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Friday 2 July 2010

ES is fighting against the EURUSD upswing

There was a simply amazing move up in EURUSD yesterday and I think that it is now highly likely that it will make my target in the 1.28 area in the next two or three weeks. On the 60min chart EURUSD is moving up within a rising wedge:

The target in the 1.28 area is to hit the upper trendline of the broadening descending wedge on the daily chart which has defined the EURUSD decline over the last seven months:

In my view the main reason that ES has been struggling to make headway on the downside in the last few weeks is that EURUSD has been in an upswing phase, and USD therefore in a retracement phase, and that equities move downwards fastest when USD is in a wave up.

In December, when the SPX was still in a strong uptrend, it would trade sideways to up when USD was in a wave up, and move up strongly when the USD was trending down. What we've been seeing the last few weeks has been the reverse of that, with the SPX in a strong downtrend, and moving downwards strongly when USD has been in a wave up, and trading sideways to down when USD has been retracing. We've seen some impressive moves since the last interim bottom on EURUSD in the 118.75 area, but have dropped, at the end of the day, only 20 points on SPX as I write. By the time EURUSD hits the upper wedge trendline SPX will probably be 20 to 40 points above where we were when EURUSD bottomed.

In terms of the current move down on ES, we are in a declining channel on the daily chart, though there have been some major intraday pinocchios through the lower trerndline of the channel, and I posted yesterday morning that I didn't think we would see the next interim low until the lower trendline of that channel was hit. We hit it during the day yesterday so from that perspective the interim low may already be in:

I was expecting a hit at the 990 ES level to be the next interim low today or next Tuesday, but as the bottom of the main declining channel has already been hit that may not happen. In the shorter term the ES is also in a smaller declining channel, though it is possible that it is a falling wedge that we are already breaking up from. If it is a channel then ES has been crawling down the upper trendline overnight, and an hourly close at 1025 ES or higher would be a break up from that channel. IF ES trades that high then the interim low is probably in and the upswing target will be the upper trendline of the main ES declining channel in the 1070 - 1090 area.

Here's the shorter term declining channel on the ES 60min chart:

So what I'm seeing is essentially this:
  • EURUSD rallying towards 1.28.
  • ES has made an interim low yesterday or will make a slightly lower low in the next two or three trading days. 
  • After the ES interim low is in then we should rally back towards the 1070 - 1090 area.
  • After EURUSD hits 1.28 and ES hits the top of the main declining channel, then USD should start another strong wave up and ES should start another strong wave down. Both moves will be fast and strong as they will not be fighting each other. My EURUSD target for the next wave down is under 1.10 and my SPX target is 870.
There is one major caveat of course as EURUSD could hit the top trendline of the broadening descending wedge at 1.28 and just go through it. That seems unlikely to me at the moment as both the ES and EURUSD downtrends look unfinished, but if that did happen then my bear scenario for the summer might well then not happen. We'll find out when we get there.

I'm out for the whole trading day today. Have a great holiday weekend everyone.

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