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Friday, 10 September 2010

SPX Support Trendline Confirmed

I posted a very speculative rising channel on the SPX 60min chart yesterday suggesting that we might see a hit to confirm the lower trendline in the morning, and we saw that hit, albeit not until the afternoon, so the channel is now confirmed:


The lower trendline was also hit on an ES speculative rising wedge from the last major low, so support is firmly established for both ES and SPX now, which is very good news as I think SPX may well peak and then break downwards today, and a break of those support levels will be confirmation that a short term swing high is in:


I'm still hopeful that we could see a major interim top here, and we could see that if we rise strongly in the morning today. My 30 year treasuries target for a rising channel lower trendline hit has only risen slightly and I'll not post an update of the chart I posted yesterday, other than to add that half the distance to that trendline yesterday morning has now been closed, and that a hit of the lower trendline would be in the 130'26 area today. An interesting spec long there would put a stop at 130'11 and as both previous waves up were over 10, the risk/reward for that spec long would potentially be 1:20.

The rising channel may break of course and if we are to see a major bull breakout here on equities then that would happen. However it is just a fact of life that bull breakouts always seem more likely at the top of a range and bear breakouts at the bottom of the range. Until we see an actual break of the range though, the best risk/reward trades come from buying low and selling high at likely reversal points within it.

Apart from long treasuries the pattern I am watching most closely today is on AUDUSD, where the rising wedge that I posted last week has evolved into a much larger rising wedge. Rising wedges do have a strong tendency to evolve into channels or other patterns, though a transformation into a larger rising wedge is thankfully rare. The upper trendline of that rising wedge could well be hit in the 93.15 area on an upswing today and that would get AUDUSD into the right area for a major reversal on the big broadening formation I posted yesterday as the major high in January was at  93.24:

There are some other interesting potential reversal patterns building here. One is on copper where we may have an H&S pattern forming at the top of what would be the right shoulder on a much larger pattern. This is one to watch and if the bear case has any real legs over the next few months then we should now see a retracement on copper into the 317 - 320 area to finish the head:


I'm seeing the same on oil, though a little more advanced with the right shoulder forming on an H&S pattern that would indicate to 58. I'm thinking that we could see a rise to 77.5 this morning to retest the broken channel lower trendline and make the top for the right shoulder and if so oil would look a very attractive short there:


I posted a possible declining channel on EURUSD yesterday and suggested that we might see a hit of the upper trendline on that channel. Arguably we have seen that hit overnight, though there is a little play in the upper trendline and we could see a more confident hit in the 1.2745 area this morning. If we see EURUSD turn down again then I'd expect a move down to support on that channel in the 1.255 area, but I'd really have my eye on a hit of the main declining support trendline from the August high in the 1.21 to 1.225 area:


I'm expecting a reversal today and if that is just a short term reversal then I'd be expecting it to last three or four days with an ES target in the 1070 - 1075 area. If we see a bounce in the morning high enough to hit my targets on AUDUSD and long treasuries though, then we could instead be seeing a major interim top and then the retracement would last longer, at least test 1040 again and perhaps then break out downwards.

There is obviously a chance that long treasuries and AUDUSD may reach my reversal targets and just keep on going. If we are going to see the major equities break up that many bulls are talking about then that will happen. That's a real maybe here though and until we see some real signs of a break up from the current equities trading range we're better off regarding that as just a possibility to bear in mind.

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