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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.

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