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Wednesday, 25 August 2010

The economy is not the market

mmTesla said in response to a question at www.slopeofhope.com yesterday that 'the economy is not the market'. Very true. That doesn't mean that they're not intertwined in the longer term, but in the short term it does mean that the economy is of limited relevance to the market. I take an almost purely technical view of the markets, and try to put my personal (very bearish over the next five or six years) view of the economy aside, as I don't think it matters much in the short or even medium term, and I'm very keen to avoid the easy trap of looking for evidence to fit my view, rather than forming my view from objective assessment of the evidence.

That does mean that my strongest views on market probabilities are over a short timeframe, and I'll switch my medium term projections without hesitation or embarassment if circumstances change and major lines in the sand are crossed. That's as it should be in my view. Anyone looking for bold projections that never change much regardless of the evidence can always sign up at EWI, and the best of luck with that. Tim Knight's views are longer term I know, but there are very few chartists tracking a wider range of individual stocks than Tim, so his view is much broader than mine or indeed anyone who mainly specialises in the main indices.

In the short term I'm seeing intact declining channels on ES and EURUSD, and I'm expecting to see a short term low today on ES with the highest probability target area on ES in the 1033 - 1040 ES area. I'll be going long there, though with a degree of caution, as this looks like a counter-trend play to me, and it is possible that ES could go lower. I'm very aware that below my target area there is little support until we retest the July low, but I'm expecting both of my ES channels to provide protective support:

On EURUSD I have a declining channel as well, though the upper trendline was being tested hard overnight and on the 60min chart I am seeing strong positive divergence on RSI and MACD. EURUSD has fallen back somewhat since I did the chart, but I'll be happier when it falls back below 1.264, breaking very short term support:

Pug's primary count here is still the bullish count until 1037 SPX is broken, which may or may not happen on this short term swing down, and many would regard him as a bull here while I am a bear. The more complex reality is in the timeframe of course.

In truth Pug and I simply have different views over the depth of the retracement of the March 2009 to April 2010 advance, in that he thinks at the moment that it is more likely to have bottomed at a 38.2% retracement, and I think at the moment that it looks more likely to make a 61.8% retracement (878 SPX), which is also the maximum retracement that Tim was putting forward as likely in a post last night. All three of us and many others think that we are likely to see the market bounce afterwards to a level considerably higher than we are seeing today, and arguably that makes all of us bulls on that longer timeframe. :-)

In my view these labels are largely meaningless. Our only concern should be to stay on the right side of the market whichever side that might be. Anyone who thinks otherwise should probably avoid trading IMO.

Pug could yet be right. I switched my view back when EURUSD broke support, as that for me is a very key indicator. EURUSD tends to form wedges and they usually play out to target. The question here is which of the two wedges that formed on EURUSD since last November will fail? I'm leaning strongly towards the more recent bearish broadening ascending wedge playing out, because of the supportive H&S that formed at the recent top, and the increasing strength of the overall bearish technical picture. Here are both of those wedges on the EURUSD daily chart:

It could go the other way of course, my daily chart of SPX looks extremely bearish, but I'm sure everyone can see the huge potential IHS building on it with the neckline at the June and August highs. As far as I'm aware I'm the first one who pointed it out as a possibility in July and it is still a possibility. If we were to rise from here and break the upper trendline of the main SPX declining channel in the 1110 area, it would be a possibility to again consider very seriously.

Something else to note on this chart is the patterns that have formed on the daily RSI and MACD. I posted this chart the other day and you can see that we are coming close to reaching the support trendlines on those patterns. Those are likely to be hit today or tomorrow morning IMO, and when they are hit the short term low should be in:

One last chart to leave you with today. On the ES 15min chart we have a fairly good quality descending triangle. These break down 64% of the time and Bulkowski ranks them at 5 out of 23 as a pattern, though they perform best on on upward breakout. Bulkowski's page on it is here, and I'd recommend his site to anyone using patterns a lot. I refer to it often. The site is free and also has an excellent section on candlesticks:

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