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Thursday 17 June 2010

The Big Picture Bear Scenario

ES has broken up to break yesterday's high overnight, and EURUSD has broken up to test 1.24, so the picture as I write looks bullish for today. Rising trendline resistance on ES is at 1128/9, and if reached, I would definitely be shorting that for a retracement.

I've been looking again at my main bear scenario for the summer today and here is my SPX daily chart again with the patterns and levels of interest marked:

Backing up this scenario on the currency side, I have a very strong broadening descending wedge on EURUSD, which rallied from the second recent touch of the lower trendline, and has a target just under 1.30. In the event that that declining resistance trendline is broken, I would take that as a very strong signal that my bear scenario for SPX was in serious trouble.

EURUSD tends to form wedges on big moves up or down and of the last four since 2006, three played out to target and the fourth made it halfway to target before failing. If this wedge were to break up, the target would be the November high at 151.44:

GBPUSD is of less importance than EURUSD, as it is a far smaller component of the USD index, but I follow it closely too and that is also in sync with this picture. On GBPUSD we have what I thought was a falling wedge, but on closer inspection appears instead to be a declining channel. I haven't shown it here, but the upper trendline of that channel is also a strong declining resistance trendline from the last GBPUSD high in 2008 shortly before it fell more than 50 cents.

GBPUSD, like EURUSD and ES, is about halfway back up towards that key resistance trendline, which would be at 1.54 today and should be in the 1.53 area when if reached in a couple of weeks. As with EURUSD, I will be watching for a break on that trendline as a signal that my primary bear scenario might be in trouble:

So that's my scenario, clean, logical and compelling.However it is only one view and there are most definitely other ways it could go. To illustrate the complex technical picture here let's consider two other indices, the Nasdaq and the Dow.

Much has been made on ES / SPX of the fact the the February low held, and also of the fact that the most recent low was higher than the previous one.

On the Nasdaq futures we can see that picture reinforced, with the February low never seriously threatened, the flash crash low being the lowest low of the three, and with the next two higher lows on an ascending trendline. A good clean bottoming process:

Looking at the Dow the picture reverses entirely. The February low was clearly broken on a daily basis on the last low, and of the three lows the flash crash low was the highest, with the next two lows on a declining trendline:

On all three indices we have clearly made a significant low, and all three are trading back above their daily 200 SMAs, but the picture is more complex than just looking at the SPX would suggest, and that reminds us all that as often as not, life is messy and only partly predictable.

In the short term I'm seeing 1102 ES as a very key support level here, and if we break back down through it with confidence then my upside target at 1164 SPX will be weakened, as that level is the upper trendline of the recent trading rectangle, and also the neckline of a possible IHS.

If the 1102 ES level is broken, then the rising support trendline from the recent low is at 1090 ES, and if that is broken with confidence that the rally in recent days may be in very serious trouble.

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