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Wednesday 23 June 2010

Perfect declining channel on ES

I'm a big fan of rising and falling channels for trading, and it has been a disappointment that in recent weeks there has been a distinct dry spell on ES for these. No longer, as the decline this week has resolved into a perfect declining channel:

Now the question of course though is whether we are likely to continue declining from here. On the upper side of the channel, the trendline reinforces the already strong range resistance trendline at 1101.5. If that trendline is broken with any confidence then the chances are very strong that the decline this week is over, and that we should expect a new short term high over 1130 ES in the near future.

On the other hand if we should reach the lower trendline of the declining channel, we would have to break through the important support level at 1084 ES, and that would seriously undermine the idea that this was just a correction before a continuation upwards. In the short term that would open up the lower trendline of the next range down at1070.5 ES, and if that was broken then 1048.5.

My view is that this is just a pause on the way up as the USD currency pairs that I watch, particularly EURUSD, have not yet reached their upswing targets, but we've already had one return to retest the lows, and I wouldn't be that surprised to see another.

In terms of EURUSD I posted a chart yesterday showing a falling wedge on EURUSD that has since broken upwards. These wedges frequently turn out to have been a diagonal slice of an unrevealed declining channel though, and this one has been testing the upper trendline of that theoretical declining channel for the last four hours as I write. If it breaks up that would be a weakly bullish signal for both EURUSD and equities, and a further move with confidence above 1.235 would be very bullish.

There is some positive divergence on EURUSD in relation to ES already. As both rose they established parallel trading ranges, and the first strong signal for me on Monday that the equities upswing was finishing was EURUSD breaking support. Yesterday ES broke down into a lower range and EURUSD did not, which was a very significant positive divergence. If EURUSD should break that range support at 1.2255 with confidence this morning, that would be a strong bearish signal for both EURUSD and equities, and on EURUSD the lower trendline of that range is at 1.2166, which would be the obvious next target:

I posted a Vix chart yesterday morning showing the likely upswing target if this is just a pullback and it was reached yesterday. RSI & stochs both look overbought now:

Oil generally moves up and down with the market and a falling wedge has developed on the oil futures (Sept) this week. As with the other falling wedges though, this might yet resolve into a declining channel and I've marked in the possible alternate trendlines if that is the case:

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