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Friday, 4 November 2011

The Butterfly Effect

The famous Butterfly Effect is the idea that small changes in a non-linear system can cause large differences to a later state. The idea is that a butterfly flapping its wings in (say) Greece might cause a hurricane to form in (say) the US. I'm no expert on butterflies but I can say with confidence that in the current market any eruption of wind from a greek politician or from one of the many empty heads of state at the G-20 in Cannes may show up in equities moments later. Be warned, and let us all hope that politicians in Europe everywhere today can avoid eating brussels sprouts and baked beans, as well as sounding off to journalists. :-)

Notwithstanding the news, the technical picture is looking bullish on balance today, though less strongly than it did yesterday morning. It's less strongly bullish mainly because a number of instruments are at resistance levels, though there are a lot of bull flags forming under those levels. On ES the W bottom I was looking at yesterday has been playing out and if resistance at 1260 breaks then I'd expect a run further up. The bull flag target would be in the 1280 area:
On NQ the W bottom there is also playing out as I was suggesting yesterday morning and a bull flag has also formed overnight. That's been weakened somewhat by a drop following a statement by Merkel as I've been writing but still looks OK. Obvious resistance is in the 2390 area:
TF broke back above the resistance level at 738 that I highlighted yesterday and has now therefore broken back up into the broken rising channel. The recovered support trendline has been retested overnight, and this setup is bullish until TF breaks down through it again. I've often pointed out channels in the past where support trendlines break, are then recovered, and then break down harder on the next break down. On another break TF may break down vey hard so it's worth watching. Meantime support is the channel support trendline and strong resistance is still in the 769 area:
I'll illustrate the case for reversal here with Vix, which is now retesting the important support level at 30 and is close to filling the most recent gap up. A break with confidence below 30 would be bullish for equities, but a reversal at 30 would obviously be bearish for equities:
On EURUSD the current setup looks bullish, with the triangle I posted yesterday having broken up and the broken upper trendline retested. I have the triangle target in the 1.41 area though there's resistance at 1.39 and EURUSD has so far reversed twice at the 38.2% fib retracement at 1.385. EURUSD looks bullish unless it breaks back down through triangle resistance:
The bullish setup on GBPUSD is clearer as I was saying yesterday. The rising wedge has turned into a rising channel of course, there is a W bottom paying out, and a falling wedge cum triangle has also broken up there. The obvious target is the last high at 1.615 resistance. Support is at 1.60 overnight and at main channel support in the 1.59 area:
I was talking about the bull flag on oil yesterday and that has broken up to a marginal new high. I'm seeing the bull flag target in the 98.5 area and a reversal at the current level would be a failed breakout and very bearish:
Last chart for today is 30yr treasury futures (ZB). The double top base has now been broken and the double-top target is in the 138'120 area. That's looking bullish for equities today:
Overall I'm leaning bullish on the technical picture this morning and the odds are decent for a big move. My WAG into Monday is that we see a strong move in one direction today followed by a strong reversal on Monday. It looks like that first move should be up but I'll be more comfortable about that when ES gets over 1260.

Two big bits of news today. The non-farm payrolls were positive though not obviously bullish on ES so far. The other big news today is the confidence vote in Greece, as the government there may fall as a result. Listening to greek politicians last night however, it seems clear that regardless of today's vote, greek politicians from both major parties are absolutely determined that the Euro bailout deal will be settled shortly without any reference to the electorate in either a referendum, or in the possible coming general election. Another triumph for Europe which takes the view that important questions of policy should never be put to voters, as they sometimes say no which can be inconvenient.

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