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Wednesday 12 December 2012

Bullish Setup and FOMC Day

In my last post of November, as NDX last approached 2700, I posted a chart talking about short term negative divergence on the NDX 60min chart and the possibility that a high quality IHS could form with 2700 resistance as the neckline and a target at 2900, over the current 2012 highs. There was obviously a not entirely dissimilar setup on the SPX chart but I dismissed that as the neckline started too early in the preceding decline to make it a reliable pattern in my view. Here is that NDX chart that I posted on 30th November:
The right shoulder was slightly lower than ideal at 2623 rather than 2636, but that right shoulder has formed and with the push to 2697 yesterday, that IHS is now fully formed and testing the neckline. There is still a possibility that we will see a double-top on NDX, but as yet there is no 60min RSI negative divergence, and 65% of potential double-tops never make it back to the valley low to trigger the downside target. The odds are with the bulls here. Here is that NDX chart today:
One thing that has had me leaning bearish is the H&S that has been forming on the EURUSD chart, and the ideal right shoulder high in the 1.30 area was reached yesterday. I did say however that a break over 1.30 area resistance would weaken this pattern and EURUSD has broken above there overnight. Here's how that looks this morning, and this pattern may yet play out though, as with NDX, there is no negative RSI divergence worth the mention here. Here is that part-formed H&S on the EURUSD chart:
Do I think this H&S on EURUSD will complete and play out? No, I think it's a bear trap. Why's that? Well I have talked in the past about the way that trend-reversing rising and falling wedges often evolve into trend-confirming channels, and how that is a key reason why these patterns aren't that good at making target. We saw an example of a falling wedge evolving into a declining channel on CL just last week. Normally those channels will develop with one of the wedge trendlines being one of the channel trendlines, but not always, as in the case of EURUSD here, where there is now a perfect rising channel from the November lows. The bear case on EURUSD is dead in the water IMO while this channel lasts, though in the event that we do see a bearish resolution here, the channel would have to break in order for the H&S to complete forming, which would then be a strongly bearish signal that the H&S should then play out:
I posted the DX daily chart earlier this week arguing that a strong push up on DX here to mirror a decline on EURUSD wouldn't weaken the overall bear setup on DX. That's still true. However it's important to remember that while that would in my view improve the symmetry of the H&S forming on DX, it isn't required, and if we see DX return to the neckline now to complete the bearish H&S there, that pattern would still look perfectly valid. It's also important to remember that QE is devaluation in intent, and in the past, in effect. The Fed is printing money on a large scale to devalue the US Dollar against everything else, and while that is the case, the overall lean on the US Dollar should be bearish, while being cautiously bullish for everything else:
I won't post the TLT chart today, but I will say that the tentative rising wedge forming there was killed off yesterday by a break of the support trendline, so the setup on TLT no longer looks bearish for equities. On CL the short term bounce I was wondering about yesterday morning is in progress, with the decent short term resistance trendline broken overnight. We may now see a run to test declining channel resistance in the 88.5 to 89 area. If that declining channel breaks the overall outlook on oil will turn bullish again, but while that lasts it remains bearish:
Today is an important news day, with the Fed announcing monetary policy at 12.30 EST, and Ben Bernanke holding a press conference at 2.15pm. As ever, Bubble Ben will be aiming to deliver a weaker US dollar and higher asset prices, and he may well trigger a break up equities and EURUSD today. That break up should be respected if we see it, and while there is definitely a significant possibility that we could then see a retracement on equities and EURUSD today or shortly afterwards, my lean will be bullish into 2013 overall unless we see NDX beat last week's low at 2623, triggering the potential double-top there, and we see EURUSD break the current rising channel, strengthening the still possible H&S forming on that chart. 

Just as an aside for number watchers here, today is the 12th day of the 12th month of the 12th year of the 21st Century. There won't be another birthday as easy to remember as this one for quite a while. I tell my daughter that she is my little binary girl as she was born on 01/11/00. Another important day coming up shortly is 21st December 2012, generally accepted as the end date of a 5125 year cycle in the Mayan Long Count Calendar. Some people are seeing this as the predicted end of the world though, as ever, disagreements over translation mean that others see this merely as the start of a new era. I wonder whether their bureaucrats were any better at forecasting than our own, as if the Fed management of the last twenty years were running that calendar, the error margin might be in the billions of years. A possible argument to delay that diet until after Xmas however. 

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