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Tuesday 29 November 2011

US Dollar Breaks Rising Support

I was talking yesterday morning about the very strong rally setup that might develop if USD futures (DX) broke rising support and we've seen that happen overnight. I've talked before about the relationship between USD and equities on moves, and commented that when they are in short-term sync, with equities falling and USD rising strongly, or vice-versa, then that's when we tend to see the fastest moves. That may well be what we are looking happening this week.

On DX I've been watching the strong rising support trendline and that has broken overnight. An H&S formed at the high and that has a target at 78 though I'd expect to see a deeper retracement. I've put the fib levels and targets on the chart. The technical target for a falling wedge is a full retracement of the wedge of course and you may wonder why I haven't mentioned that on the chart. That's because while rising and falling wedges are good indicators of a reversal, they don't actually make the full technical targets often enough for me to consider them seriously. The target remains of course and that might happen:
I was talking about an overthrow on the EURUSD chart yesterday, and that falling wedge has now broken up with confidence on some news from Europe this morning. EURUSD has touched the strong resistance levwel at 1.343 and that is obviously the first level that must be broken on the way up. After that I have targets at 1.361 and the 1.38 - 1.382 areas and I'm leaning towards 1.38 as my preferred target:
On GBPUSD the falling wedge there has also broken up with confidence. There's a significant resistance level at 1.569 but my preferred target is the next strong level up at 1.589:
I'll just look at 30yr Treasury futures (ZB) quickly, as it was the support break there that kicked off this rally in equities. That had a surprisingly strong bounce yesterday which is a concern on the bull side. The neckline of the H&S was retested, but that's something you usually see before the H&S has played out to target rather than afterwards. Nonetheless I'm expecting ZB to continue down and my preferred target is strong support and the possible H&S neckline at 140. If ZB holds 142 on an hourly close basis that will be a warning flag on the bullish scenario I'm laying out today:
The short term bullish scenario on equities is best shown on the SPY 60min chart. You can see the island reversal and double bottom on the chart of course, though I would add that island reversals that I've seen anywhere on the last few months haven't tended to last long. Of more interest however is the IHS that has formed with the neckline in the 120.1 area. That indicates to the 123.9 area and if we should gap over the neckline at the open today particularly, then we might well see that target made quickly:
On ES we now have a decent rising channel from the lows. I'm hoping that holds as if it does then it does that should deliver some nice in-channel trades, and also signal when this move up is ending. Channel resistance today will be in the 1217 - 22 area, and support is currently at 1190:
On TF I have a candidate declining channel I'm watching. TF was testing strong resistance at 704 at the time I capped the chart, but once that breaks then I'll be looking at channel resistance in the 730-33 area:
On NQ I have a possible declining channel upper trendline that was being tested at the time I capped the chart. Once that breaks I'll be looking at strong support turned resistance in the 2280 area, and then declining resistance in the 2330 area:
From a purely technical perspective, this is a very strong bullish setup in the short term that could carry SPX into the 1240-50 area while USD retraces. It's worth mentioning however that there is a lot of resistance in the 1215-20 ES that will be hard to get past, and that this is not a purely technical market. The mess in Europe hasn't gone away, and either good or bad news from Europe could have a big impact on the scenario I've outlined here. The wall of worry that any move up has to negotiate is in this case almost a wall of disbelief from the market that any strong rally can be sustained.

That said, the short term trend is now up, and buying the dips looks likely to pay off until at least Thursday, subject to any unpleasant surprises on the way. After that we'll see how it looks. Short term I'd be concerned to see ES break below 1190, and alarmed to see it break below 1180. If it breaks below 1170 then this strong rally setup would most likely be trashed entirely.

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