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Friday 6 August 2010

The case for an interim top here

The non-farm payroll numbers are out before the open this morning and while yesterday's numbers suggest that they won't be good, we may see the usual trick of announcing flat to weakly positive numbers, with a revision down quietly a few weeks down the line.

It is anybody's guess what the market reaction today will be, but as we move closer towards the tip of the rising wedge on ES, the range is getting tight, and resistance at 1130, which has held all week, may still hold for this interim top to be made here. It may also be significant that the rising wedge on the daily ES RSI, which I have marked on my ES chart, is breaking down out of the wedge already:

I've been taken aback by the large number of analysts and traders that I respect calling for a move to the 1150 to 1170 area before the next interim top is made, and I have been giving my various charts a thorough workout to see if I can see a good argument for that, but I can't. In terms of the ES rising wedge particularly, a move to that level would involve a break up from the wedge that would go beyond a credible overthrow, and if that happens then I'm seeing a rapid move to new highs on SPX over the next few weeks.

Now I don't see that rapid move to new highs as high probability for a number of reasons, but the key reason is USD, which has been in a steep swandive from the high eight weeks ago, losing 10% of its value, which is a very big move for USD in a very short time. I simply don't find it credible that this plunge can continue without any significant corrective move, and when that move happens, given the matching rising wedges on EURUSD and ES, I'm expecting a move down on ES as well. Here's the USD falling wedge on the daily chart:

EURUSD is in a mirror rising wedge of course, and is close to the rising support trendline on that wedge. I've been watching for a support break on it, and we're close, if EURUSD makes it down below 1.31, then the wedge will look broken, though a daily close below it would be needed for full confirmation. It needs to break down here, as a move to the top wedge trendline at over 1.34 would seem likely to push ES up beyond the top trendline of the ES rising wedge:

One thing I'm watching closely here as well is AUDUSD, as that is in a much smaller rising wedge, within short term and longer term rising channels, and a break of that wedge would be a significant topping signal IMO. It is very close to a break at the moment and I am looking for an hourly close below 0.913 to confirm a break:

Of other currency pairs that I watch, there's no rising wedge on GBPUSD, but it looks very much as though it has topped for the moment within the steep rising channel from the low just over 1.42:

On the commodities side, copper reached my IHS target at 337 on Monday, and has since stalled just below resistance at 340. I don't have anything to suggest that it will fall, but I no longer have anything suggesting it will rise either.Oil on the other hand clearly looks to have topped within the recent rising channel, though there is a little play in the top trendline.

All in all, I still think we are at or very close to an important interim top, and I'm seeing a move back down towards a possible target at 1070 ES, but very possibly declining no further than 1084.5 ES.

My alternate scenario is one where the ES rising wedge would break up, and we would move to a target in the 1250 ES area over the next few weeks. I'm very doubtful about that as it would imply a move directly back to last year's USD lows without any significant retracements. I'd be the first to concede that USD is a dog, and that the US government is both willing and determined to debase it in pursuit of the doubtful proposition that asset inflation will deliver prosperity, but EURUSD is no oil painting either, and big moves down in USD historically don't tend to come as near-vertical plunges.

In summary I'm leaning short today, and will be watching EURUSD and AUDUSD particularly for early signals that the ES rising wedge will break downwards.I have a short term rising resistance trendline at 1129 ES, and if we get there I will be trying a short from 1128.75 with a stop at 1030.5, just above the June high. If that falls and we reach the top of the ES rising wedge, then I'll be shorting from 1134.5 ES as a swing trade. If we then reach 1140.5, or close an hour above the rising wedge trendline currently at 1134.75, I'll cut my shorts and watch to see whether the rising wedge is breaking up.

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