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Thursday 26 August 2010

Classic Reversal Setups

There was much discussion yesterday about whether yesterday's reversal would be a one day wonder or lead to a deeper reversal. I was already leaning towards a deeper reversal and after looking at the overnight action and I am leaning very strongly in favor of seeing a rally on ES into the 1070 area over the next two days.

We hit some key targets yesterday. Not only did we bounce at the key Feb low support level at 1037 ES, but we also hit the top of the rising channel on my 30 year treasuries chart and broke the short term EURUSD declining channel. I'm seeing a number of short term reversal setups and I'll go through the main ones.

On long treasuries I was wondering whether my steep rising channel was breaking, but they fell back after the morning and closed within the channel. I'm expecting a move back to the lower trendline of the channel, though it still looks a courageous short and it may trade sideways rather than down:

I posted my SPX:VIX indicator a couple of weeks ago showing the target I would expect to be hit on this downswing. We hit it yesterday, which is a signal that we are likely to get a respectable bounce here:

On the SPX 15min chart I'm showing the declining channel from the August high. We hit the lower trendline of that channel at the low yesterday and I would normally expect to see a return to the top of the channel. In that circumstance an H&S pattern will often form, and as you can see we have the left shoulder and head of a possible IHS formed now. I'm expecting us to make the right shoulder today before moving up towards the top of the channel:

I've gone into a bit more detail on the ES 60min chart. You can see that we reversed at the obvious level overnight and I've added a very possible short term rising channel to take us back to the top of the declining channel from the August high. If I'm right about that channel, then I'd expect a low in the 1046 to 1049 ES level this morning or early afternoon:

Looking over the USD currency pairs this morning I'm also seeing some classical reversal setups. EURUSD has broken the recent declining channel and is in a small ascending triangle from the recent low. I'm expecting a pullback to the lower trendline of that triangle in the 1.265 area before a break upwards to retest the recently broken broadening ascending wedge on the daily chart at the very important resistance level at 1.292. If I'm right about the initial retracement, or on a break with confidence of 1.2725, I'll be taking a spec long for that target:

GBPUSD has broken up from the falling wedge of recent days, and I'm expecting a retest today of the broken wedge upper trendline in the 1.548 area before a move towards 1.562, which is the target if the falling wedge is developing into a declining channel:

On AUDUSD the rising channel from June has held so far, and we have another potential little IHS forming. I'm expecting a reversal to the 88 level before the IHS plays out towards the target at 90.1:

It may go the other way today of course, but given the key levels hit yesterday, the odds have to favor a multi-day reversal here, and that's what I'm expecting. Equally we may move straight up towards the upside targets here, but given the potential IHSes forming, there is a good chance of a drop in the morning to set up some good short term long entries.

I have a bad cold today and in consequence I've had to change my travel plans this week and I won't be able to do a post tomorrow, though I might be able to put a couple of charts up after the close tonight. Everyone have a great holiday weekend! :-)

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