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Thursday 8 July 2010

Rectangles and Rats

After the incredible trend day rally yesterday, ES has been almost entirely flat overnight. After a trend day we would normally expect one to three days of retracement afterwards before the next move up, and I think that today at least is likely to be flat to down, though that is a cautious prediction after yesterday's wild move up.

On ES, the extremely ugly IHS that I posted yesterday morning finished the left shoulder, broke up, and is halfway to target in the 1080 ES area. I'm expecting a retest of the neckline today and I would add that the IHS target is supported by a nice looking rising wedge that broke up, as they do 31% of the time, and targets the same area. I am expecting to see 1075 ES hit within three or four trading days at most:

Within the GBPUSD rising channel a (69%) bullish rectangle has formed in the last three days with a target of 1.5375. I am expecting this rectangle to start to play out in another day or two, though if it makes target it would take GBPUSD through an important declining resistance level and might well signal a major bullish breakout. That wouldn't surprise me as the UK government seems to be moving back towards sound money policies and the currency is starting to look much more attractive to anyone concerned about the current general government debt bubble:

EURUSD has spent the last three days crawling up the upper trendline of the current rising wedge. A break above the trendline would be very bullish, but it looks very overdue for some retracement today. I am encouraged at least that the big move up in ES yesterday did not carry EURUSD correspondingly higher with it. I'm unconcerned about a break of declining resistance on GBPUSD, but a matching break through to 1.28 on EURUSD would be a disaster for bears this summer IMO:

The mirror image of the main broadening descending wedge on EURUSD this year has been the broadening ascending wedge on USD. I'm seeing support at 83.5, unlike many, and I've explained my reasons on this daily chart below. I'm watching this carefully as a key indicator of a major bullish breakout as IMO, a break with conviction below 83.5 would signal that the USD rally is over, and demolish my primary bear scenario for the summer:

Another key indicator that I am watching is 30 year treasuries. We are well above key rising trendline support at 125 and a very encouraging bullish rectangle was formed in recent days with a target in the 129.35 area. Again, if we get a major bull breakout this summer then treasuries should break support, though this may well be a lagging indicator:

I think the primary bear scenario for the summer will play out, and I think that bears will get an ideal short entry next week somewhere between 1080 and 1090 ES with a target in the 870 area. This could break the other way though, and if it does then I will abandon the bear side with great speed.

We should learn a lesson from the rat here. A captain goes down with his ship, while rats are packing bags and hitting the exit. This is one reason why there are a lot more rats than captains, as rats are very focused on living to fight another day.

While the US government particularly has the power to borrow huge sums and print trillions of dollars to support a counterfeit recovery, the bulls are armed with an extremely potent weapon. I'm doubtful about seeing new equity lows while that remains the case and bears need to be on their guard for any signs that the bulls are breaking up through key resistance levels.

I'm out much of tomorrow & may not be able to post. If I don't check in beforehand, everyone have a great weekend.

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