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Tuesday, 2 November 2010

Waiting for a Break

There are two immediate scenarios for SPX and ES that I can see. We are either in a rising channel, or a rectangle, or both. You can see that on this chart:


The best patterns on SPX are those that are repeated on ES, and the rectangle is the better current pattern on that basis, but we also have a rising channel on ES, albeit with a lower upside target. In terms of SPX, the rectangle target is 1220 and the rising channel upper trendline is in the same area. On a break of the recent highs with confidence, that is where I would expect to find resistance next. Technically the next rectangle target is at the lower trendline, but to reach it the rising channel would have to break, so I'm doubtful that we'll see that. Another touch of the upper rectangle boundary without an interim touch of the lower boundary will indicate a high probability that the rectangle is about to break up, and rectangles like this break up about 70% of the time in any case.

I've been looking again at USD and the picture still looks bullish until the lower triangle trendline is broken. It isn't encouraging that USD has really no more than stalled at that trendline since it was reached, and dollar bulls are very hard to find nowadays, but the risk/reward favors the long side here regardless until triangle support is broken. If that happens then USD could fall a lot further and, though could find some support at the 70.70 low, my next trendline target would be in the mid-60s:

 
EURUSD is 55% of the USD index so it is the critical element for any USD bounce. The declining channel on EURUSD is still intact though the upper trendline has been tested twice in the last two days and it failed to make the lower channel trendline on the last wave down. If the channel breaks up then the prospects for USD will look much more doubtful and the prospects for equities much more bullish. It isn't a coincidence in my view that since EURUSD topped three weeks ago, equities have stalled:

One chart that still looks very bearish amidst the bullishness of the last two months is XLF, with financials still within a clear declining channel from the April high. From the chart is looks poised to move down further though if XLF were to break up through the declining channel upper trendline, and then the upper rectangle boundary, the picture would then look very bullish. Financials are in serious trouble over the ongoing mortgages fiasco though, and it is a little hard to see that happening at the moment:

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