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Tuesday, 7 February 2012

Trendline Festival

The longer term trendlines from October and November are looking a little thin here, as I've mentioned before, but in the shorter term there is no shortage whatever of decent trendlines, and looking at those this morning I think everyone is likely to get a surprise, as there seems to be a powerful consensus that we are going to see new highs today, and my charts are suggesting a move down instead. You be the judge, but I'll show you what I'm looking at.

Short term the move up since last week's low on ES has formed a very nice looking rising wedge cum channel, which I posted yesterday. I suggested yesterday morning that this looked likely to retest the high in the 1342 area before hitting the support trendline and I was very pleased to see that play out exactly as I predicted, albeit in slow motion. The next upside target is in the 1353.50 area at the moment, but I have marked in the potential double-top that is now in play if rising support breaks here:
120207 ES 60min 8 Day Trendlines
If we widen the view on ES to a three month view, then you can also see that  short term trendline resistance on ES intersects today with resistance for the channel starting just after the Dec 19th low. That is therefore a very powerful resistance level and I'd be seeing that level as a very attractive shorting opportunity if we reach it today. Worth noting on the way however is a resistance trendline coming off the November high and that is in the 1345.50 area:
120207 ES 60min 3 Month Trendlines
So far, so bullish, with the caveat that ES and NQ have formed potential short term double-tops on negative 60min RSI divergence. Looking at the EURUSD and GBPUSD situation however, the situation starts to look considerably more bearish.

I noted yesterday that both EURUSD and GBPUSD had topped out short term and had broken their respective rising channels. Yesterday there was a strong bounce on both, and that bounce topped out at perfect kiss goodbye retests on their respective broken rising channels. That looks bearish, though since then they have both traded sideways, in what might be a prelude to breaking up instead. here's how that looks on EURUSD:
120207 EURUSD 60min Poss Bull Flag Forming
Here's how that looks on GBPUSD:
120207 GBPUSD 60min Trendlines
Now that is a pretty decent bull setup on ES, and a very decent short setup on EUR and GBP. Only one would be likely to play out, as while the greater trends on equities vs USD can diverge widely, there still tends to be a significant inverse correlation on an intraday basis, that is a positive correlation between EURUSD and ES in particular. I would expect one of these setups to fail, and it ES that has broken rising support since I capped that chart, which is an interesting and unexpected development.

This is particularly interesting as ES appears to be in the final subwave of this move up from the December low, so this might actually be a significant interim top. Short term the double-top neckline is at 1330.25 ES and the double-top target on a break below 1330 is in the 1318 ES area. It's worth noting that I have six week rising channel support now in the 1314 area and that trendline would be the likely target.

What do we have to suggest that we might be making a significant top here? Well I capped two charts yesterday that look interesting in this respect. The first is the Vix chart, where the support trendline of the huge falling wedge from  October was hit again on Friday. I mentioned yesterday morning that ES and Vix often moved up together after a support hit and that's what we saw yesterday. I capped the chart however as there are two other points worth making about the chart.

The first point is that the falling wedge is running out of road, and even a fairly modest bounce will break the wedge. The second point is that when the last Vix Sell (equities) signal triggered two weeks ago, I mentioned that I had seen these trigger in the past just before before a last move up, and that something similar had happened last April. Have a look at the chart below, as that makes an interesting comparison with today:
120207 Vix Daily Falling Wedge
The second chart I capped yesterday night was the NYMO chart, and there is clear negative divergence there. That doesn't always mark a top, and the last time this happened in early January, was negated shortly afterwards. More often than not however, divergence like this tends to mark significant highs or lows as you can see from the chart:
120207 NYMO Daily Negative Divergence
I'm expecting to see more downside on ES (and EURUSD/GBPUSD) today. First support is in the 1330 area and if broken, the next target is the 1318 area and the channel trendline slightly below at 1314. Looking at the charts above, there is at least a possibility that we are seeing a major interim top being made here. I'm not calling that top, but it is a possibility to bear in mind, and I am saying that we may be in the topping process for a significant interim top now. If we see a move on ES under 1330 with any confidence then it will then be very likely in my view that we are into the topping process.

The rest of the week might get very interesting :-)

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