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Friday 23 September 2011

United We Fall

I'm a member of Pug's excellent subscription site and find his counts a very useful reference to use with my take on the markets, with my take almost entirely derived from trendlines and patterns so the comparison is a very useful cross-check.

Pug tends to lean slightly bullish while I tend to lean slightly bearish but Pug eliminated his last alternative bullish count last night, and we stand united in the strong expectation that we are going to see more downside.

Pug's main count for a while now has leaned more bearish than my expectation, as I'm seeing likely support in the 1000-1020 area, and Pug's looking at the same area as his highside expectation, but thinking we might go somewhat lower. Both of us are assuming that the world financial system won't collapse, which seems a decent assumption for another year or two at least at the moment. If you include Tim Knight, targeting the 1040-50 area, you have an odd reversal of the usual arrangement, with Tim being the most bullish, Pug being the most bearish, and myself, as before, between the two. Whoever is right we should see a number of decent signals as we approach the low, with likely positive divergence from Dr Copper and EEM when we reach it, and we'll all be watching for those signals.

Obviously we had a wild day on the markets yesterday, and it was so wild, and so wide-ranging, that I'll have to do another broad spectrum post rather than focusing mainly on equities. The first question to consider here is whether the powerful wave down that we've seen since the Fed announcement has finished, or whether we are entering the last stage of that now.

We should find out shortly, with ES looking to test yesterday's lows at the moment, but I have a couple of points to make on my ES chart. The first point is that a strong support/resistance level has now been established in the 1123-5 area on ES, and that level was support overnight repeatedly until it broke 90 minutes ago. If we see a break back above there today then we should be into the retracement wave. The second point is that unless we see a very powerful further break down, then the next low will be established with decent positive divergence on the 60min RSI, which would be a decent low signal. Depending on where that low is I have a provisional retracement wave target in the 1160 ES area:
The other equities chart I'll show today is the RUT 60min chart where the triangle I posted a couple of days ago was greatly strengthened by RUT gapping through the support trendline. RUT made a new low below the August low, which backs up the bear analysis here, but the big gap down also establishes two obvious retracement targets at the top and bottom of the gap, roughly in the 655-65 range:
Looking across other markets, 30yr treasury futures are up to over 146 after breaking strong resistance at 142 after the Fed announcement. I have a very rough target of 148 based on a rough channel but it may not make it yet. The lower trendline is more solid than the upper trendline. I understand that the Fed target reduction for Operation Twist on 10yr treasury yields was 0.10% to 0.15%. With those yields now down over 0.3% in the last two days Operation Twist has exceeded those targets without the Fed shuffling a single treasury around. I did mention that the targets were ridiculous yesterday morning and I think that point is well made now:
Silver is down an astounding 20% in the last two days, and was testing the very important 33.5 level on SI as I capped the chart below this morning. It has fallen since but I'll be watching the close today to confirm a support break there. SI is now testing the May lows:
Copper pinocchioed my first target at 330 overnight but is holding above it for the time being. We may see a decent bounce here but if it breaks then next support is in the 300 area:
I haven't space to show the Vix chart today but obviously we saw the clear break of the 40 level that I was looking at yesterday. Vix closed above the daily bollinger bands and I'll be watching for a buy signal on equities now, though that's much less meaningful in a bear market and the last one failed miserably. I'll show the oil chart though and oil has now almost reached the strong double support level in the 77.40 area (Dec futures) that I was targeting yesterday. Oil may well bounce there but if it breaks then I'd expect a move into the 60s:
Possibly the most interesting and important charts today though are the forex charts, so I've saved those for last. First on EURUSD we are seeing the support zone I highlighted yesterday and the day before tested, but it's holding so far. This is a natural level to see a bounce and the level is holding so far. I'm fairly confident that it will break in the next few weeks but it may well hold short term:
Just to underline the importance of the current support levels on USD currency pairs, here's the GBPUSD daily chart. This chart didn't make the cut yesterday, though I posted it on twitter, but you can see that GBPUSD has now reached a very important support level in the 1.534 area, and I'd expect a bounce here:
We're reaching a number of important support levels on a number markets here, and this is a natural area to expect a bounce. My feeling is that we'll put a wave low in on equities sometime today and then bounce for a day or three before resuming the downtrend. There are some important meetings among world leaders over the next three or four days where attempts may be made to 'save' the financial system with further cross-guarantees of worthless paper by (currently) solvent guarantors. Any resemblance in this process to the securitisation of mortgage debt in the runup to the last financial crisis by bundling bad bonds with good bonds and giving the result a decent rating is accidental and irrelevant I'm sure.

A slightly rushed post this morning as my labrador died overnight and I was consoling my eldest son this morning. She reached a very good age for a labrador, almost 15, but a sad day nonetheless.

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