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Monday 13 September 2010

Be Careful What You Wish For ...

.... as you might just get it!

I was concerned last week that we hadn't yet reached the key reversal zones necessary to make a major interim top on equities, but SPX didn't reverse, and we are clearly now going to see key resistance or support tests across the board this week. At that point we will either see a major interim top, or if those levels are broken, a major bull breakout.

I won't bother reposting the SPX rising channel or the ES rising wedge today as the next trendline targets for both are a long way above the key resistance levels of 1130 SPX and 1128.25 ES. I will post, on the bull side, the massive IHS that has almost finished forming on ES with a target of 1253.75 ES. I posted in late July that if we were to see a major bull breakout then I would expect a reversal to make the right shoulder on this pattern and well, here we are. That doesn't mean we will break up from here but it underlines the potentially very large scale of this breakout if we do:

On EURUSD my declining channel held when tested on Friday, and again when markets opened yesterday, but broke on the third test. There was a strong divergence between EURUSD and SPX at the close on Friday, and I wasn't expecting that to last long. EURUSD is pausing at declining resistance from the August high at the moment, but if that breaks and it reaches key resistance at 1.292 then it will have finished forming an IHS indicating to 1.325:

I'm going to post seven charts today as I'm trying to define all of the resistance and support levels that I see as important this week. Possibly the most important of the other charts is 30yr treasuries and there we have reached the rising channel support trendline and, since I did this chart, are poking through it. If this closes a day at below 130'15 that would look very bullish for equities, as would any break of 130:

On AUDUSD we have reached the reversal zone for the huge broadening formation that I posted last week. Short term resistance is at the upper trendline of the rising wedge in the 93.5 area. If this wedge breaks up, as they do 31% of the time, then the wedge target would be over 98.7. The broadening formation target would be in the 107 area of course:

I don't think CADUSD is particularly key, but I've found a very interesting rectangle bottom on this chart. Resistance is in the 98.5 to 99 area and on an upward breakout we would have a target of 104, on a downward breakout the target would be 89.5. These break downwards 55% of the time:

Oil and Copper don't have the very firm reversal levels of long bonds and AUDUSD, but on oil the next key resistance level is the broken rising channel trendline in the 77.75 area, and I would regard a break of that as a fairly bullish signal:


Copper has been underperforming equities in recent days, and I would see the recent high at 352.5 as the key resistance level. If broken then the next obvious target is in the 400 area:

Momentum is irrelevant at this point in my view, as momentum is generally with the other side in a key reversal area, and obviously if the strength of the economy was the key factor then we would see a reversal here. It isn't though, as we're in a mainly technical market, so the possibility of a major bull breakout here has to be taken very seriously. My personal feeling is that the bulls have a very real chance here, and it wasn't at all encouraging for the bear side that declining resistance from the April high was convincingly broken on Friday, and that long treasuries have failed so far to reverse at support overnight.

If we see a break down, then the downside potential is very big, and if we see a break up, then the likely targets look to be a long way up. On SPX we are looking at a likely break of 90 to 125 points in either direction. Only the bull breakout would look definitive though. If we reverse here then we are just continuing to trade the range that we've been in for months, but a bull breakout would most likely take us to new highs.

I'm mainly planning to play this area on the short side, but that's only because the risk/reward here is better on the short side. If we break up I'll reverse and make back my losses on the long side. That's just a strategic view though. Putting aside the bearish bias common to most of us who have read a lot of economic history I would say that the bulls have the technical edge this week, and a break up through resistance wouldn't surprise me.

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