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Wednesday, 14 July 2010

Directional lines in the sand

Intel beat earnings expectations massively last night, prompting some flashbacks to the bear wipe-out last July and wails of how it is happening all over again, and that may be right, but it isn't demonstrated yet, and there are more earnings than Intel's to come in the next few days. A quick look around us tells us that we are unlikely to see record earnings all round this year.

The silliest comment that I saw was that technical analysis was no longer relevant to this market, which is garbage. Even if the SPX rises to new highs in the next two years, which seems unlikely, there will still be important trendlines, channels, patterns and indicators to light the way and supply good trading entries and exits. Only fools would think otherwise.

Back on planet earth ES reached rising trendline resistance at 1098.75 after the Intel announcement, and has since fallen back to 1090.5. I have an immediate target of the centre trendline in my ES rising channel in the 1086 to 1089 area depending on when it is reached:

On the bigger picture the best indication that this rally was the start of a new bull move would be the main indices breaking above the June highs, though most have now broken declining resistance from the April top, including ES which broke it yesterday at 1094.5 ES, albeit that hasn't been broken on a daily basis yet. There are some other indicators to consider too though, and they are the reason that I was expecting this rally, if it is a rally, to fail at yesterday's high. I have serious doubts about that now as this move up has looked so impulsive, but let's review them again.

The key one is USD. USD and the main component of the USD index, EURUSD have been in mirror image wedges. Here's the broadening descending wedge on EURUSD which has not quite reached target, as the USD one has equally fallen slightly short:

EURUSD has a history of forming wedges on big moves, and when broken, they generally play out to target. It is very important for the bear case that these wedges don't break, as a bear move down against the tide of a falling dollar would not be easy.

The second key indicator that I am watching is 30 year treasuries. There we have a strong rising trendline since April that was tested yesterday and is still intact and it will help the bear case if that remains the case:

On oil I've been considering whether we have a rising channel or a broken rising wedge. The broken lower trendline of the wedge has been retested hard yesterday and has not broken, which supports the idea that it is a wedge. If so, we can expect a move soon below $70:

Of the USD currency pairs GBPUSD has now reached my target at the upper trendline of a declining channel from last October. I am expecting it to turn down here to a target under 1.40 but if it doesn't reverse, that will be a major bullish breakout, strengthened by the fact that the upper declining channel trendline goes back to July 2008:

I posted a possible IHS on AUDUSD yesterday and I am watching that very carefully, as a serious break up over the June highs would suggest a target of 92 to me, and most likely a return to the upper trendline of the larger broadening formation at 94. I can't see that happening really unless the recent equities low is to hold for several months at least. The June high held as resistance yesterday and I'll be keeping an eye on that today:

I still think we may have seen a major interim high on ES yesterday, though I am aware that is very much a minority view at the moment. If so, we will most likely consolidate that top over the rest of the week before the main bear event of the year begins.

If not, USD and bonds will break downwards and I'll outline my alternate bull scenario with a target at 1400 SPX, but we're not yet at the point where that needs to be seriously considered.

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