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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.

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