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Thursday 2 September 2010

The Devil and the Deep Blue Sea

The move off 1040 SPX this week was a familiar sight.Since the beginning of October last year there have been six previous moves up from 1040 or below and it is worth noting that not one of those failed to make it to at least 1099 SPX. That's what I'm expecting to see this week as well.

I was thinking about Trader1's BAR (Big Ass Range) yesterday and looking over the SPX over the last twelve months we have spent a majority of the last year, and over ten of the last fourteen weeks, trading in the range 1040 - 1105 SPX:

I'm wondering whether we will see a major break out of this range anytime soon. The bears are expecting a significant break downwards, and the bulls are expecting a significant break upwards, but it's possible that we could just chop around here for quite a while longer, trapped in this range between the devil (Fed threats to intervene if assets prices fall) and the deep blue sea (a US economy that is failing to produce much in the way of good news).

I was talking a couple of days ago about the possibility that the markets saw a technical low (the bottom for several lead indicator markets) in late May, with USD peaking slightly later in early June. One of the things I was thinking of was EEM, the Emerging Markets ETF, which saw the low in late May and diverged sharply from SPX from there. It is interesting to see on the daily chart that EEM has just bounced at wedge support from that low:

There are several commodities, currencies and markets that are now close to their April highs. Copper is one and another is AUDUSD. I posted a right-angled and descending broadening formation on AUDUSD back near the SPX April top with a suggestion that it looked shortable for a move down to the 81.5 to 82.5 area within that pattern. You can see that post here. Since making a double bottom near 81 in late May & early June, AUDUSD has moved back up towards the top of the pattern, with a target in the 93.85 area and it looks very likely to make it to that target. The pattern may break up from there but if it doesn't then the next downside target will be in the 72.5 to 75 area, so it looks like a very interesting short from the next hit of the top trendline.

In the short term on ES / SPX, yesterday's close raised the possibility that we have just completed the head on an IHS indicating to 1123 SPX. I'd be disappointed to see a significant pullback today to make the right shoulder, as a move to that target would break the upper trendline of the main declining channel on SPX from the April high, which will be in the 1105 SPX area early next week. A break of that trendline would blow a huge hole in the bear case over the next few weeks:

We have a rising channel on ES that I'm expecting to hold today and tomorrow. The lower trendline of that channel will be at about 1086 ES by the close tomorrow, which fits with the sideways to up chop that I'm expecting to see until then:

I've been receiving the (free) daily charts from Clusterstock Chart of the Day for a long while now and they often have something worthwhile to show. Yesterday's was very interesting showing a strong positive bias for the week before Labor Day, with a particularly strong bias for the first day in September. I'm expecting to see a short term swing high tomorrow or early next week followed by a sharp retracement so it was good to see that COTD's chart is showing a significant negative bias for next week. You can see the full COTD post here:

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