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Thursday 6 May 2010

Bounce or Bottom? Downside targets almost reached

My young daughter has a book about a talking beast called a Not-Yeti, an indecisive beast who is forever deciding that he would like to do things but 'not yet, not quite yet'. I'm feeling somewhat that way about taking a large long position on equities and EURUSD this morning.

SPX on the daily has not yet met the obvious target at 1150, which would have satisfied both the large H&S patterns on ES, Dow & Nasdaq, and met the main SPX support trendline from March 2009:

This Nasdaq 60min chart shows the head and shoulder pattern and target. As you can see it is close, but no cigar as yet:

When I went to bed EURUSD and DX were well short of my targets, but they came close overnight, without actually hitting them. Here's EURUSD on the daily chart falling short of the lower wedge trendline, which would be at 1.271 for a hit today:

Here's DX on the daily chart falling just short of the top trendline on the main rising channel, at 84.79 today:

I was reviewing some of my favorite indicators last night for clues and it looks as though we may have already peaked on my Vix weekly fan chart:

On my SPX:VIX daily wedges chart we don't look as though as though we have quite reached target, but it sometimes falls a little short. On the weekly chart it has reached target already:

On my CPCE daily chart we don't seem to have reached a significant peak yet, but then both peaks and troughs have been trending lower on it since the beginning of 2008. Nonetheless this looks unusually low for a significant bottom:

On my indicators charts particularly though, I am looking at them with an underlying assumption that the wave up from March 2009 has not yet peaked on SPX, though I'm expecting it to peak in the next few weeks. The SPX:VIX daily wedge particularly as well as the Vix itself will break out once it has done so. I'm basing that assumption in large part on USD, as it is very close to the top of a steep rising channel which it seems unlikely to break up from, and while a sharp rise on USD has been accompanied by either flat to down trading in equities in recent months, a sharp fall in USD has invariably been accompanied by strongly rising equities.

When the trend in equities changes, I am expecting that this will reverse, with equities trending down strongly as USD rises, and trading sideways to up as USD falls, but what we've been seeing over the last two weeks looks fairly typical for the last few months.

It may be that we have made a significant low now, and that my swing targets will not be hit. Equally, we may just see a bounce here before coming back to make a real swing low. If this is just a bounce, I would not expect to see a significantly higher bounce on equities than the necklines of the large head and shoulder patterns, which are at 1180 on ES, 10918 on Dow futures, and 1995 on Nasdaq futures. A break higher would invalidate those patterns and weaken the case for a further fall considerably.

For today though, ES broke my short term declining channel on the ES 5min chart, and has now broken through a significant declining resistance trendline after making two higher lows over the last days. On that basis I'm leaning towards the long side for today at least:

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