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Wednesday, 5 May 2010

USD & equities testing the boundaries, but no major technical damage ..... yet

USD made target in a powerful wave up yesterday, and tested the upper trendline of the broadening ascending wedge hard without quite breaking it. It may crawl up the trendline for a while, but it should fall back soon, and should then make it back to the lower trendline:

Looking at EURUSD, which broke my lower channel target of 1.3030 yesterday by almost a full cent, it is now clear from the daily chart that it is in a broadening descending wedge which mirrors the USD wedge. It has hit the lower trendline and the next upside target is in the 1.32 to 1.33 area, depending on the time taken to reach it. As with USD though, it may crawl down the trendline it just hit for a while before returning. Patterns like these are safer plays trading with the direction of the pattern:

Both of these patterns are reversal patterns of course, 73% of the time at any rate. In the context of the USD rally and EURUSD decline starting at the beginning of December, these may well be fifth wave termination patterns, signalling that when they break, we may well see significant retracements from both. EURUSD is now close to the rising wedge target of 1.25, and there is significant support there. It would be a logical point to end a first major wave down with a retracement / wedge target in the 1.36 to 1.37 area. Here it is on the weekly chart:

As for equities, we had powerful moves down yesterday which as yet have done little technical damage to the potential patterns and channels. All three of the Nasdaq, ES and Dow have stalled the decline at the lower trendlines of the declining channels, though the Dow and ES particularly were testing those hard.

Two of my favorite EW chartists, Pug and alphahorn both have as their primary scenario that the fifth wave up from March 2009 has one more major peak to make in the 1230 SPX area before a serious retracement begins. That would fit the broadening top scenario I posted yesterday as a possibility, and that is still on the table unless we see significant further equities downside today.

For the immediate future though, the important things today are the declining channels and head and shoulder patterns on all three indices. Here are both on the Nasdaq, which has the cleanest hit of the declining channel lower trendline of the three:

If these head and shoulder patterns were entirely within the channels I would disregard them, as regardless of size, reversal H&S patterns within a channel just tend to indicate to the opposite trendline of the channel. That isn't the case here though, and these complex H&S patterns look very viable. Until we see a rally that breaks back up through the necklines, they are more than likely to play out. If the necklines are rebroken in rallies today, then the upper trendlines of the declining channels are the next targets.

Here's the chart on ES. I've marked the targets on each chart. :

Here's the chart on the Dow:

On balance, and even though DX and EURUSD have hit the wedge targets, I'm leaning towards the short side on equities today on the basis that the head and shoulder patterns look strongest until proven otherwise. The targets could easily be reached without DX and EUR breaking those wedges and there is a very tempting target at 1150 SPX which would fit with the H&S target on ES. That target, which is the main SPX rising support trendline, is shown here on the daily chart with two other possible targets below:

Most likely, given where we are with USD, we would see a significant rally there, and the main SPX rising trendline would still be intact, but there are two possible targets below that are worth bearing in mind. 

The next target down is the (red) lower trendline of a rising wedge on the SPX where the upper trendline has been solid resistance since September and that is in the 1120 area. The third target is in the 1040 to 1060 area and that would be the neckline for a possible H&S with a target in the 860 - 920 area. As we would still be making the head at this stage though, that is a very speculative target, though if we did bounce near there, it would become a very real possibility.

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