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Monday 16 August 2010

Starting to bounce perhaps

I'm expecting the week, broadly speaking, to play out as follows. Today I'm expecting to close up, though that definitely doesn't preclude a heavy fall in early trading, we may see a retracement downwards tomorrow, and then I'm expecting to rally from Wednesday into opex. The strength of that rally will tell us a lot about what comes afterwards, but increasingly I'm leaning towards seeing a strong fall below last week's lows next week.

EURUSD held wedge support and may well bounce here to form the right shoulder on a big H&S pattern indicating to the 1.213 area. If so, I'd expect a bounce into the 1.30 area to make the shoulder:

AUDUSD bounced at the important 88.5 support level overnight and I'm expecting a bounce back up into the 90 area:

GBPUSD pinocchioed through the wedge support trendline overnight, which was a signal that the wedge may well break soon, but has regained 1.56 since then and looks likely to bounce here:

Oil reached the lower trendline of the rising channel and has bounced at support there:

So the USD currency pairs and oil are looking cautiously bullish for the start of the week, which fits in with my expectations so far.

I'm not at all convinced that ES has found a bottom overnight however, and even though I'm expecting a fairly high degree of inverse correlation between USD and ES over the next few weeks, that won't necessarily be the case every day. A number of EWers were looking at a bounce level at 1069 SPX. We may see that level near the start of trading today and if it is broken with much confidence then we may fall to test the next key support level on ES at 1050. This support level looks very attractive because it marks the neckline on a potential H&S pattern that would indicate to 970, and in the cold light of day it looks the obvious target for ES from here unless we see a strong bounce on ES / SPX from near the open today:

Something that backs that target up is the chart for 30 year treasuries, which I've been looking at again this morning. These have been flying up over the last few days, and have made a lot of progress overnight. On the daily chart I've marked in a rectangle which I posted in mid-May, and that has a target at 134. In the shorter term I have a rising channel with a target at 1.35. This move up doesn't look complete to me, and if it continues to rise strongly towards 135 today, then I could definitely see equities falling in response, and as I said, 1050 ES looks like a strong target if that is the case:

Overall the charts are starting to look very bearish, and we're close to the point where I may upgrade the bear scenario for the summer to being my primary scenario. In the interim buying the dips is looking increasingly dangerous. 

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