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Wednesday, 2 February 2011

Targets and Broadening Tops

That was a very impressive move up yesterday and there has been much talk about how this breakout is the start of a major new leg up. That's possible, and I'm expecting some more upside too, but I have a range of upside targets to lay out today, ranging from the modest to the downright scary.

The most modest, and the most credible IMO, comes from the rising wedge on the ES daily chart, which now looks extremely solid, with the latest ES low perfectly bouncing from the lower trendline of the wedge. The upper trendline is now in the 1311 - 1313 area if we were to hit it today. One thing to note about this is that I have mentioned before that rising wedges often evolve into rising channels. Usually they will break down to form the channel, but occasionally they can break up to do it and I have two candidate upper trendlines in the event that this wedge breaks up. That's worth bearing in mind:
On the ES 60min chart, the move up from November has now resolved into a perfect rising channel. The channel may be evolving into a broadening top as you can see from the red declining trendline from the last couple of weeks. and the upper trendline target is in the 1318 - 1320 area today. That's higher than the rising wedge target on the ES daily chart but it's worth bearing in mind that wedges often overthrow near the end and it's possible that the channel target could be met without breaking the rising wedge:
The scary chart I have to show this morning is the NQ chart, and this is the one that would fall into the major breakout category. Here there is a now very large broadening top with the upper trendline target in the 2430 - 2450 area. Supporting that target there is a possible continuation IHS with a target at 2400 that has formed in the last few days. I'm doubtful about this IHS but it is definitely worth bearing in mind:
Copper had a big break up yesterday, though oil and silver were strangely flat. EURUSD broke up to make a higher high again and I'm seeing a possible broadening formation on EURUSD that would give an immediate target of 1.388 - 1.39 before a reversal within the pattern to support at 1.3575:
On the bigger picture USD (DX) chart the target for this move is now obvious, as we are within 100 pips of the main support trendline, currently at 76.16. That should be good for a bounce, but it looks very bearish to me that the latest USD bounce was so small, and that it has fallen back to support without a significant retracement. I'm expecting that main support trendline may break in the next few weeks, and that is of course the logical consequence of the massive debasement of the US dollar that is being undertaken at the moment by the Fed. If it happens that break down will have major consequences, and may mark the beginning of the end of the Fed's current policy strategy:
For today, I was wondering whether support at 1300 ES and 2318 NQ would hold overnight and it has. As long as those levels hold I'm expecting another move up today. As to whether I think a top is still forming here? Well I'm mainly watching the rising wedge on ES for that and it is growing stronger by the day. For the last few months we have seen equities rise while treasuries tanked. Both are looking very good for some retracement here and that's still what I'm expecting to see. How long will that last? Hard to say, but the reversal scenario on both has been steadily strengthening in recent days and until we see a major breakout on either, that's still my primary scenario here. We haven't seen that breakout yet and forming tops tend to form on increasing volatility, which is exactly what we have been seeing for the last two weeks.

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