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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.

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