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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. :-)

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