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Tuesday 24 August 2010

Long Opportunity Coming Up

Well ES didn't even make a retest of 1084.5 ES yesterday before falling again and closing the day down. That clarifies my expectations for the next week, which are that we will fall into a short term low on Wednesday or Thursday that will lead to a relief rally lasting three or four days.

The key question is where we will make that low of course, and I still have the same two targets that I posted last week, though I'm leaning slightly more now towards the higher of my two targets as I'm not expecting big down moves today or tomorrow. Obviously I could be mistaken however.

The lower target is a hit of the very important support level at 1037 ES today or tomorrow. I have a fairly high quality declining channel from the July high with the lower trendline in the right area. If that target is hit then it may well be that the subsequent rally would be capped at the 1074.5 area, where the upper trendline of this short term declining channel will be by then:

I've switched to the SPX chart to show the higher of my two targets, and that target would be at 1055 SPX, at the neckline of a potential head and shoulder pattern where this low would be finishing the head, and the relief rally would be making the right shoulder. In this event I would expect a retest of the strong resistance level at 1085 for the right shoulder, and if broken, I would expect a test of 1100 SPX as that is the same level as the left shoulder, and that is a level I would be very surprised to see broken, so it should go no higher. It is worth noting that RSI, MACD and the 5,3,3 stochs are all showing positive divergence now, which is an indication that we may well be close to a short term swing low. You can see the RSI on this chart:

Looking at forex overnight EURUSD and GBPUSD have made new lows, and AUDUSD has broken the very important support level at 88.56, which it has been testing in recent days. I'm seeing the next target for AUDUSD in the 87.4 to 87.5 area.

The big forex news overnight though was on CADUSD, which broke a twenty month rising channel with a lot of conviction. I have two strong pattern targets for the short term downside and have marked them on the daily chart. I haven't marked it up yet, but I am considering the possibility that we have a very big H&S on CADUSD with the neckline in the 93 area and a target at 85.5. If so CADUSD may find some support at the neckline:

I haven't reviewed the flight to safety trades on gold, bonds and yen for a few days so I thought I'd review those quickly today. Gold, technically the strongest of the three in my view, is still rising within a two year old rising channel and may be falling in the very short term towards an internal support trendline in the 1205 - 1210 area. There is a possible head and shoulder pattern forming but it has too much sideways action on the head to make a good pattern really, and to finish the right shoulder it would have to break down through the lower trendline of the main rising channel in the 1180 area, at which point I would start to take it much more seriously. As gold is still close to the bottom of the rising channel the upside targets are the 1320 area for the significant interior trendline, and 1410 for the upper trendline of the rising channel :

Of these three flight to safety trades, gold is the only one that can't be printed in vast quantities by profligate central bankers, which gives it a distinct advantage over the other two IMO. The second, thirty year treasuries, seems undaunted however by the ever swelling supply, and has been in a strong uptrend for months now. I'm uncertain as to whether this is a rising wedge or a rising channel and I'm leaning towards the latter, If it is a rising wedge then we have been topping in the short term for the last few days, and if it is a rising channel then I have a target slightly under 136:

The flight to safety trade that I find hardest to understand however is the yen, as interest rates are slim even with deflation taken into account, and in solvency terms Japan looks like a dead man walking, with a public debt of almost 200% of GDP, disastrous demographics, a recession that has lasted on and off for twenty years, and one in three yen spent by the government being borrowed. Suspending my disbelief however I've charted this using USDJPY rather than JPYUSD as most people prefer the former, and it appears to be in a large falling wedge. I say appears as the criss-crossing between the trendlines is choppier than I would like.

The RSI on the JPYUSD hourly chart is in oversold territory and the RSI on the daily chart is developing clear positive divergence as well. On the 60min chart it has hit a significant support level overnight and there is a significant probability that it will reverse there. On the daily chart though, 82.9 still looks an attractive target and this still looks like a risky long. On a break of the upper trendline of the falling wedge this will look a very attractive long and I'll be watching for that in the coming weeks:

I've got a very busy week offline this week and won't be around much though I'll be doing my daily posts every day. I'll be away on Friday in a location with unreliable internet access, but I'll be doing the morning post unless it fails altogether.

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