you can see from this three year chart:

My $SPX:$CPC chart has also been hitting major lows within a falling wedge:

I'm expecting to see a lower low in the next day or two, but everything is saying that we are due a sharp relief rally in both equities and USD currency pairs soon. I'm viewing this week as a great short term long entry to play that rally. Counter-trend plays are notoriously tricky though, and all trading options this week look risky.

Friday 21 May 2010

Occam's Razor and a road to 870 SPX

After the amazing day yesterday I have spent a lot of time reviewing various charts. The first thing I have looked at is the wave count on SPX. After yesterday I don't think there can be any real idea left that the low on May 6th was just a 'fat finger' error. It was a powerful third impulse wave down, and the wave count so far looks pretty obvious from the SPX daily chart, even though I definitely wouldn't regard myself as an EW expert.

Whether we are in the first wave down of an ABC correction, or of a five wave bear market move, doesn't really matter at this point. I favor the first scenario for longer term reasons that I'll explain in a weekend post soon, but until we reach the end of the third wave down, it doesn't make a lot of difference.

For this first wave down though, it seems obvious enough that the first subwave bottomed at 1181.62, and that the third subwave bottomed at 1065.79. Subwave 4 was almost exactly a 76.4% fib retracement of wave 3, topping out out a few points below the bottom of wave 1. The subwave 3 low was taken out on ES last night in what is obviously the current subwave 5.

Occam's Razor tells us that the simplest explanation is often, if not usually, the correct one. I've seen a lot of EW counts over the last few weeks, but this count looks to be the simplest and most obvious explanation, and more than likely it is the correct one:

Where will this first wave end though? The third subwave down was 143.57 points, and the fifth subwave will probably be shorter, though not necessarily. From the subwave 4 top at 1173.57, that would give a likely wave range down to 1030 SPX for the completion of the first main wave down.

The target of the broadening bottom that I posted yesterday was 1044 ES, which is very close to the February low and would be a good subwave 5 target. If we do bottom there, it would strengthen a pattern setup that would be pure chartist poetry for the next two waves of this bear move.

It would confirm that there is a right angled and ascending broadening formation on SPX (66% bearish) and would also finish the head for a huge head and shoulder pattern within that broadening formation. Both patterns would indicate to the July low at 870, at what was (or is) the most important support and resistance level for the bear market. We would reach the top of the right shoulder on the next main wave up, and then the third main wave down would carry us through the neckline to the target:

The strangest thing about yesterday was the powerful move up in EURUSD at the same time as the powerful move down on ES. This may signal that the usefulness of this positive correlation between the two is at an end, but I suspect it just means that ES is lagging EURUSD by a few days, and that after making an interim bottom on ES shortly, we will see that return to normal. I hope so, as EURUSD has been a very good indicator for equities for quite a while now, and if the correlation fails completely, that will be a great loss.

In the short term, the IHS that I posted yesterday has now formed, broken the neckline and started to play out. The target is 1.282:

That's what I would expect from EURUSD, which bottomed where I expected it to this week within the current broadening descending wedge. These wedges are very good performers on EURUSD, as I mentioned earlier this week, and as you can see from this weekly chart of EURUSD over the last few years.

The only wedge that failed to make target on this chart was the broadening descending wedge that ended in late 2008, and that target failure was signalled both by the pullback in early 2009, and by the boundaries of the subsequent rising wedge. Another interesting thing to note on this chart is the rising wedge into mid-2007 that broke up, as rising wedges do 31% of the time. I mention that because EURUSD is currently in a broadening descending wedge, and these break down 45% of the time.

Barring imminent apocalyse though, EURUSD is due to correct up to the top trendline of the current broadening descending wedge, currently at 1.33 and declining rapidly. We may see a period of sideways trading where EURUSD slowly moves towards the line at a lower target of 1.282 to 1.30, but we are due a bounce here and one seems to have started already. During such a period, we would expect to see SPX trading up or at least sideways. It is disturbing that we haven't seen that since EURUSD bottomed early on Wednesday morning:

The right-angled and ascending broadening formation is perhaps the characteristic pattern for where we are right now on equities. There are quite a few of these as well as broadening tops across various indices. Here is another example of one on the FTSE, and seeing these is a large part of the reason why I think that if we don't bounce soon, then we may fall a great deal further over coming weeks.

As you can see from this chart, we are right at the bottom of the pattern, and it is an ominous sign that after a partial rise, the FTSE has returned to retest the lower trendline. That signals an imminent downward breakout 81% of the time, but until we see SPX break support at the February low with conviction, I would regard it as subordinate to the SPX pattern, as the FTSE is really just one tail on the SPX dog.

If SPX does break support there though, and then takes out the November low at 1029.38, then this subwave 5 would be longer than subwave 3 down, and the potential would open up to go a great deal lower in the coming weeks.

In that event the recent action on the daily chart for 30 year US treasuries would also look very ominous. For the past year, these treasuries have been trading in a large rectangle, and have broken up from it this week. These aren't always reliable when they take more than a few months to form, and the eight month rectangle on XLF that broke up in April failed to make target at 18, but FWIW, the target is 134, which is what I would expect to see if we get a very major flight from risk over coming weeks.

So there we have it. We bounce very soon, or equities continue falling into a chasm of unpredictable depth. Should be fun either way, but it will be a lot easier to trade this if we do bounce, so that's what I'll be looking for here.

Thursday 20 May 2010

Pre-opex chop and some positive divergence

I was having a closer look at the broadening bottom on ES yesterday, and I found an interesting declining channel that has confined it so far. I have redrawn the lower trendline to fit that channel, and on that basis we have hit the lower trendline at the low yesterday:

RSI and MACD on the 60 min chart suggest that we have probably made a significant low and if we break support at that low this week with any confidence, then we may see a very significant further break downwards from there.

Barring that though, we are showing significant signs that we may be bottoming for the moment. As well as hitting the lower trendline of the broadening bottom, we also hit the lower trendline of the recent declining channel on ES, and while we may make a touch lower down on the channel and pattern, the next targets to consider are upside targets for the next swing up.

The first serious resistance I see is the top trendline of the declining channel, currently at 1130 and declining to 1120 by the close of trading on Friday.

If ES can rise beyond that, then the next target will be the top trendline of the broadening bottom, currently at 1160 ES, and rising at six or seven points per day. I'm not really expecting to see that hit though, and a failure to reach it would be a good indicator that the broadening bottom will break downwards with a likely target in the 1040 area, which is in line with my expectations for a major interim low in the next three weeks or so.

In terms of positive divergences that suggest a short term bottom here, we have also seen a significant bounce in oil, and serious pullbacks in both gold and USD.

I posted a EURUSD chart yesterday suggesting that we had made my short term target, and it has risen significantly since then. We may well have an IHS forming on it now with a target at 1.282:

On the GBPUSD chart that I posted yesterday, I had two alternative lower trendlines, the higher of which had been hit, and it looks as though that may be the correct one. There isn't much of a pattern on that at the moment, though there may be a possible (67% bearish) descending triangle, but I am seeing a very possible triple bottom:

I'm not expecting that GBPUSD has made a major bottom here, but I think it may bounce back up before returning to make that important low. Having come so close to long term support at 1.40, I am expecting to see that hit in the next few weeks. A look at the 30 year monthly chart shows us that on all four occasions that we came this close to 1.40 in the last 25 years, there was a test of 1.40.

The large broadening formation shown on that long term chart suggests that at some point, very possibly soon, that key support trendline will break and we will see a really major fall in GBPUSD. That wouldn't surprise me. The UK government in recent years could have taught Lehman or Enron a few tricks about concealing off balance sheet liabilities, and has been so profligate that even US public spending has looked relatively cautious.

This right angled and ascending broadening formation is a 66% bearish pattern and the partial rise within the pattern before returning to the lower trendline would indicate a 74% chance that the pattern will break downwards shortly afterwards. The pattern target would be 0.70, with a 68% chance of making target. I think a more realistic target in the event of a break might be parity with USD though. Even in a spendthrift country that bears realistic comparison with Greece, a halving of the currency from here looks overly pessimistic:

In the short term on equities though, I'm expecting us to chop about until after opex without a really big move in either direction. We may retest yesterday's low, and perhaps go a little lower, but I think the next significant move will be up.

If we break the lower trendline of the broadening bottom (and declining channel) though, then I think that we would most likely see see a fast move down to a new low for May. The pattern target for the broadening bottom would be 48 points below any break.

PRE-MARKET NOTE: Since writing this we have seen another hit of the lower channel trendline on ES at 1092.5. It looks as though we may well see a break with confidence of that trendline on the hourly chart and if so, that most likely signals a major fall today. The pattern target for the broadening bottom is 1044 ES with a 44% chance of that being hit.

Good luck everyone!

Wednesday 19 May 2010

The ES Broadening Bottom and USD Currency Pairs

Yesterday's early bounce failed at the key resistance level I mentioned yesterday morning, which was the top trendline of the broadening bottom on ES, and it fell most of the way towards the lower trendline over the rest of the day. After a very weak close, it has fallen further overnight to well below Monday's lows.

As it is still very clearly the dominant pattern here I'll be focusing on the broadening bottom today. Here is where we are on ES at the time of writing:

The first thing to note about this particular pattern is that it is a monster. If it was to break up from here without touching the lower trendline it would indicate to 35 points higher than the top trendline of the pattern. As soon as we have a hit of the lower trendline of the pattern though, currently at 1093, then the breakout target would increase to 54. If we were to break up from (say) 1160, that would indicate almost to new highs, and if we were to break down from (say) 1080 that would indicate to 1027. This is now a very big pattern.

The lower trendline of the pattern is currently at 1092, and won't be lower than 1088 if we hit it today. If we get that far then we should expect a bounce there, as even if this pattern is going to break downwards, there is a reasonable expectation of a partial rise from the trendline and then a return to break through it.

Even though this pattern is called a broadening bottom, these break upwards only 53% of the time. A partial rise and return to the lower trendline would indicate a 67% probability of a break downwards, but if we do break downwards, there is only a 44% chance of meeting target. This is not a high probability pattern on a downward break particularly.

As with all patterns and channels, if we hit the lower trendline, we should watch carefully to see whether an IHS is forming. If we are to see a good bounce, then there is a better than 50% chance, in my experience, that we will see one form. If we are to make it back to the top of the pattern, then it will most likely be a big IHS, and I can see now that we have formed a possible left shoulder to such an IHS overnight.

As ever these stats come from Bulkowski's excellent website.

Now the inverse correlation between USD and equities is not what it was. When USD bottomed in November the SPX was trading in a rectangle between 1085 and 1115. Now that USD has rallied almost 18% we are still near the upper end of that SPX range. That said, there has been a strong correlation in the meantime in that while USD has been in a strong wave up, equities have either traded sideways, or corrected down. While USD has been trading sideways or down, equities have rallied strongly.

That matters, as USD has been in a very powerful wave up since mid-April, accelerating powerfully in the last two weeks particularly. At some point this wave up will finish, and if the correlation remains the same, we will then see a powerful rise in equities.

The most important of the USD currency pairs is obviously EURUSD, and in recent days that has met the rising wedge target just about 1.25, and has since hit my broadening descending wedge target at 1.215 overnight. Unless EURUSD is in freefall now, which is definitely possible, then we should be close to an important reversal point:

GBPUSD has also been sold off powerfully and I have been having a very careful look at this on the weekly chart. Again we have a broadening descending wedge and my target if it should be hit this week is 1.408. If it is hit next week it will be at 1.40, which is the key long term support level for GBPUSD. At minimum we should see a powerful bounce there and I will be a buyer of GBPUSD if and when that level is hit:

Of the commodity currency pairs, I posted on 21st April that AUDUSD, which was at 93 at the time, had a very good chance of falling ten cents or more to a target of 81.5 within a right angled and descending broadening formation. As I write AUD has been below 84 overnight, and there is a good chance now that it will make that target. Naming no names, there were a couple of bloggers who suggested that my AUDUSD target was ridiculous at the time I posted it. Hopefully they didn't go long. :-)

There is another target to consider as well though, and that is the 62.5 target from the rising wedge that defined the last major upswing. These wedges are indifferent performers on equities, but are very good performers on currencies. If AUDUSD breaks down from the broadening formation, the target for the next decline would be 69.5 and while I'd hesitate to go long at 81.5, this would look like a very appealing short on a weekly close below 80.5. If that pattern target at 69.5 was reached then the rising wedge target at 62.5 might well also be reached:

The real question for AUDUSD of course is what is likely to happen on commodities. I've read quite a few posts in recent days about how oil is now near the bottom of the trading range for the last year, but that isn't what I see on the weekly chart at all:

It looks clear from the chart that oil has been in a gently rising channel for the last year, and that the channel is now broken. Unfortunately there are no downswing targets from a broken channel, but this could well be the beginning of a very major reversal. If it is, then we could see oil fall a long way from here and the same applies to most of the other commodities with the possible exception of the precious metals. That would put the commodity currencies under at lot of pressure and we might then see that rising wedge on AUDUSD play out to target.

As ever, time will tell.

Tuesday 18 May 2010

Probable Bounce Today

The right angled and ascending broadening formation that I highlighted on ES yesterday morning didn't quite play out to target, as the target I gave then was 1109 ES and yesterday's low was at 1112 ES. Close enough though that we should consider this as played out unless 1141 - 1143 still acts as solid resistance today:

We do have a new pattern emerging since the lower trendline of the broadening formation was broken, and that is a broadening bottom. There is also a potential IHS developing as well.

You can see that 1141 was the top for the overnight action, and in the event that continues to be the case, then we should expect a downward breakout with a target of 1082 ES. Broadening bottoms, despite the name, break upwards only 53% of the time. On balance though, and with the IHS as well, the upside target at 1172 ES looks more likely. Reading around the blogosphere this morning, everyone's expecting a rally today, and I'm not seeing much to contradict that.

If ES did rally to 1172, then it would meet a key downswing declining trendline from the top there, where I would expect the rally to fail unless this downswing is over:

The potential IHS patterns are also well formed on Nasdaq and Dow, here's the Dow version of it:

You can see on the Dow that the lower trendline of the previous broadening formation has already been broken, and the same is true on the Nasdaq. I'm definitely leaning long today.

Longer term though, more downside looks likely. I see from Mortie's post on slope overnight that he is forecasting a strong wave down after this short rally. There is strong evidence to suggest that on the FTSE at least, as there is another, and much larger, right angled and ascending broadening formation on that.

That pattern on the FTSE is a monster, and signals a fall of almost 20% from yesterday's close, falling almost to the low last July. The UK has very serious problems of course, and if commodities particularly take a serious hit, then the FTSE will be one of the most affected.

As I write 1141 has just been broken on ES, and if we see a break with confidence of the upper trendline of the broadening bottom, currently at 1146.5 ES, then I'm expecting that we'll most likely see 1170 ES today.

Monday 17 May 2010

The Red Pill - Initial Downside Targets

The right-angled and ascending broadening formation that I identified on ES last week broke downwards on Friday. That was very significant, and signals that there is most likely more downside coming. Iinitially though, the pattern target is 1109 ES, and these patterns reach target about 68% of the time:

Oil broke down from the rising channel it had been within since August last year. Another signal that we are seeing a significant correction that has not yet finished:

USD is running away to the upside at the moment, and it may be that EURUSD is simply breaking down now, and that no pattern target remains relevant. I am having some trouble reconciling where I see EURUSD now, ie nearing a significant bottom, with where equities seem to be heading, which is very significantly lower.

That said though, I have had a very careful look at the EURUSD weekly chart, and I am still seeing a broadening descending wedge that may provide some support when the lower trendline at 1.208 is reached:

The triangle on GBPUSD last week played out beautifully, and GBPUSD kept falling beyond the triangle target. There appears to be a falling wedge on the weekly chart, and the lower trendline target at 1.426 was reached overnight. It has bounced almost two cents since then, but I'm not convinced that there is a bottom there. Now that we are so close to it, a test of long term support at 1.40 seems likely in the next few weeks:

Thursday 13 May 2010

Patterns Emerging - Road Maps For May

The 'fat finger' spike down last week caused some serious damage to my charts and I've largely given up trying to include the spike below the low on Friday. I've left it out of most of the patterns that I've been looking at since.

That doesn't mean that it wasn't significant of course. One very sharp eyed chartist noticed that Thursday's low exactly hit the main rising trendline on SPX over the last 20 years, which was very interesting:

The first pattern to look at on equities is the huge IHS on ES and other indices, indicating to 1230 ES if you take Friday's low as the bottom of the head, and 1257 if you take Thursday's low instead. I'd be inclined to use Thursday's low as it fits my perception of overhead resistance better:

I'm not expecting the IHS to play out immediately though, if it plays out at all. There have been too many crosses of the neckline since it broke for my liking and I'm looking at another pattern that I think looks stronger at the moment. If we break up from the current short term resistance trendline that is the top of that second pattern though, the IHS would most likely play out.

I'm thinking that we might see a zigzag on ES for much of the rest of May. Partly that's based on Alex Grant's ES forecast, and here's the one from a couple of days ago:

This, like all market forecasting tools, has to be used with caution, as it sometimes reverses or breaks away altogether, but over the last year it has been a fairly reliable forecaster of market action, and I generally bear it in mind. He's been on holiday in recent weeks and hasn't updated his blog since early April, but he usually updates his forecast there every few days, and I'm assuming that he will resume doing so soon.

The ES forecast for May fits the second pattern that I'm looking at very well, and that is a right angled and ascending broadening formation on ES:

I have sketched in a forecast of how this might play out in the remainder of May. I have it breaking up at the end, though 66% of the time these break down, and that's because I think we are nearing an important interim bottom on EURUSD. I've been hearing a lot of talk about how EURUSD is doomed, that we'll be seeing parity with USD soon and so on, and that is the sort of talk that you often hear before significant reversals. We were hearing similar talk about USD last November for instance.

The correlation between EURUSD and ES has been following the same pattern in the last two weeks as we have seen since EURUSD topped late last year. The strong spike down in EURUSD was accompanied by a correction in equities, as it was in January, but as EURUSD has traded sideways over the last week, equities have been trending up. If EURUSD starts trending up too, then the rise in equities should accelerate.

I think there may be a bit more downside to come on EURUSD in the very short term however. The obvious H&S pattern on EURUSD in the chart below should be ignored as it would be a continuation pattern, and head and shoulders patterns are classically reversal patterns, but having made a significant floor just above 1.26 over the last week, EURUSD has broken down through that floor this morning. If we go on to make a new low, then we might drop another couple of cents over the next day or two and ES should fall with it.

GBPUSD also looks weak in the very short term. We have a fairly classical symmetrical triangle on GBPUSD, with what looks like a classical break for this sort of triangle, with an initial false break up, followed by the real break down. If this triangle reaches target, we should see GBPUSD below 1.46 again in the next couple of days:

So in the short term I'm expecting to see ES and EURUSD break down, with an ES target just above 1140 and then a sharp reversal up on both.

If we see a break above the recent overhead resistance trendline on ES though, then I would expect to see both ES and EURUSD rise strongly, with a new high on ES in the next week or two.

I won't be doing a morning post tomorrow as I'll be out for the morning. Good luck trading everyone.