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Friday, 10 February 2012

Inflection Point

As I mentioned yesterday the negative divergences have been building over the last few days and it appears that at the time of writing, equities are likely to gap down heavily on reports that the Greek deal is falling apart. I'm surprised by the Greek news I have to say, I was expecting it to last at least a week or two after being finalised, though against that, the deal is so obviously against the best interests of Greece, and has so much resistance to it there, that perhaps this is not such a surprising development after all.

Quite a few interesting charts this morning and I'll lead with a chart showing the daily bollinger bands on SPX, NDX and RUT. You can see how these indices have been walking the upper bollinger band upwards during this amazingly strong move, and if we are to see a retracement here, which seems likely, the obvious targets are the middle bollinger band in the 1320-5 area on SPX, with some strong support in the 1333 area, and rising channel support (marked) on NDX and RUT:
120210 SPX NDX RUT Daily BBs
On the SPX 60min we are seeing a failure at the resistance trendline I was talking about yesterday and obvious trendline support is in the 1333 area (again) and the 1300 area, which looks like a long shot but is worth noting, as in the event that we have just finished a third wave up from the October low, wave 4 cannot cross below the top of wave 1 at 1292.66 SPX:
120210 SPX 60min Trendlines and RSI Divergence
Across various markets I am seeing bearish signals here. On EURUSD the rising channel broke a few days ago, but EURUSD recovered back over it and held that briefly. After that broke again overnight EURUSD then tested breakout support at 1.3234 and that has now also broken. The obvious downside target is now strong support and the possible H&S neckline at 1.303:
120210 EUR 60min Breakdown
On gold, which has been moving up with equities of late, the rising channel has broken, and it has now made a lower high, and at the time of writing is testing the last low. On a break below 1700 the obvious target is strong support in the 1650 area:
120210 GC 60min Rising Channel Broken
Copper futures look more ambiguous here. On the bull side copper finally closed over strong resistance at 390 yesterday and tested weaker resistance at 400. On the bear side copper is down this morning and if that holds today, that will be a marginally higher high on strongly negative daily RSI divergence. I have copper in a steep rising channel and if it breaks below that I would see strong support in the 376.5 area, and if that doesn't hold, a technical double-top will trigger with a target in the 353 area. I say a technical double-top as, while this qualifies as one, I like to see the two tops closer together than this for a better quality pattern in my view:
120210 HG Daily - Resistance Break and Rising Channel
Two last charts to show today, and the first is Vix, where the big falling wedge broke up yesterday as Vix touched the middle bollinger band on the daily chart. If we see a move above that at the open today, and that obviously looks likely at the moment, I'd be looking for a touch of the upper bollinger band in the 21.5 area. Obviously the technical target for this falling wedge is 46.88 but I'd need to see considerably more evidence before taking that seriously. Vix isn't a tradeable instrument and both rising and falling wedges have a poor track record in my experience of meeting the full technical target:
120210 Vix Daily Falling Wedge Breaking Up
The last chart today is the TLT chart. I've been posting the potential H&S forming on ZB and that finished forming yesterday, but I'd like to look at how that looks on TLT. The first thing to note is that there is also an H&S on TLT (not marked, target 107), and rising support for the summer move up has broken, and there is also potential double top in play that would retrace all of that move up. In the short term a shallow declining channel has formed from the last high.

The other thing to note about this chart though which is worth thinking about, is that you can see that while equities have recovered all of the losses from last year and most of the losses from the highs last year, bonds have not yet retraced much of the flight to safety trade gains made while equities were falling. Potentially that may mean that bonds will now give equities a strong bullish push by falling from here but there is another possibility worth considering.

Conventional wisdom holds that equities and bonds are like two sides of a cushion, and that while one falls the other will rise, and vice-versa. That hasn't been the case over the last few months however and there is another possibility to consider in the event of a greek default. Sovereign bonds used to be considered a risk-free return, but nowadays they are better described as a return-free risk, in that real terms yields are often negative (US, UK & others), and there is a significant risk of losing capital from default risk, or inflationary policies, and/or simply from a decline in bonds for these historically very high valuations. If the risk perception changes, and sovereign bonds particularly start being seen as a risk asset, then bond values might drop very hard, and equity valuations might trade sideways or even drop while that happened. Equities and bonds have not always been inversely correlated in the past, and as sovereign debt burdens grow ever higher, those sovereign debts become ever more risky. Thought for the day:
120210 TLT Daily Trendlines and Poss Double Top
I'm expecting to see more weakness today, and my support levels to watch on SPX are double support in the 1333 area, the middle bollinger band in the 1320-5 area, and if that should fail, a possible test of the 1300 area, which shoud be extremely strong support if it is reached. Short term we might see a low established today with a bounce from there, and continuation down on Monday if Greece isn't 'saved' again over the weekend.

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