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Thursday 16 September 2010

The Gathering Storm on USD

I've been having trouble pinning down a high probability pattern or channel on SPX since the last low but I'm now certain that I've got it. We have an atypical rising wedge on SPX that is very likely to evolve into a rising channel on either a break up or down. It is very likely to evolve into a channel because both alternate channel trendlines marked already have two touches, making both high probability reversal levels on a wedge break in either direction. Here it is on the SPX 60min chart:

This big rising wedge hasn't yet broken of course and the bulls and bears have been fighting for control of this tape since we hit 1127.36 SPX two days ago. There is some reason to think that it might break today as we had a small rising wedge form yesterday on ES that broke overnight. My bullish EW chum Pug also posted an atypical but valid small H&S indicating to the 1102 SPX area last night and has his current primary count that we probably made a short term peak at the high two days ago, and are now starting a modest retracement. Pug's projections play out a lot of the time, and he is very much on my daily required reading list. There is also some reason to think that the powers that be would like an 1100 SPX pin for opex tomorrow. Here's the broken rising wedge on the ES 5min chart:

Unless we see a major bullish break up on equities in the near future I am expecting to see some more upside on 30 year treasuries. If we do see equities break resistance though, as I mentioned yesterday, bonds are then likely to trend flat to down and we're unlikely to see another big move up on bonds in the near future IMO. There was some discussion about this yesterday and I'll clarify what I said in my post yesterday morning by saying that Fed purchases of bonds primarily boost equities. The only support function they have for bonds is to prevent bonds falling as much as they otherwise would while equities are trending up. When equities are trending down bonds trend up naturally and therefore need no support.

On the 30yr treasuries chart since the recent bounce at support for the main rising channel, these have returned to the top trendline of the shorter term declining channel, and have been repeatedly retesting that trendline. During those retests a small symmetrical triangle has formed and I'm expecting that it may well break up through resistance today, clearing the path for a larger move up. These only break upwards 54% of the time though so it may break downwards instead. Here are the declining channel and triangle on the hourly chart:

There is something that is really worrying me in term of seeing a significant equities retracement here though, and that is the rapidly deteriorating technical position on USD (DX). If the Fed are going to announce a big new QE2 push on Tuesday, as everyone now seems to expect, then equities may soar, treasuries will struggle, and USD will most likely get trashed. Rightly so as another wave of, in effect, printing the US deficit will further damage the outlook for USD as a long term store of value.

I've posted the EURUSD IHS a couple of times in recent days and after the recent neckline break EURUSD has stalled at the 1.303 resistance level. Here's the IHS again on the 60min chart:

Over the EURUSD move up from 1.2642 it has formed a smaller broadening ascending wedge, and while it has been repeatedly testing the 1.303 resistance level it has moved across from the upper trendline of that wedge to the lower one. While I've been writing this post EURUSD has broken up through 1.303 with conviction and is heading towards 1.31. The IHS target at 1.325 now looks a high probability target and the upper trendline of this very steep broadening ascending wedge will be in the 1.33 area if hit today. Here's the wedge on the 60min chart:

GBPUSD has also formed and broken the neckline on an IHS, this time indicating to 1.588. We have a classic bottoming sequence on GBPUSD, with a declining channel breaking to form a rising channel while the IHS has formed. The neckline broke yesterday and we've so far seen three successful retests of the broken neckline overnight, with one deep pinocchio through to hit the lower trendline of a small rising wedge that I haven't marked up on this 60min chart:

This leaves both EURUSD and GBPUSD looking likely now to rise close to their early August peaks, which is a very serious concern for equity bears here, as a declining USD is not at all supportive of declining equities. It is the next chart that is the really worrying one though, and that is the USD (DX) chart itself, where a very large H&S pattern is forming with the neckline at 80, and the moves I've been talking about on EURUSD particularly would largely complete the right shoulder and return USD to the neckline of the pattern. Here it is on the DX 60min chart:

I'm still thinking we could see some retracement on SPX over the next day or two but I'm now seriously concerned that we may see SPX break up through resistance instead. If it does, then the neckline of the SPX IHS will break, and we could well see a move up to a level high enough for the broken neckline to become the next retracement target. Looking at my SPX chart at the top, the next rising channel target on a break up would appear to be in the 1160 - 1170 SPX area. There is therefore good reason for equity bears to be extremely careful here.

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