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Wednesday, 20 February 2013

Currency Wars

SPX rose to hit the daily upper bollinger band again yesterday. That is significant resistance, so the chances are that any further moves up this week will be incremental, delivering two to four points of increase in a day. The negative divergence on the daily RSI has a little more room here, but will most likely be killed off as a signal if SPX should reach the 1540 area:
On the weekly chart, as I mentioned on Monday morning, the upper bollinger band is in the 1545 area, and that is the level of potential upside into the close on Friday, with a close significantly above this band unlikely. If that level is reached then SPX will be approaching the strong resistance levels at the 2000 and 2007 highs, and I'll be talking more about those tomorrow:
CL has bounced as expected, and is testing the 97 area resistance level. That may hold, but if there is a clear break above then we should see the current highs just above 98 retested. Strong support is at 95:
I want to look at the dollar in some detail today as, though the surging equities part of the QE script is playing out, the strong USD decline that was expected to accompany that is not playing out so far, and may not. The largest component of the USD index at 57.65% is the Euro, and EURUSD has seen significant gains against USD this year. The ECB is however now making comments obviously designed to slow or reverse this rise on the Euro, and that may be successful. Short term I'd like to see EURUSD hold rising support from 1.30 at 1.334, and if that does hold there is a nice bottoming setup targeting the current rally highs:
The US dollar however is close to where it started the year, and though a perfect bearish H&S has formed indicating far lower on a break below the H&S neckline, USD has so far reversed strongly after completing the pattern. If USD should rise over the right shoulder high at 81.46 I will be inclined to disregard this pattern and will start wondering seriously about a retest of the 2012 high at 84.10:
Why is USD not falling? Well that's because apart from this oversold rally on the Euro, USD is rising strongly against the other main currencies in the USD index. The largest of those is the Yen, at 13.6% of the USD index, and I posted a chart in November when JPYUSD was at about 126 showing the extremely bearish setup there and giving a main target in the 105 area. After a wild decline since then the Yen has made it to 105.86 and I am treating that H&S target as made. The weekly RSI is very oversold and we could well see a bounce here, with the obvious target in the 114-6 range. That may be the right shoulder forming on a much larger H&S targeting the 80 area:
The next largest USD index component is the British Pound at 11.9%. That has also declined very strongly against USD this year and is testing triangle support on this trading hours chart. That has broken overnight and rising support from the 2009 low has already broken, so I'm not optimistic about GBPUSD holding this level. On a clear break below the obvious target is the major long term support zone between 1.36 and 1.42, and we might well see those tested:
Given the massive money printing at the Fed one might expect USD to devalue, but the Fed is not alone in this of course. Money printing has also been very big in both Japan and the UK, and both have expressed a desire to see weaker currencies to boost exports. To an extent one shouldn't really view any of these currencies rising in absolute terms, as it would be more accurate to see them as all falling at different speeds, with Yen and Sterling being the current leaders in the race to the bottom. If the ECB should join in to devalue the Euro then we could see a major rally on USD regardless of the Fed's attempts to devalue. We shall see.

Short term on equities I'm not seeing much reason to expect weakness on the 60min charts. I have moving average support on ES in the 1517-22 range, and if we are to continue this rise into the end of the week I would expect to see decent retracements followed by pushes up intraday. Very strong support levels have been established on ES in the 1511 and 1491 areas, and if we see either one retested now then a topping pattern should be forming. Until we see that the default assumption should be that equities will continue to push upwards.

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