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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!

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