- This blog has a copy of all header posts that I publish anywhere, so that those interested in seeing what my thoughts are on the markets can find them easily.
- I will be answering questions and responding to comments, so feel free to respond to any posts and I will see your comment even if it is not on the most recent post.
- If you're interested in seeing any intraday charts I post, I do that on twitter, and my twitter handle is @shjackcharts.
- The charts in the posts are as large as I can practically make them. if you would like to look at one more closely, click on it, and the link will take you to a larger version at screencast. If you click on that again, you will get a full page version, and can use the resizing function on your browser to enlarge parts of interest further.

Friday, 30 March 2012


My blog has passed a few milestones this March. I published my 500th post on Wednesday 7th March, passed 500,000 lifetime pageviews on Monday 12th March, and Tuesday 13th March was the second anniversary of my first post on my blog, though I'd obviously written quite a few header posts around the blogosphere before then.

Blog traffic has been increasing steadily in what is almost a perfect rising channel over the last two years, with the last retracement after I smashed my lower leg (top and bottom) at the end of May last year. Interestingly I'm now hitting channel resistance again, so I'll be watching for either a breakout or a retracement into channel support here, and taking care to avoid slippery surfaces.
I started writing header posts to indulge my liking for writing and charting mainly, and didn't really give any thought to whether that might ever become more than an enjoyable hobby but, with a real prospect of passing a million pageviews by the end of this year, I've been giving a little thought to where this blog is going in recent months, and while my thoughts there are still evolving, I have started to make some changes to the blog to put it on a more professional footing.

What I have done so far this year is to take the www.channelsandpatterns.com domain name and to experiment with advertising. After an initial unsuccessful attempt to build a working relationship with the software at Google Adwords, I have gone with a different advertising company using humans to interact with customers, and their decent quality financial ads should be starting to appear on my blog over the next few weeks. I've also set up an Amazon link for people to buy from Amazon via that link, and will be setting up an Amazon shopping site as and when I have time.

Obviously I've changed the format of the blog extensively over the couple of weeks, and that's gone pretty well, and is much more flexible than the old format I was using. I'll probably get a logo done too, though I like the modified title I did a few days ago, and might yet just adapt that into a logo and banner. I hope everyone likes the changes and the feedback has been almost all positive so far. I've also changed my twitter handle from shjack666 to shjackcharts tonight, as my wife suggested that many non-chartists might miss that 666 was the SPX low in March 2009.

Anyway, I just wanted to give an update on why I've been making changes to the blog, and what changes can be expected in the future. Everyone have a great weekend, and I'll leave you with a classic clip from Red Dwarf, a cult BBC comedy that is one of my favorites:

Confused Yet? & AUDUSD

I have a provisional overall scenario for the next month or two that I'm expecting to play out. Obviously I may be mistaken, but it hangs together fairly well. On equities I think we are in a sideways type wave 4, which will be followed by a wave 5 up that will probably peak at a major pivot, either at 1442 SPX or slightly north of 1500. Given the proximity of 1442 SPX to where we are now there's a better argument for the higher target I think. That should take us into the seasonal high area late April to sometime in May. After that I'm expecting a big correction over the summer and we'll see what the bears can do with that, if any have survived this monster move up.

While that plays out I would expect new rally highs on EURUSD, and a major drop in bonds. As long as USD can hold uptrend support during that time, I then have a hugely bullish overall setup on USD that could see it spike up to over 90 while EURUSD gets crushed over months following.

Short term I'm a bit concerned by the support break on Dow yesterday, but it didn't last long and the recovery was strong. It is a warning signal though, and should we see a more definite break then there will be an argument that we have already made a major interim top:
On SPX yesterday we had a third close down, but again that was followed by a strong rally, so net downside over those three days is still modest. I have a provisional rising channel from the March 7 low established at the low yesterday and I'll be watching to see if that holds. I would draw your attention to the RSI divergences on the 15min RSI on the chart below and that's worth watching, as if this is a sideways wave 4, then we should expect another significant down move after the current up move. We'll see how that develops today:
EURUSD tested rising support from the last low very hard yesterday but it held, and the immediate technical picture remains bullish as long as that is the case. I have a slightly rough rising channel from that low and that needs to hold on an hourly close basis. As long as it does the IHS target is 1.356 and the next obvious target is a retest of the current rally highs in the 1.349 area. The bigger picture on EURUSD looks bearish, and the fundamentals obviously stink, so as and when the current rising channel breaks that may well be the start of a long downtrend. USD and equity cycles often diverge for long period so we may well see a rally top on EURUSD well before a top on equities:
On bonds I'm seeing the current move up as a retest of broken support before a continuation down. This could go as high as 140 but the 139-140 area is strong resistance and ZB is faltering here on increasing negative RSI divergence. There is a very decent support trendline from the last low and I'll be leaning bearish again once that breaks:
I've been concerned about possible weakness in oil since the support trendline from the October low broke last week, and it broke short term support in the 104.5 area yesterday. I have a provisional declining channel and I'd expect a bounce within that channel next. Hard to see where this might end but I'm looking at the strong support levels around 96.5 and 93.8:
I've taken a little time to look at AUDUSD today as a friend requested it, and on the long term monthly chart I think there's a good argument that the top last year was a major top that may last several years. If we should see a break below major support at 0.94 then we may well see a powerful drop that could fall into the 0.68 to 0.70 area, though that's obviously a long long way down from here:
On the short term picture a sort of rising wedge has formed from the October low and AUDUSD tested rising support on that yesterday. Unless that breaks down I'm expecting a rally back up into resistance next. Short term declining channel resistance is in the 1.05 area, and on a break above the wedge resistance target would be 1.087, with declining resistance from the 2011 high slightly below in the 1.0825 area:
I don't have time to show them here but I've been looking for a bottoming pattern to develop on gold and silver here as the PM complex has tested important support, and there are part-formed IHS patterns on both gold and silver which look provisionally bullish. I'll be posting those on twitter when I have time later and my twitter handle is shjack666. I have a twitter related question to ask today and it is this. I use 666 on my email and twitter handle because it was the 2009 low on SPX. Obviously the number has some religious connotations however, and my wife has suggested that I should change this for that reason. Feedback welcome and I have already identified a decent alternative.

The outlook for today is fairly neutral statistically, with a slight downward bias on SPX and Dow, and a slight upward bias on RUT. If SPX can make a short term higher high at the open I'll be looking for a further run up for a few points before another probable move down. into early next week. I'll be watching that SPX 15min chart for a short term high signal. I'll be in and out today.

Thursday, 29 March 2012

Another Inflection Point

SPX was very weak yesterday, breaking my first support level and bottoming in the next support zone in the 1395-1400 area. The move broke below rising support from the March low and a first look at the charts suggests a test of the lows on Friday, with rising support from November and the middle daily bollinger band in the same 1387ish area:
However there is a strong case that yesterday's low was a significant low, and that any break below there would be a major technical signal of weakness. The reason is that the low yesterday bounced at the support trendline on Dow from the October low. That is a very strong trendline with five touches now, and is the key trendline to watch on equities here. A break of the trendline would not tell us that the top is now in, but it would signal that a significant top is at least close, and a move over the 1442 SPX pivot would then look much less likely. Here's how that looks on the Dow 60min chart:
If we were to see a strong bounce here, that would most likely be in the context of a strong move up on EURUSD as well. EURUSD retested the IHS neckline yesterday, and has done it again overnight. The setup there looks bullish unless we see a move below rising support from the last low, currently slightly over 1.325:
Looking at bonds my next ZB target has not been reached, but it might not be. The rally has established a decent quality support trendline that looks like the support trendline of a rising channel. A break below would look bearish and a move below 137 would suggest strongly that this bounce has been a bear flag which should then play out to a target well below the last lows. There is some negative RSI divergence here and this could well break down soon:
I was talking about the CL break below rising support from October as a significant sign of weakness there earlier this week, and that has broken again yesterday. CL is trading in a rough consolidation range between 104.5 and 108.65 and a break below that at this stage would look very bearish:
The last chart for today is an interesting long term chart of SPX since 1980 on log scale. In this I have treated the secular bull market from 1980 (or arguably 1982) to 2000 as a rising channel, and the secular bear market since 2000 as a right angled and descending broadening formation, a direction neutral pattern. The obvious next move within that pattern would be a test of the 2000 and 2007 highs area and I'd only really expect to see that pattern break up in the event that the secular bear market had finished, though that might be mistaken of course. Worth noting there is that would assume that the secular bear market ended at the March 2009 low after nine years, whereas historically these last 15 to 20 years on average. Food for thought at the least:
The next couple of days are very important from a technical perspective, and the bulls need a move up to new highs soon if we are indeed still in a strong uptrend. On the bull side it is Thursday today, the most bullish day of the week since October, the low yesterday saw a touch of rising support from October on the Dow, which is the key equity support trendline here, the EURUSD IHS has been retested and is still very much in play, and there are some signs that this rally in bonds may be petering out. This is a potentially very strongly bullish setup for equities.

If we see a move below yesterday's low that breaks that strong support trendline on the Dow, it would be a major technical sign of weakness. It wouldn't mean that the top is in, and I would still favor a further move to test the 1442 SPX pivot, but it would suggest strongly that the current move up on equities would fail there. If we do see further weakness then I see strong support for SPX in the 1387 area near Friday's lows. A break much below would look very weak and clear the way for a deeper retracement over the next few days.

Wednesday, 28 March 2012

Bonds Still Rallying

SPX was struggling yesterday, and one of the reasons for that is the ongoing rally in bonds. ZB reached my first bounce target yesterday and broke up through it. My next bounce target is broken support in the 140 area, and with ZB in the 138 area that's still some distance away. I have a decent rally channel for ZB and the next obvious target is to hit channel resistance in the 139'10 area:
EURUSD is still consolidating after breaking up from the IHS. The IHS target is in the 1.356 area and short term support is at the IHS neckline in the 1.328 area, and rising support from the last low in the 1.3235 area. A break of rising support would throw the short term trend and the IHS into question but I'm not expecting that:
I've led with ZB and EURUSD because in the very short term, neither is supporting a move up on SPX here, and yesterday's bearish looking close on SPX could well be a warning of more consolidation this week. On SPX the next obvious upside target is in the 1442 pivot area, and I'm expecting that to be reached, but that doesn't mean that we won't test support more before that happens.  For today I'm watching the 1409 area, as I have potential channel support there as well as the last short term low. If that breaks there is decent support in the 1400 area, and if that breaks then we could see the Friday lows tested:
The 60min SPX chart is looking cautiously bearish short term, with Monday's marginal new high on negative RSI divergence. You can see that a retest of Friday's lows would also be a hit of rising support from November and that should be very strong support. A break below would look correspondingly bearish of course:
I'll close with an interesting long term chart today, and that is the 30 year monthly (LOG) chart of the Nikkei. There are a couple of interesting things about this chart. The first is that the 82-90 bull market, rising some 560% in eight years, was contained within a single narrow rising channel. The second thing is that most of the action since has been contained in a wider 22 year old declining channel, with a short-lived breakout during the 2005-8 bubble. After the recent strong rally the Nikkei is once again testing declining channel resistance, having failed there at the highs in early 2010 and 2011. If it breaks up I have a rising channel target slightly over 12000:
The bulls need to perform today. There have only been four instances so far in 2012 of two consecutive red daily closes, and all of those were during consolidation or retracement periods. Historically the end of March has tended to be weak however. I'm watching the 1409 SPX area for short term support and then 1400 if that breaks. If it does I would expect a test of Friday's lows. On the upside 1442 is the next obvious target and a strong resistance level.

Tuesday, 27 March 2012

Bull Patterns Break Up

Well the bull flag setup I was looking at yesterday morning broke up, and I'm expecting to see more upside. How much is uncertain as SPX is nearing a key resistance level in the 1440 area. That area is also the retest of the broken support trendline from March 2009 into the high last year, so it is a significant level. On a break over it the path is cleared to test the resistance levels near the 2000 and 2007 bull market tops, and they are in the 1520 and 1550 areas. There is a high probability that we will see a major pullback from a failed test of one of these three key pivot levels. As you can see from a look at the 2010 and 2011 highs , they both failed at lower pivot tests, so on a break of one level, the next one up becomes a strong target. Here's how that looks on the 15 year SPX chart:
In the short term the bull flag that broke up yesterday has a target at 1460, with the caveat that it will have to get through 1440 SPX resistance first, and with the note that if SPX clears the 1440 level, it may well then run up towards 1520. I have marked a provisional rising channel on the 15min chart below, but it is very steep, and most likely we will see a break below it in the next few days to establish a less steep support trendline:
On the SPX 60min chart the high yesterday was at the (already broken once) old resistance trendline from November to mid-March. This is a natural level to see a bit of retracement, but I wouldn't expect it to hold long:
I've been having a careful look at the Dow chart I posted yesterday, and as I said then, the next obvious upside target is in the 13400 area. That is decent resistance and should fit fairly well with a test of 1440 on SPX. In the event that breaks up, I have marked in a channel trendline that would be the following obvious target, and that is currently in the 13700 area and rising fast:
The Transports index has diverged from Dow and SPX over the last two months, and is currently located in a bizarre parallel universe where overhead resistance is strong, and stocks can retrace significantly. It's still a decent indicator for resistance levels and swings though and the current pattern there is a broadening descending wedge that would indicate to a test of the 5390 resistance area on a break up. I'm expecting that wedge break soon, but we may see some retracement first. That test, when we see it, may well also fit with a test of the 1440 pivot on SPX. On a break above, as with SPX and Dow, I'd be looking for a run considerably higher. I'll be coming back to this in future posts as the overall setup on TRAN is very interesting:
Supporting the break up on equities is the break up from the IHS on EURUSD yesterday. The target is 1.356 and that fits well with my USD chart, so I think there's a very good chance that target will be made. We may see a pullback soon to retest the broken neckline, and if that test is today, it could overshoot to hit rising support in the 1.322 area. This would obviously look like a dip worth buying:
ZB held up well yesterday, clinging on to 137 support against stiff equity headwinds. The bounce might well run further before resuming the downtrend that seems likely on the bigger picture. On the TLT 60min chart you can see why I'm wondering about a possible test of broken support in the 115 area:
I thought I should finish with the oil chart today, where there was a bearish break of the support trendline from the October low on Friday. That trendline has since been recovered, and if CL can break over strong resistance at 108.66 then the (sort of) triangle setup would suggest a test of main resistance in the 113 area. I'd be looking doubtfully at that broken support trendline though and that might well be a warning of a more definite support break in the near future:
Yesterday was a trend day so the odds today favor a consolidation or retracement. The odds also slightly favor a higher close than yesterday's close. The gap fill odds are good. Any low on SPX under the 1395-1400 area would be unexpected and suggest that we have not yet finished the consolidation of the last few days. I would provisionally expect early weakness, a low in the first hour or so, and then strength for the rest of the day.

Monday, 26 March 2012

Flagging Retracements

Cobra was saying at the weekend that the Dow is the leading index from a technical perspective at the moment. That may well be right. If so then the low on Friday at rising support from the October low looks particularly important, and it's obvious from the chart what will need to happen next if we are to see any more retracement this week. On a break below trendline and level support in the 13000 area the obvious next target is in the 12750 area. Without that break the main upward trend remains unbroken, and the next obvious upside target is in the 13400 area:
On the SPX 15min chart the marginal new low on Friday on positive divergence on the 15min (and 60min) RSI looks bullish, and I have a possible rising channel formed from the March 6th low, though the upper trendline is a little weak. A move much below 1390 today would kill that off, but the main trendline I'm watching here is the upper trendline of the declining channel from the high. If that is a bull flag, and I'll be looking at that more on the following 60min chart, then a break over that trendline would obviously be very bullish. The technical target for that bull flag would be 1460 with a 64% chance of that being reached, though there is some significant resistance on the way there, and this move up from Dec 19th is looking somewhat tired now:
Looking at the SPX 60min chart for the move up from late November it's worth noting that all three previous retracements within this uptrend formed declining channels before breaking up and this is a classical bull flag setup as you can see from the reference page at Bulkowski's excellent and free website. You can see from the three declining channel retracements so far that two of the three hit the technical bull flag target before the next retracement, which matches Bulkowski's stats well. If we do see more weakness today what is also worth noting is that I would expect to see a hit of current declining channel / bull flag resistance in the 1400 area before the next swing down, that the next downside target would be in the 1380-5 area, and that rising support from the late November low is in the 1375 area, which matches the support level at 1370 ES that I've been mentioning:
One reason I'm a bit doubtful about the prospects for much retracement on equities here, apart obviously from the classical looking low on SPX on Friday, is that my take on the bigger picture on bonds here is extremely bearish, with the current bounce no more that a counter-trend retracement in a much larger move down. That bounce hasn't reached my next target yet, but the action overnight looks weak, and if ZB loses the important 137 level the short term setup will look bearish:
The other reason I'm a bit doubtful about more retracement on equities here is that I can also see a decent technical case for a move to a new rally high on EURUSD, and if we see a move on EURUSD to a new rally high, then that would be supportive of equities short term. EURUSD is still in the current consolidation range I was looking at on Friday, but there's also an interesting, and equally ambiguous, setup on GBPUSD that is worth showing here. That setup on the bear side is a possible H&S that has reached the ideal right shoulder high, and the bull setup is a broadening wedge or megaphone which targets the 1.608 area on a break up from the current consolidation area:
Last chart for today is a chart of USDJPY, which is the inverted Yen chart. I've said a few times that the prospects for Yen and Japanese bonds look extremely grim over the next few years, with Japanese government debt to GDP at over 200% and one in three yen spent by the Japanese government still being borrowed. How on earth has Japan managed this dark miracle of debt accumulation? Well in large part they managed it by taking over the huge personal savings in their Post Office system and spending it, leaving a very dubious IOU in its place. As Japan is obviously the pioneer of current economic policies in the western world that is an example worth noting, especially as we see governments plunder the private pension systems by forcing them to buy very long dated government bonds at the current centrally planned very low interest rates.

That well looks dry in Japan though, and their prospects for financing further debt are reducing to selling their extremely doubtful debt abroad at an interest rate marginally above zero (hollow laugh), or continuing to just print more money to finance their deficits. It will be interesting to see how long that can last, but meanwhile further Yen weakness (USDJPY strength) looks very likely after a retracement here:
The overnight action on ES looks bullish, and declining resistance from the high at 1400.75 has been broken. I'm expecting at least a hit of SPX declining resistance just over 1400 today and if ES can hold the current levels into the open then that would be a clear gap over that resistance. In the event that SPX reverses at resistance at the open then downside targets today would be in the 1390 and 1380-5 areas.

Friday, 23 March 2012

Inflection Points

There is always a conflict when you see short term patterns for during trading hours on both an index and its 24 hour futures equivalent. An H&S pattern completed the head on SPX and ES yesterday, and there was a clear short term double bottom on both at the lows yesterday. On ES overnight that double-bottom has played out to target, and the H&S is now largely formed. Where does that leave these patterns on SPX? It may be that we will see that right shoulder bounce on SPX this morning, as a sort of echo of the overnight ES move, but for the moment I would treat the ES move as completion of that double bottom, and disregard the setup on SPX. We'll see how that develops this morning.

For the most part ES has followed the roadmap I set for it yesterday morning, and with caveats, that looks bearish. On the bear side the low yesterday was 1.5 points below my 1384 target (with hourly close above) and the overnight high was one tick over the 1393.5-5 range I gave then for the ideal bounce high to make a right shoulder on the  potential H&S I was looking at. So far so good, as that H&S is very much in play and almost fully formed now. On the bull side the short term declining resistance trendline I wanted to hold at that high was broken,and that opens up the possibility that the main declining resistance trendline from the high, currently in the 1202 area, may be tested. If we see that test, the symmetry of the part-formed H&S would be fatally weakened. Overall, with ES at 1387.50 as I write, I'm leaning cautiously short, with that turning to definitely short on a break below yesterday's low with any confidence, with an H&S target in the 1360 area, neutral on a break above the overnight high at 1395.25, and bullish on a break above declining resistance from the high in the 1402 area. Here's how that looks on the ES 60min chart:
That ES chart will be my only equity chart today, as it seems clear enough really, and I'd like to look in detail at the interesting setup on USD and precious metals here. EURUSD did not make it to the 1.31 area yesterday, reversing strongly at 1.3133. It then made a slightly higher high overnight, potentially completing the bullish IHS that I've been talking about, though there is an argument that this is only the completion of the head on that pattern. Direction is uncertain while EURUSD is trading within the consolidation range that I have marked on the chart below, and would become strongly bullish on a break above 1.33, bearish on a break below yesterday's (potential double-top valley) low at 1.3133, and strongly bearish on a break below 1.30:
I've been cautious on overall EURUSD direction here, and part of the reason for that is the USD chart. On that chart I've mentioned a few times that my ideal retracement target for USD has not yet been hit, and you can see from the daily chart below that I have USD in an overall rising channel from the April low last year. The obvious retracement target is a touch of the support trendline on that channel. Since the last touch of channel resistance in January, a falling wedge formed on EURUSD that then evolved into a declining channel within the overall rising channel. Until that smaller declining channel breaks up the obvious next target is a hit of channel support slightly under 78, and that supports the short term bullish EURUSD scenario. If it should break up, then that would then support the bearish EURUSD scenario. Time will tell, and as long as that larger rising channel on USD holds, the bigger picture on a break upwards is the huge two year IHS that is forming with a target in the 90.5 area, so the bigger picture on USD remains strongly bullish:
I mentioned that ZB was looking short term overbought yesterday and it formed a consolidation triangle which then broke up overnight to a (so far) marginal new high. On the upside I'm looking for a touch of declining resistance in the 138'15 area, but it needs to move up with some conviction soon, as the current marginal new high on negative RSI divergence is obviously potentially bearish. If we see a reversal here then I have both level and rising channel support in the 137 area. A break below there would suggest that this little bounce on bonds is most likely over, and the bigger technical picture on bonds is obviously strongly bearish here:
The other three charts are all for precious metals. I gave a downside target for gold in the early 1600s some weeks ago, and that was almost reached yesterday. This is a major inflection point for gold and precious metals generally in my view. If gold can reverse back up near here then the IHS I was talking about then is very much in play with a target at new highs. On a break down we might see a large correction in precious metals, though I have marked two other significant support levels down to 1500 on the chart below:
The reason that I think the key inflection point is here is for three reasons. The first is that gold tends to retrace in the first three months of the year to make a low that then holds for the rest of the year. You can see from the chart above that it did that in each of the last three years, and we are now near the end of March. The second reason is the large H&S that has clearly formed on the GDX chart, completed on Tuesday with the neckline tested again yesterday. H&S necklines are strong support until they are broken. On a break below however, we may well see a very large move down on GDX, which would most likely be in the context of a similar move down on precious metals:
The third reason is that a smaller, but very clear H&S has formed on platinum since rising support from the December low broke a few days ago. Again 1600 is strong support until it breaks but again, a break down would probably be in the context of a wider breakdown on precious metals:
Overall I'm leaning cautiously bearish on equities today, but I'm watching carefully to see whether overhead resistance on ES and EURUSD is broken, and whether support on ZB holds. I'm still of the view that this is a counter-trend reversal, and it looks fragile this morning. We need to see a definite move down to confirm the bear scenario, and that should be as early as possible in trading hours today. If we are going to see a break down then Friday is the most bearish day of the week since October and the best day to see that. If we don't see that break down today, then yesterday's low could hold for weeks, and I would be watching declining resistance on ES from the high to signal a possible bullish break up.

I'll be out for most of the session today. I've added a column on the left to my blog overnight and widened the page. Please have a look and tell me if you think that it is now too wide. I had a few requests for larger charts yesterday, but I've reached the maximum size that the site template will allow. If you click on any chart however, you will link through to the full size version at screencast, and you can click on that again to enlarge it further.

Thursday, 22 March 2012

Retracement Targets and EURUSD Patterns

Overnight we got the lower low on ES and the break below 1393.5 that I was looking for yesterday morning, on a string of bad overnight data releases. On ES this looks like something I have seen before, which is a break from a steep uptrend channel into a shallow rising channel, then a break into a shallow declining channel, and next in the process would be a break into a steep declining channel as the retracement gathers pace. Broken support is at 1393.5-5 and I'd like to see that hold. Declining resistance is at 1398.25 and falling fast. In an ideal world we would see a move to the potential neckline at 1384 today, then a bounce to the 1393.5-5 area to make a right shoulder and touch (by then lower) declining resistance, then a strong move down to the next support level around 1370:
The Nasdaq looks interesting here. I've been posting the little rising wedge on QQQ this week and we saw a break down on Tuesday, a retest on a higher high yesterday, with some significant weakness on the closing candle. I'm expecting more downside there and strong support on QQQ is in the 66.5, 65 and 63.1 areas. The obvious downside target is 65 I think, but it's worth noting that the rising wedge target is 63.1. A hit of 63.1 and bounce there would look bearish as that is a potential H&S neckline:
The likely bounce I was talking about yesterday on ZB came through, and my first upside target at 137 has been hit and broken. ZB is looking a little overbought short term. but I'm expecting a move to declining resistance (currently) in the 138'25 area with a possible move higher to test double resistance at broken support and higher declining resistance in the 140 area. The overall technical picture for bonds looks pretty dire on larger timescales so I'd expect failure there if it is reached:
I've been considering the EURUSD picture here and it's clear that we are at a very significant short term inflection point, with decent bull and bear scenarios over the next few weeks. The bear scenario is that we saw a break down from a small H&S yesterday indicating to the 1.3085 area. On a further move below 1.30 a larger H&S would be completed with a target just below the January lows:
The EURUSD bull scenario is the one I posted yesterday. On that scenario the little H&S broke down yesterday towards a target in the 1.3085 area. On a model right shoulder low between 1.3085 and 1.3115 we would then see a reversal back up over 1.33 towards a target somewhat above the current rally highs at 1.356. The bull scenario fits better with my USD chart and with a significant interim top on equities sometime in April or May but it might go the other way regardless. The correlation between EURUSD and equities has been weak in recent months:
Oil was unexpectedly weak overnight and CL broke my short term support trendline. This is interesting because CL is now close to my main support trendline from the October low in the 105.35 area. A break below that would look significantly bearish and set up a possible move to strong support, and a possible H&S neckline, in the 96.5 area:
The last chart today has been the subject of much excited commentary over the last couple of weeks, and that is the long term comparison chart between bond and equity yields, with the bullish implications for equities of a reversion to the mean on this chart. This is one of the main reasons for the very bullish forecast by Goldman Sachs this week.

Yes ..... but. This rather brings to mind the monetarist experiments in the 1980s. The correlation between the  money supply, inflation and output became briefly fashionable then, and policymakers in the UK and US started targeting monetary levels, rather than interest rates, as a tool for controlling the economy. What they then discovered was that the correlations that had been stable until then, became unstable as soon as they tried to control the money supply directly. Clearly bond yields are being centrally planned at the moment to a very large degree and this past correlation is therefore somewhat doubtful as a predictive tool. I'm not saying that the correlation will vanish, but there has to be a significant possibility here that it will.

The other thing to mention is that the obvious example of similar policies being tried over a long period is in Japan over most of the last two decades. There are two points worth noting there. Firstly the policy in Japan has entirely failed to deliver either stock market rises or growth, with the Japanese economy in a two decade depression and the current stock market value, after a huge rally, slightly less than 75% below the 1990 high. The second point is that even after twenty years of almost uninterrupted failure, policymakers there have yet to seriously consider abandoning this policy, which is something to consider. Anyone still clinging to the hope that the Fed policymakers have good forecasting skills should really read this article here. It might be that the events of the last few years have sharpened them up a bit, but it's worth noting that, as with Japan, the response to the crisis they blindly created in the run up to 2007-9 has been to massively expand on the same policies that led to that crisis.

Essentially what I am saying is that there is a historical correlation between tasty looking food and having an enjoyable meal. Would that correlation still hold if cow dung was presented attractively as a main course in a good restaurant? I suspect not but only time will tell. Here's the chart for what it's worth, and you can click on the chart to take you to the full article at Business Insider's Chart of the Day:
I'm leaning short today and and rallies should be sold unless we see a break over 1398 ES. Strong resistance in the 1393.5-5 ES area will most likely hold today.

I've updated my blog format overnight and any feedback on the changes is welcome. Among other changes I widened the page and enlarged the text and charts. I am thinking of widening the view further and would appreciate any feedback from those for whom that might be an issue. That change wouldn't affect the mobile format though.

Wednesday, 21 March 2012

Short Term Retracement Setup

I had mixed feelings about the action yesterday and overnight from a directional perspective. On the bull side the early low and grind up yesterday was a classic strong uptrend day and NDX recovered from the gap down to make a new high. On the bear side ES delivered a lower low, the down gap on SPX didn't fill yesterday, and we saw a perfect test of broken ES rising support overnight without a higher high there as yet. Overall I'm cautiously bearish today as long as we don't see a new high on SPX.

On ES the retest of broken rising support was almost picture perfect, rising support from yesterday's low has broken, and a nice little double-top has formed. Immediate resistance is at 1405.75 at the overnight high and the current high at 1408.25. Strong support is at 1393.5 and on any move down today I'd like to see an hourly close below that to open up targets further below:
TRAN and RUT both retraced nicely yesterday and were weak relative to SPX. I won't post the charts for those today but I will post the chart for QQQ, where the little rising wedge I posted yesterday morning broke down and retested during the day. This is a promising setup but really requires QQQ to retrace to yesterday's close by the open today. We'll see whether that happens:
In terms of intermarket relationships, both EURUSD and bonds are looking very promising to deliver short term counter-trend retracements to support what would also be in my view a short-term counter-trend retracement on equities. On ZB there is now very marked positive divergence on the 60min RSI and I'm looking for a retracement to at least the 137 area. As I have posted before the longer term setup on bonds still looks extremely bearish IMO, so I'm only looking for a bounce here:
On EURUSD my target area at 1.329 was made overnight and that was an important technical target. Why? Because it is the potential neckline on a large IHS that I have been watching to signal a move to new rally highs in EURUSD. The obvious next move would be a retracement to the 1.31 area (ideally) to make the right shoulder on that pattern before a move to the 1.355-1.36 area. I was grumbling at the recent high that it fell short of what I was expecting from my USD chart and this would therefore fit well into my bigger USD picture. Short term the retracement would look supportive of some retracement on equities. After the right shoulder low is made then that support would obviously most likely end:
I don't often chart the Dow by itself but I was looking at the chart this morning and the trendline setup there is one of the clearest of any equity index at the moment, so I'm going to be charting this more often for a while. You can see from the chart that there is a strong support trendline from the October low, and that it also has some decent resistance trendlines. Support from the October low is currently slightly under 13000 and that is both the likely target and very strong support on any retracement here. If it breaks then the bears will have something to get excited about, but until it does that trendline is very strong support and the uptrend  is ongoing:
I've stated regularly that I am a long term precious metals bull, but any uptrend has pullbacks and some of those pullbacks can be deep. I post the chart for GDX every so often and some of you will recall the strong support trendline there that I have highlighted before. That trendline was hit again yesterday and has completed a very bearish looking H&S indicating to the 31-32 area. This may be a very important signal for precious metals direction over the next few months, and any break below this perfect declining support H&S neckline should be respected in my view as a strong short term bear signal both for GDX and PMs generally:
Overall on equities and EURUSD today I am leaning short, and on bonds I am leaning long. As I mentioned however these all look like short term counter-trend retracements to me over a likely timescale of a few days at most. If we start to see major trendlines break on equities, or a lower low on EURUSD, I might need to change that view but until then the overall trend is intact.

I've been trying and mostly failing to get these posts out over an hour before the open over the last few days, and that's because the clocks changed in the US the weekend before last, and the clocks in the UK did not. The clocks change in the UK this weekend so the posts should be earlier again next week.