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Monday 23 August 2010

Another bullish Monday?

Pug was asking on Friday why I had switched back to being strongly bearish from having switched to bullish a few weeks ago, and the reason for both changes was EURUSD. A few weeks ago EURUSD broke up from a broadening descending wedge and a rise to a target in the 1.46 to 1.50 looked likely. That was bullish for equities. On Friday EURUSD, having formed a new broadening ascending wedge, broke down from it, and is indicating towards a retest of the June lows. That is most definitely bearish for equities.

It isn't just me who thinks that about EURUSD, the positive correlation with equities is well established, though complex and obviously a proxy for the complex equities inverse correlation with USD. On the EURUSD direction, Arthur Hill wrote in his Friday night post that a retest of the EURUSD lows (at least) now looks likely, and technically that's obviously right.

Longer term I'm considering the possibility that the EURUSD broadening descending wedge that broke up was just the lower section of a much larger broadening descending wedge where we have just touched the top trendline at the recent high. If so the next EURUSD target is the strong declining support trendline currently below 1.10, and if so then we could see a very major fall in both EURUSD and equities. I'm short EURUSD from 1.2835 and I'll be holding on to that for a while in the expectation that I could well extract a 2000+ pip fall from this short. If EURUSD recovers to 1.28 I will be adding to that position.

I always liked the bear scenario here, we have multiple patterns pointing towards 870, and it has the force of economic logic behind it as well, given that the economy is quite obviously still in a mess, and that we have finished one major bout of stimulus and quantitative easing (shortly before the SPX peaked this year) and have not yet started another.

The short term bull case looks DOA to me here and now, and if it is to rise from the dead, we'll have to see a break of the SPX declining channel, currently at 1115, and a return to the June highs to complete the right shoulder on the possible IHS indicating towards the 1250 area. I don't suggest that anyone hold their breath waiting for that to happen but you never know. We are only ever dealing in probabilities of course .

I've marked the technically flawless SPX declining channel on the daily chart below, and marked in the potential IHS that could be forming. If the declining channel is to break though, I'd be very surprised to see that happen soon as I have a number of indicators suggesting that no major swing low has yet been made. Two of those indicators are the RSI and MACD on this daily chart, which form patterns sometimes with clear support and resistance levels. You can see that we are still well short of the obvious support levels. Even on a bull scenario, the right shoulder of the IHS bottomed twice in the 1040 SPX area, so the obvious target for the bottom of the right shoulder would be in the same area:

Short term though, we could well see some retracement. The nice little declining channel within which ES closed the week has broken, and an IHS formed with the neckline at 1074.5 and a target at 1087.5. As I've been writing the neckline has broken and we have risen as high as 1076 ES. I'm expecting at least one, and possibly several retests of the strong resistance level at 1084.5 ES. I'm doubtful about getting as high as 1090 ES but that can't be ruled out. I'll be regarding any moves higher primarily as an opportunity to add to longer term short positions, though I am scalping as well and went long at 1071 ES this morning after looking at the overnight action.

On EURUSD we could see a retest of the broken wedge trendline just over 1.28, but it is looking very weak this morning, and hasn't followed ES up overnight:

GBPUSD is looking slightly livelier than EURUSD today, and again, we could see a retest of the broken wedge trendline just over 1.57:

Oil has found support at an obvious rising support level, and I'm expecting a bounce here. That bounce could go as high as a retest of the broken channel trendline slightly above 76, but the obvious longer term target remains the May low just above 67:

I posted a chart on natural gas a few days ago suggesting that the obvious decline target was the strong support level at 3.8. Since then it has made some progress and has broken a minor declining support trendline, and I'm fairly confident we'll see 3.8. Technically the triangle target could be a retest of the 2009 low at 2.4 though, and while it looks worth a spec long at 3.8, if that strong support level breaks with any confidence, then gas could fall a long long way. Regardless of direction UNG looks a poor way to play gas as it has failed to track the gas price well over the last year:

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