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Monday, 9 August 2010

Still in the Rising Wedges

A disappointing day for the bears on Friday, and the rising wedges on SPX and EURUSD remain unbroken. Here's the updated version of the rising wedge on SPX that I posted on Friday afternoon:

I've tweaked the ES rising wedge to fit better with the rising wedge on SPX. Logically this also fits better now as the ES low was an overnight low not shared on the SPX:

In retrospect it was a major tell on Friday that there was little weakness on EURUSD, and that the rising wedge on EURUSD was not threatened at all.

I know many don't believe that the correlation between USD/EURUSD and equities is strong enough to trade, so I've marked up on the chart below in red highlight where EURUSD has been in a downward wave, and in blue highlight where EURUSD has been in a an upward wave. SPX is the background to the chart in green.

My point here is just to show that in the last ten months, a period in which SPX has made little upward progress, anyone who had been long only when EURUSD was in an upward wave would be massively up, and anyone who had been long only when EURUSD was in a downward wave would be massively down.

Any significant retracement on equities will therefore be unlikely unless it is accompanied by a downward move in EURUSD and identifying the start that move is therefore of great importance regardless of whether your bias is long or short:

There was some talk at the weekend about the bearish engulfing candlestick on the Vix, but a bearish engulfing candlestick requires that the previous candlestick be in the direction of the previous (bullish trend). Friday's candlestick was a bid red candlestick after a long downtrend, and immediately after a red candlestick the day before. There was therefore no bearish engulfing reversal candlestick on Vix:

So where does this leave us? Exactly where we were on Friday morning more or less. On EURUSD we are waiting for either a hit of the top trendline of the rising wedge, now approaching 1.345, or a daily close below the lower trendline of the wedge, currently slightly under 1.32. On SPX we still have the strong resistance level at 1130, and the top of the rising wedge is in the 1140 area. As the lower trendline of the SPX rising wedge is rising at 5 points per trading day, it is at 1109 SPX today.

Ideally we would see both SPX and EURUSD hit the top trendlines of their rising wedges, as that would deliver the optimal short entry. That won't necessarily happen though as both are up near strong resistance levels. Either way both rising wedges are running out of road, and unless they both break up, which rising wedges do 31% of the time, but seems unlikely here given the overbought state of both on RSI and other indicators, then I'm seeing the maximum that SPX can reach within the rising wedge in the 1150 SPX area.

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