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Thursday, 29 December 2011

EURUSD Still Important

There have been quite a few people saying that as EURUSD has kept falling since late November while equities have rallied, then that means that these have decoupled and the relationship is no longer important. As we saw yesterday that simply isn't the case. While it is true that the multi-week trends on them have decoupled for the moment, as is often the case, on the daily timescales a big move down or up on EURUSD will still generally be shadowed by a move on equities.

Short term I'm still using TRAN as my leading index for equities, and the obvious next move there within the ascending triangle is to rising triangle support in the 4900 area. That should roughly equate to a move to the 1225/30 area on ES, and that's where I'm expecting this move to finish as ascending triangles break up 70% of the time:
On ES the little double-top  that was forming as I wrote my post yesterday played out almost exactly to the 1244 target. The 60min RSI reached oversold and it's possible that this retracement is complete, but on balance the odds favor more downside after a bounce I think. On a conviction break of 1244 I have some support at 1232.25 but I'd be mainly watching the big support level at 1223-5 which should match up best with TRAN hitting triangle support. If we reach the 1223-5 area then it's worth noting that there is a potential H&S neckline there:
As I suggested in my EURUSD chart yesterday the break of the support trendline on EURUSD was swiftly followed by a test of the lows and then a new low. I've mixed feelings about EURUSD at this level as there is some decent support in the 1.287 - 1.29 area and there is some positive divergence on the 60min RSI. However falling wedge support is in the 1.274 area at the moment and I posted a chart in early November giving an H&S target  in the 1.27 - 1.275 area. Until demonstrated otherwise I'm expecting EURUSD to fall to that area and find some support there:
I've seen quite a few references to a cup with handle that has formed and broken up on DX / USD, and you might be wondering why I haven't mentioned that. The reason is two-fold. Firstly the cup was a V shape where it needed to be a U shape, and secondly these aren't great at making target in any case. Worth bearing in mind in this case but not to be relied upon in my view. I'm referring to the cup with handle that formed in October to December between 75 and 80. There is a larger one that has taken all year to form but that should be disregarded because it would be a reversal pattern, and a cup with handle is a continuation pattern. What I do have on DX is a decent rising channel for the current move and that's what I'm watching. As 80 is a strong historic support/resistance level I'm also expecting it to become significant support if DX can get much over 82:
Gold had a bad day yesterday and I've updated my main gold chart to show the significant support levels as I see them here. Gold hit one of those yesterday and that is at rising support from the 2008 low in the 1550 area. That is a significant level though this is only the third hit of that trendline. If 1550 breaks then I have stronger support in the 1500 area at a six-hit support trendline from January 2009 that hasn't been hit since July 2010. If gold falls below 1500 then the door is open to a much larger reversal and I'd be watching support areas in the 1300, 1150 and 1000 areas. I'll be watching gold carefully as I'll be backing up the truck as and when I think it is bottoming out. I do not believe that the gold bull market is over:
30yr Treasury futures have broken back well above the support trendline that broke down the other day, so I'm wondering about another run at the highs. I posted the 26 year declining channel in 30yr treasury yields a few months ago and it's worth dusting off here so see where bonds are on the very long view. Still some way off target which would now be under 20 or 2%. The last three months have the look of a bear flag but if we do see a move directly down to the bottom of the channel then that would be the fastest move from channel resistance to support in the long history of this channel. We are trading in a long period of extremes at the moment of course, but history would suggest at least some more consolidation first I think:
Yesterday was a trend day down and I'd expect to see at least some bounce or consolidation today during normal trading hours. Looking at the growing positive divergence on the EURUSD 60min RSI we could see a strong bounce on EURUSD today and that that may well be matched by a strong bounce on equities. It is possible that the retracement yesterday is all that we are going to see but for a number of reasons at least some more downside seems likely.

My plans for the weekend have changed so I'll be doing a post tomorrow.

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