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Wednesday 11 August 2010

Don't Play The Gap Fill Today

SPX spiked up strongly after the FOMC announcement stated that the economy is so weak that the Fed is going to be printing more money, but even this good news wasn't enough to sustain the market long, and overnight ES broke both yesterday's low and last Friday's low. In the short term ES formed a small head and shoulders pattern yesterday with a target of 1096 ES. That is also the level for the gap fill from last Monday's gap up and a strong candidate for a likely area to see a bounce today:

On the bear side it is excellent news that the strong support level at 1104.5 ES broke on an hourly basis overnight, and even with a recovery above it the path further down looks wide open now. While we haven't yet seen a daily close below the ES / SPX rising wedge, it no longer seems credible to think that the wedge has not broken downwards:

I won't repost any of the updated forex or oil charts from yesterday. They're all playing out as I suggested then, and Oil and AUDUSD are both now testing the first weak level of support that I indicated. EURUSD and GBPUSD are both halfway to the stronger targets that I indicated.

We therefore now have a confirmed wave up in USD at the same time as a confirmed wave down in equities, and that, as I've mentioned before, is when we see big moves down in equities. On that basis I'm somewhat doubtful about either of my first ES support levels at 1084.5 or 1070 holding, and Pug's alternate count target near the very important support level in the 1040 SPX area looks the most likely to be reached. I'm expecting that we will see a fast move downwards over the next week, with a bottom being made between Monday and Wednesday next week in time for a bounce into opex on Friday.

I have a couple of other charts to share today that look interesting. The first is the CADUSD chart, where I posted a symmetrical triangle that was breaking up last week and mentioned then that I hate trading these triangles because they often break out one way before resolving in the other. That appears to be happening on CADUSD now and it will be interesting to see whether it will make the downside triangle target at 0.92:

Denizen mentioned yesterday that there is a huge head and shoulders pattern on copper, so I had another look at the chart on a longer term basis, and he's absolutely right. I've redone the copper chart showing the bigger picture:

The copper chart is one to watch carefully. For the bull case, the first rising channel target near 310 should hold, but if it doesn't the next obvious strong (declining) support level is near 260, which would be a new low for 2010. If that breaks and then confirms by breaking 252 (3%), then the H&S target is 180, which would have far-reaching implications.

Copper is one of the more important indicators to watch for the medium term bull case and I'll be watching the rising support trendline at 310 very carefully. If it breaks then the bull case may be in trouble, and if copper should reach declining support at 260 then it will be in very serious trouble.

Another indicator that I'll be watching is EURUSD. My view is that EURUSD is just retracing during a bull move towards a wedge target in the 1.46 to 1.50 area. If I'm right, then I'm expecting rising support for EURUSD in the 1.275 area to hold. If it doesn't then the bear scenario over the next few months will look a great deal stronger.

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