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Friday, 20 August 2010

ES and EURUSD Break Support

I was looking for confirmation that a major decline might be starting yesterday and I got it when ES broke the rising channel. Looking at SPX the channel was broken even more convincingly and just to underline the point the 13/34 daily EMAs recrossed bearishly, backing up the 13/34 weekly EMAs which recrossed bearishly last week:

EURUSD didn't break the broadening ascending wedge yesterday but has dropped well below it overnight, and has also dropped through the neckline of the big H&S pattern indicating to 1.214. Short of a really major recovery today I'm regarding the EURUSD wedge as broken, and that is confirmation once we see the close today that we are likely to see new 2010 lows on both ES and EURUSD:

Where we are on EURUSD is of enormous importance in my view as it is the key inverse proxy for USD. I've posted before on the complex relationship for the positive correlation between EURUSD and ES/SPX, and that the moves down on ES move furthest and fastest when both ES and EURUSD are both in powerful waves down, as they were between the SPX top in April and the early June, during which time ES fell just over 180 points on a peak to trough basis. I think it is now likely that we are in another such period now.

I have put a tentative EW labelling on the EURUSD moves down from the top so far. On my primary count wave 1 completed at the June low, and the recent high was the top of wave 2, putting us in wave (iii) of 3 now. On my alternate count we just completed wave (iv), which retraced almost exactly 50% of wave (iii), and have just started wave (v) of 1. EW pedants should forgive my not using the standard labelling, but I think the meaning is clear enough, and either way new 2010 lows from here now look likely:

Looking at the SPX daily chart I have also found a simply beautiful declining channel from the April high to support this overall picture. Looking at it now it is a perfect technical declining channel from the top, and should define the target for the current swing down, subject of course to the time taken to complete it:

On the basis of that channel and the current situation on EURUSD, and assuming that we don't see a major reversal on EURUSD taking it back into the broadening ascending wedge by the close today, I am therefore seeing the next major swing low in the 940 SPX area in mid-September. We shall see if I'm right over the next three weeks. :-)

In the shorter term I also have a smaller declining channel on ES for the current move, and also a largish potential H&S pattern indicating to the 975 area. These give us the two most likely bounce levels for the immediate move down, and they are the 1050 ES area to finish the head on the potential H&S pattern, and the powerful support level at 1037 ES, which would be the declining channel target and also the neckline for the big H&S pattern on ES / SPX that indicates to the 870 area. I'm favoring the lower target:

So there we are. I have put my bear suit back on and am once again targeting 870 SPX as the most likely main target for this move down, as it is the target for the big SPX H&S, the broadening formation, and also the bearish gartley pattern that I posted yesterday, as well as being the key support / resistance level for the October 2008 to July 2009 period. I am hoping that we will get a second Hindenburg omen in the next few days just to add the final touch to the overall technical picture here, which in my view hasn't looked as bearish since August 2008.

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