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Monday, 9 January 2012

NQ and GBPUSD Patterns

There's still not much to see on SPX or ES in terms of trendlines and strong resistance on ES is obviously at 1280. While ES and TF were struggling last week however, NQ took leadership and kept pushing up while the others stalled. That has delivered an interesting setup on NQ, with a perfect rising wedge having formed since the end of the year. That would seem to limit upside unless the wedge breaks up and I have wedge resistance currently at 2366 and wedge support at 2347. Both of those are moving targets obviously:
On 30yr treasuries ZB has bounced from the last low, establishing a decent support trendline, and looks ready to bounce towards declining resistance in the 144'10 area. A small IHS may be forming to take it there. Overall the setup does not look bearish as this appears to be a falling wedge from the last high, though the upper trendline needs another touch to confirm that:
Oil has broken the rising wedge I posted on Friday and while it has found some support in the 101 area, I'm expecting more downside. The obvious target would be the intersection of rising support from the October low and a possible H&S neckline which should meet in the 98.3 area later this week:
I posted a rising wedge on DX on Friday that is interesting from a trading perspective as it cannot be seen on the current DX contract DXH2 (March). Dx is thinly traded compared to the equities or oil futures contracts and sometimes throws up some strange anomalies, especially for the data before the current contract becomes the main current contract, when trading on these is very thin indeed. The chart I showed on Friday and am showing today is on the continuous contract and you can see DX reversed perfectly at wedge resistance, so I'm treating this wedge as valid. Wedge support is currently slightly over 80 and we might see a push down to test that if DX doesn't just correct sideways:
What I'd really like to talk about today is the very interesting setup on GBPUSD though. I posted a GBPUSD chart on the 10th of October speculating about the possibility that GBPUSD might form the right shoulder for a large H&S indicating towards long term support in the 1.40 area. You can see that chart here. On that chart I speculated that if a right shoulder formed then the H&S might be complete at the start of January and as you can see from the updated chart below that is pretty much exactly what has happened:
Now there are a couple of caveats on this chart. A horizontal neckline like this is also a strong support level, and the positive divergence on the daily RSI is arguing for a bounce here, which we are seeing to some extent already. However there is also a perfect declining channel from the highs, with resistance in the 1.574 area, and unless we see a break of that channel resistance trendline, then this H&S is likely to play out, all the more so because the H&S target at 1.395 targets long term support for GDPUSD since 1985, which I have shown in the monthly chart below. This would also fit with further weakness on EURUSD, which seems likely, and strength on USD. GBPUSD is therefore one of the most interesting shorts that I'm looking at and easier to play than EURUSD as the trendline setup is much clearer:
Short term ES is either consolidating or topping here and it's hard to say which one that might be as there is no clear support trendline to break on either ES or SPX. Short term I'm looking at NQ for direction and if the rising wedge on NQ breaks up then I'd expect a strong push up on equities across the board. Rising wedges break down 70% of the time though so I'm leaning cautiously bearish here. That said, and given the overall setup, this rising wedge looks more likely to break up in my view than the pattern stats would suggest.

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