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Tuesday, 28 June 2011

The US Dollar Retracement

Tim Knight was saying the other day that trading equities was all about the US Dollar at the moment. There's a lot of truth in that while the spectre of a large scale sovereign debt crisis haunts the markets, so let's consider where USD is likely to go from here. At centre stage is the year old falling wedge on UUP, the dollar bullish ETF, and looking at that it seems likely that USD has bottomed for the year, as the wedge is now fully formed and making exploratory breaks of the resistance trendline:
Short term though EURUSD is bouncing. The small falling wedge I posted on EURUSD yesterday broke up and made the 1.43 target I gave, but there may well be more upside coming looking at the DX chart, where a larger rising wedge broke down yesterday and has not yet reached the target just below 75. If that plays out to target or below then it might well help equities to make an impressive break up over the next few weeks:
Why's that important? Well I still have my eye on the large H&S patterns that may be forming on SPX, NDX and RUT. To form the right shoulder on SPX we'd need to see a move to at least the 1310-20 area and lasting most likely into the end of July. If the H&S forms that doesn't necessarily mean it will play out of course. As with the large H&S last year we might then see a bottom near or slightly below the neckline. I've added some moving averages to this chart showing that the daily 200 SMA is currently support and the daily 20 SMA (the mid point of the daily bollinger bands) is currently resistance:
Short term the 60min futures charts for ES, NQ and TF all reached interesting levels yesterday. On ES the rise topped at declining resistance from the previous two highs, though there were three pinocchios through the trendline overnight which suggests that it will break soon. Resistance there is currently at 1276.75:
NQ was the strongest of the three indices yesterday, and topped out at a very interesting level, which is an alternate slightly upsloping neckline for an IHS which is less pretty than last week's IHS. It still looks valid enough though and the target on a break up would be 2340, which would be in my target zone for the large H&S building on NDX:
TF topped out yesterday at the declining resistance level I gave yesterday morning, though as with ES there were some pinocchios through that suggest that the trendline will break soon. On a break up I'll be looking for the rectangle target at 814.1 to be made, though the upper trendline of the rectangle has been violated repeatedly in recent days which weakens it somewhat:
We might see some retracement today and I'm watching my declining resistance levels to see whether they can be broken. A break up through those levels would be bullish, though I'm not really expecting a decisive move up before the Greek vote on Thursday, which could well give EURUSD a strong boost for a few days.

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