The Bund (German 10 Year future) rally may be petering out, the past few days has seen a sharp correction from last weeks high. There are indeed signs that it may be preparing for a deeper correction. (Which would presumably favour further risk-on activity). - Before I outline my thinking, this is counter to a very strong trend, and may merely be a pause within that trend, however, there is much to suggest that a deeper correction is a good possibility.
The Chart below shows the Daily Continuation Bund Future.
Here are the technical signals:
1) Major trendline break.(Yesterday)
2) Bearish 3 Crows Pattern. (Past 3 days). - (Follows a similar pattern 2 weeks ago)
3) Potential Double Top Pattern (Needs a high volume break of 135.12 to confirm)
4) Strong Bearish Divergence on momentum. (Triple divergence on RSI, Double on MACD).
The Double-Top Pattern is not yet confirmed, but if it was, it would also be the first significant lower low since April and would strongly suggest that the trend has turned for now. - Note, unless and until it is broken, then the trend is higher still, and the current price action is a consolidation.
Although risk seems to gaining some traction again, I can not help thinking that the upside is limited. THE SP500 followed through nicely on last weeks call, and whilst a bounce is possible, I can not help thinking that further downside is to come. I will hopefully elaborate on this further at some point this week, when I have time.
Echoing this theme, of risk-off has been a the Bunds (German Government 10 Year Future), which has seen a decent bounce and rally of late, echoed by a large drop in German 10 year yield, all helped by the latest concerns on Greece and the PIGGS. This looks like it it a serious bounce, and I can not help thinking we have more upside to come over the coming weeks, though probably after some consolidation.
I have attached a Daily chart which shows the Bund future continuation. It looks as though we may have an irregular double bottom on this chart, also of interest is the daily pattern over recent days, the 3 up days ending yesterday have produced a bullish '3 White Soldiers' pattern, the antithesis of the bearish '3 Black Crows' pattern.
For longer-term players, there is a possibility of a move in coming weeks towards 127 area, with support first in the mid 123s, and more meaningful support in low to mid 122s, which will have to hold to keep rally on track. If this is correct, we may see some further flight from risky assets at the same time in coming weeks, after a small pause/correction.
The EURUSD weekly canclesticks has produced a Bearish Harami pattern on the weekly charts.
A Bearish Harami pattern has the following key features:
• Day 1 is a long positive-day bodied candle continuing an established uptrend. • Day 2 is a small bodied-candle whose range is within (or mostly) the first days body, above its midpoint.
I would not use this as a reversal signal in itself, but it does hint to the possibility of a small set-back or perhaps further extended consolidation. Bearish Haramis tend to be relatively moderate signals on their own, however it is worth keeping an eye on subsequent price action which could produce a further signal.
In range bound markets this formation will occur frequently with little significance. But if this pattern occurs after a protracted uptrend it is of greater importance. If this does turn out to be a reversal pattern the high of the two candles will likely turn into a significant resistance level.
My own view is that the breakout of the high 1.42s/1.43 of recent weeks is likely to be highly significant if it can be maintained, however, given its significance, it was always likely to be tested several times around the break. Initial support will be in the high 1.42s/1.43. A break could see a test back to the 1.4000 area, however I favour any moves below 1.42/1.43 being short-lived. - Of course, given fresh concerns around the Euro, I can not rule out a deeper correction, and given the number of new longs on the recent break to the upside, we may have a much deeper reversal, with the risk of the recent break being a false break.
USDJPY
I am throwing the towel in on my long USDJPY view of now. I believed it had turned the corner in recent weeks, and while this may still be the case, I am back to neutral on this for now.
EURCHF
Has struggled of late, helped by lingering concerns over the Euro, and as long as worries persist, I guess this will continue to meet sellers on rallies. I think it still may be forming a 'Double Bottom' pattern, but the jury remains out, unless a confirmed break over 1.3210/20 occurs.
BUND
Bounced beautifully off of last weeks Morning Star signal, may still have more upside, though I am aware of resistance around 121.70, and more particularly in a broad band from 121.41-121.89.
Interesting price action the past few days. The pattern formed over Friday - Tuesday looks like a possible reversal pattern, or at least a meaningful correction pattern. - The pattern is a 'Bullish Morning Star' pattern, these are usually pretty reliable, though the tech analyst caveat of 'follow-through required' should be added. Of course as all traders know, in the real world, if one waits for follow-through one may miss it, whereas if one acts now, the pattern may turn out to be a dud with no follow-through. - That my friends is why it is called risk-taking.
Of course this signal is coming up against a very strong and powerful downtrend, which could easily overwhelm it; short-term resistance is at the Thursday/Friday gap at 120.56/63, above here the odds of at least a meaningful correction grow stronger. - It is worth noting, that this week's low is very close to the 38.2% correction of the 2008 to 2010 rally at 119.63. This may add to the idea that we are due a correction. Also supporting this view is the weekly RSI momentum set-up, with this recent low producing 'Bullish Divergence'. In addition RSI momentum has produced an Inverse Head & Shoulder pattern. - I am aware this is an unconventional way of looking at momentum set-ups, however I have noticed similar occurrences occasionally at previous major reversals, such as the 2007 and 2008 lows (highlighted on weekly chart).
Below shows an illustration of a 'Morning Star' Pattern, the current daily chart showing this pattern, and the weekly chart showing RSI.
FX Update
EURUSD - The breakout of the 1.4280/1.4300 last week has followed through well so far.
1.4280/1.4300 should now act as support for pullbacks..... I think a push to the high 1.4000s remains on the cards.
EURCHF failed to follow through on the upside, though I still think the 'Double Bottom' pattern formed on the weekly remains a favourable development.
Support on the downside is 1.2930/50 and then 1.2840. A clean break of 1.3200 is needed to confirm the large Double Bottom pattern, with upside targets at 1.4000.
USDJPY. I think we have a valid upside break on this pair, however this move lower is straining that view.
I feel it needs to probably hold the mid/low 83s, if so then I still fancy a run at the upside, below 83 may however cause a re-think.
The EURUSD bullish 'Cup and Handle' pattern, which has been very much in my focus the past few weeks, is looking rather troubled. The breakout last week stalled quickly at the weekly resistance line which connects weekly closing highs from summer 2008, late 2009, and the high in late 2010. (See upper chart below). This morning the market has broken below the 1.3850/60 breakout level, (so far this is only a minor breach), however the longer it is maintained, and the deeper it moves, the greater the likelihood that this is a significant failure. Further to that, there is rising trend-line support just below current levels around 1.3805, a breakthrough here combined with the Bearish Divergence on the daily RSI and MACD, could spell the death-knell for the 'Cup and Handle' pattern. (Though, just as a caveat, the breakout of this type of formation, is often a tortured affairs, and a dip like this, followed by a 'screw-you' rally, is not untypical). - If however, this does turn out to be a failed 'Cup and Handle' pattern, the failure could have serious consequences for a much deeper pullback to the low 1.3000s.
Bund Update - Re Cup and Handle pattern.
This morning has also seen a failure in the bearish Bund 'Cup and Handle' pattern, I highlighted a couple of days back. This could also be significant in the short-term, with a risk of a move back up to trend-line resistance around 122.85/90.
MID-DAY UPDATE. EURUSD languishing above 1.3805, and below 1.3850. Not much conclusion yet... Bund failed to hold the morning's gains, and is close to 121.80 again. The original bearish Cup and Handle scenario is still a possibility on the Bund, as is the failed C and H at this stage. Right now, the inability to hold over 122.00 so far is not encouraging, but lets see where subsequent price action heads.
With my EURUSD Cup & Handle pattern, fighting to stay alive (so far so good), I have found what appears to be another Cup & Handle pattern (This time an inverted one on the Bund future). Whilst the risk risk of looking like a total mug (Apologies for that, too much Starbucks today) if this one don't work I have highlighted it on the chart below.
The breakdown level (On a sustained basis) should be around 121.20, with target if that holds at around 119.20. As I say with these patterns can be flakey, I'd say around 50% success rate, but the risk reward in my opinion makes it worth a punt. i.e. Stop at 122.00 Short around here, currently 121.48, target 119.20 with a trailed stop. That is 50 points risk for 230 points reward on a 50/50 bet, well 50/50 if it breaks and hold 121.20, probably slightly less currently, but I'm sure you get my drift.
With regard to the EURUSD Cup and Handle of the past few weeks, it came back today and re-tested last week's breakout, if this is going to be a successful pattern, that level around 1.3850 (I'd allow an over extension slightly) needs to continue holding and then act a springboard for the potential gains well into the 1.4000s. If it fails to hold 1.3800 I'd have to seriously doubt the pattern, and will consider the possibility of much lower levels ahead.
The break up yesterday on the SP500 Index above recent resistance would appear to suggest further gains ahead. Last week I highlighted a number of Bullish Technical Factors supporting the SP500 (Can be seen by clicking here), the breakout of the Neckline of a continuation inverted Head + Shoulders pattern further bolsters this. - Key now will be to see how this performs in the wake of this breakout, I still suspect that we may see a pullback in the next week or so after a probable further push higher, possibly to the neckline of the breakout at 1132 on the SP500, or I suspect perhaps deeper to the gap underlying the the recent consolidation around 1110-1113. - If this occurs, then subsequent price action on this pullback will provide a strong clue as to future direction. Bigger picture I favour a return to the highs of April 2010, if however, the pullback makes a successful break below the 1110 gap, then I may have to reconsider.
USDJPY FX
After last Wednesday's intervention inspired rebound on the USDJPY from a low below 83.00 to almost 86.00 the USDJPY has been consolidating just below 86.00, I still feel a stronger rebound remains a possibility. The pattern on the weekly chart supports this, the past 3 weeks has formed a Bullish 'Morning Star Pattern'. This can be seen on the Weekly chart shown below: Note how the entire downtrend from late April began with the Bearish form of this pattern, a Bearish 'Evening Star Pattern'. Dec 2009 also produced one of these patterns. I also refer back to the analysis I produced last week whereby I noticed a similarity between USDJPY recently and the period in early 2004, this can be seen by clicking here .
Thus far the USDJPY has not yet re-tested the breakout around 84.70, I do not rule this out before this makes further headway, however it is possible that a re-test may not yet occur and the USDJPY forges ahead, this will grow more likely on a sustained break over 85.90/86.00. The daily chart below shows the key resistance around 85.89-93.
BUND FUTURE
The following chart shows the Bund Future (German 10 Year Yield inverted) daily candle chart. The past few weeks have seen a significant retracement of the major June/July rally. Currently I feel this move is an on-going correction, I feel that there may be some further room to run on this move. If this correction does run further, then I have highlighted some levels where I feel this may run to, I have a cluster of supports around 128.20 - 128.45, with a key level just over there at 128.70. I am however keeping an eye on a possible breakout of a Bullish 'Flag' pattern on the US 10 year note future ( I will highlight this on the next chart) should this happen it is probable that the Bund would get dragged higher too, if that proves to be the case then the downside may not have much further to run on the Bund future.
US 10 YEAR NOTE FUTURE
The following chart shows the 10 Year Note Future continuation daily candle chart up to last nights close. I have highlighted what I believe is a Bull Flag pattern, this is a continuation pattern, a successful break of this pattern should see a further resumption of the strong rally seen over recent months. Note, this morning the T-note has broken above the upper flag line, however I would prefer to see whether the move is valid in US trading hours. Also, at the risk of missing a big move, I would like to see if any break can hold for a couple of days.
AUDUSD FX
Finally the AUDUSD, this broke above its key resistance of the past year. If this can now hold this break through the week, ideally over 93/94, then this suggests significant gains ahead in coming months for the AUDUSD. - A failure in the wake of the break of resistance could however be a signal of a deeper retrace. though for now I consider this the lesser probability. Weekly momentum studies are supportive, though shorter-term studies suggest immediate further headway and some consolidation are perhaps likely.
This week has seen some decent price action across markets, with Equities posting strong gains, and Bond markets seeing strong some corrective forces following huge gains in recent weeks. With US employment data and ISM non-manufacturing later today, markets could still see some whipiness (not sure if that is a real word) today, before it all calms down so the US can enjoy their Labour day weekend. However, the strong moves lower this week in bond markets, are worth looking at further, since this may have implications for equities moving forward.
Bund Futures
With regards to the Bond markets, yesterday I touched on the subject of Japanese 10 Year yields, these have seen further correction overnight, to the degree that Japanese 10 Year yields (JGBs) are now at 1.15%, having touched 0.90% last week. Other 10 year yield markets have also seen sharp turns higher, US (T-notes) and German (Bunds) 10 year yields are around 20bp higher than their lows of last week. A few weeks back I did an analysis of the Bund future (can be seen here), I expected a strong rally at the time, however the sharpness of this rally, with no real pullback did surprise me, however I feel it has also left the Bund vulnerable to a sharp correction, (which is occurring, and may possibly go further). -I will highlight my thinking with regard to this by showing the Symmetrical Triangle Pattern on the recent Weekly Continuation Bund (Top Chart) together with 2 the prior examples of this which I had previously used (See lower charts). In both prior examples, the Bund rallied strongly following the break out from the Symmetrical Triangle, achieving a rally roughly equal in magnitude and duration to the rally which preceded the triangle. Once that post triangle breakout rally had been achieved and completed the Bund fell back almost to the breakout level of the triangle. Now as I always like to point out, it is dangerous to infer that a similar situation will occur just because 2 prior examples formed in a same way, however it useful to be aware of the comparisons, particularly because so far they have unfolded with very similar characteristics to the current set-up. - Note, in both prior cases, this pullback turned out to be a correction, not a turn in the trend, I would suggest that if this occurs, this would probably turn-out to be along the same lines.
How does this spillover to Equities?
The past few weeks of Bond markets rallying proved to be a tough environment for equities. It may however be the case that the recent move in equities, which has already corrected sharply this past few days, continues to correct to better levels, if the Bond markets continue to move lower. - My main there this week has been the abating of risk. Today's data could see a set back on that, or it could continue because or in spite of this.
Finally - something for the weekend. -- This week there was an article on the BBC website about how French Physicists had found out how Roberto Carlos's famous 1997 goal for Brazil v France, sometimes called 'The impossible goal', was actually possible --- (I guess that with the Large Hadron Collider down for much of last year, they had to find something else to keep them occupied). That article can be seen here for those interested. To be honest the physics in the article went straight over my head, however the goal is definitely worth seeing again, so here it is: - (Watch the replays to really appreciate its magnificence).
Class...and just to prove that it was not a fluke, here is another one of his many impossible goals.
In the wake of the posting yesterday regarding the Head + Shoulders pattern on the EURUSD (Can be seen by clicking here), the price action proved indecisive, a test of the neckline was rejected in the morning followed by a consolidation. I still fear that this pattern may be forming a 'Failed Head + Shoulder' pattern, which would ultimately be bullish for EURUSD, though whilst it remains below the neckline at 1.2730/35 the downside is still slightly favoured. The two charts below illustrate why I feel that this risk is very real. It shows a comparison between the current short-term pattern, formed over the past month (top chart), and a Failed H+S pattern on the EURUSD Weekly chart from 2004/2005 (lower chart). The different time periods do not matter in my opinion, it is the similar elements in the make-up which I am looking at.
(Click on charts to enlarge)
Similarities accross the 2 charts include:
Right hand side of the patterns formed as Declining Wedge patterns.
Right Shoulders much smaller than left Shoulders.
Bullish Divergence following Neckline breaks for both RSI and MACD.
A break up through the declining trendlines on RSI.
Both made exact Fib Retracements of prior rallies. 38.2% of Weekly and 50% for Daily.
There are of course some differences, but these are on a micro level at best. - I would point out that having so many similarities does not mean the same outcome will occur, but it does in my opinion make it a good possibility.
(UPDATE : As I have been writing this, the EURUSD has rallied sharply to test and post a minor break of the Neckline).
BUND
A few weeks ago I posted that I expected some strong gains on the Bund in the wake of a breakout of a Symmetrical Triangle. (Can be seen here). The Bund achieved my target and then some. The strength and distance of this move was far greater than I anticipated. However yesterday saw the first sign that a pause and possibly some corrective action may be on the cards. Yesterday's candle saw a large Doji candle (almost a gravestone Doji); the close was almost at the same level as the open, and towards the low of the day's very large range. This was also on huge volume, certainly the largest volume on this move by far. This also occurred with daily Stochastics in an extremely overbought stance. - The chart below shows this. Note at this stage, and in the wake of such a strong rally, I do not anticipate this move being anything more than a correction.
SP500 Index
Finally, the SP500 posted a potential reversal Hammer like candle yesterday (See top chart below), what was interesting is that this occurred at the 76.4% Fib retracement and at support from the extension of the upper line on the large Q2 falling wedge pattern. On the shorter term picture (lower chart), this can be seen to have occurred with Bullish momentum divergence on the MACD indicator. As is the case with the other above potential reversal indicators above, the main trend remains in place, however this is a warning that a turn in direction may be on the cards, or at least a period of corrective consolidation. - On the SP500 there is a gap between Monday's Close and Tuesday's open from 1067.36 - 1063.00, this area is likely to prove resistance, with short-term longs likely to take profits around this level, and prospective new shorts looking to enter around here. However, if the SP500 can break and hold above this gap, then this should favour a further move higher.
There is a lot to comment on after yesterday's moves : - Starting with the SP500; the solid break out through the bottom of the Rising Wedge has set up some interesting scenarios, though in my opinion nothing is resolved yet. The price action in the past couple of days and even weeks, has not yet broken the 'Lower highs and lows' trend from late April nor the 'Higher lows and highs' from early July. - It is worthwhile noting that this pattern is not consistent with other US equity markets; the New York composite broke both the prior high and the prior low, the Dow broke the prior high and remains above the prior low, whilst the opposite is the case for the Russell 2000, and in addition the SP500 futures have broken this low with the overnight move. - So it may even be a moot point. - I am re-posting the 'Clash of the Wedges' chart, which I have been flogging this past couple of weeks. Yesterday's breakdown was clearly a bearish development, though my hunch is that it is corrective in nature, thus I want to see how follow-up price action over a few days transpires before I have a stronger opinion on this. - Looking for clues elsewhere does not really help me at this stage. I believe 10 year yields in the US, which I covered yesterday, are due for further lows in coming weeks and months. This should be a poor reflection of the US economy and hence should not be bullish for equities, yet it is possible that equities could take heart from a low rate environment, particularly if the Fed are seen to be helping their cause. The strength of the JPY, which I touch on below, is a sign that people are continuing to flee risk, and should argue for equity weakness, though it may also reflect Japan's own particular problems and may be less of an indicator than in the recent past.
Moving onto the Bund. - Last week I made reference to the Symmetrical Triangle, the original posting can be seen here. Since then the Bund has broken sharply higher in almost a straight line. I think further gains remains on the cards towards the triangle target at 132.20 (Current level 131.10), and probably higher. The Bund hit a first target @ 131.20 yesterday, this was measured off a Broadening Triangle Pattern which was internal within the bigger triangle. - I would however caution, that some corrective activity is probable before making the targets in the 132s. The area around the 131.20 target may act as temporary resistance for the Bund. Whilst I do not see any immediate sign of divergences on the shorter-term charts on the Bund, if the Bund starts struggling in the vicinity of the 131.20 area over coming days, then there may be a risk of a correction before eventually shooting for at least 132.20. If that correction did occur it would probably be short but sharp, possibly taking the bund briefly back to the high 129s. -- The chart of the Bund is posted below:
Looking at the USDJPY: Firstly, let me say that I don't like trying to predict the USDJPY. Over many years this currency pair has made a good job of making me look and feel extremely stupid. Nonetheless I feel there are some matters to watch on the USDJPY right now. The USDJPY remains within a strong downtrend, and the downtrend is at present the dominant force. Yesterday the USDJPY fx pair made its lowest level intraday and daily closing since 1995. - This is significant as the JPY has been a source of safety from risk in recent years, and continued JPY strength could be a strong sign of further flight from risk. - One observation yesterday however was that the price action produced a small 'Hammer Candle', these are potential reversal candles. In addition daily momentum in recent weeks has been diverging higher from the lower price trend. There is also a clear 'Falling Wedge' pattern since Mid-May, which could be a sign that this may be readying for a reversal. I merely point these out as something to keep an eye on, whilst bearing in mind that the major trend is lower. The daily chart is posted below:
The EURUSD has had a great run lately, however I believe that there are growing signs that it may be due for a correction. This week's high hit 2 significant resistance levels, the low from Mid-March, which was a pivotal level through April, and the key 76.4% retracement. In addition, the entire rally from June has taken a wedge like shape, which is a bearish development; the rising trendline associated with this stands at 1.3140 today. Also momentum studies are showing clear signs of Bearish Divergence on both the Daily and shorter-term charts. A failure to take out and hold over 1.3260/1.3270 and a break below the rising trendline at 1.3140 and the low of the past 3 days at 1.3119 should put the EURUSD on the back foot. - However, (and there is always a 'However') on the plus side, weekly momentum is supportive. Furthermore the EURUSD did manage to break above a significant trendline connecting a series of highs from February through to April, in the past week. It has since consolidated above this line, which now acts as support at around 1.3100. --- For today at least, this suggests the key battlegrounds will be the 1.3100/1.3140 on the downside, and 1.3260/70 on the upside. --- If corrective forces do start to take hold of the EURUSD, then I would favour a move back to 1.2670 - 1.2730, where I have a cluster of strong supports. On the upside a break and hold over 1.3270 could see this setting the EURUSD up for further gains towards 1.34/1.35. The chart below is the 8 hourly EURUSD chart, which shows the various levels mentioned. -
Yesterday afternoon the Bund broke the key levels which I was looking for in yesterday's post, I am now looking for further gains. On the downside I would not want to see 129.00 broken if this is going to make the strong gains which I favour, on the upside there is a hurdle at 129.86 and this is key to break if the Bund is going to make my initial target at 131-131.10.
The SP500 advance over the past few days has continued, though on very light volume. I would not however read too much into this as conditions are likely to be affected by the August Holiday season. However, there is some 'Bearish Momentum Divergence' showing up on the intraday charts that could be indicative of a impending pause or correction. - That said the market does not always follow through on divergences, for one thing momentum is a secondary indicator, price is always the primary indicator, momentum is a derivative of price and time. Secondly, how effective divergence is, can sometimes depend on how advanced a trending move is, particularly on intraday movements. In the early stages of a trending move divergence can be less effective, whereas in the advanced or mature stages of a move, it is likely to exert a greater influence. - This also adds a slight extra dimension to divergence, since how a market performs at a divergence can be crucial as to determining whether a move is in the earlier stages or at a more advanced stage. - The following chart is the SP500 chart, each candle is a 1/3rd of a trading day. This charts illustrates the above point and shows the current divergence. - One final point, the similarities of the current market are in my opinion closer to the market in early March. At that time the index was climbing out of a correction in a rising wedge shaped formation, volume was very low, and Bearish Divergence was present, however, this did not lead to a correction.
(Click on chart to enlarge)
(The following paragraph is amended from this morning's original posting.)
With regard to the Bund future chart from yesterday. The Bund managed to break over the top of the upper triangle (descending) line, and moved up to an intraday high of 129.47 (See chart below). Unfortunately this move was less than impressive, and saw a drop back towards the upper triangle line. - At this point , I have to hold my hands up here, and admit that I may have been a touch lazy with my analysis. Usually when I look for a significant development on the Bund I will consider the behaviour of the German 10 year yield chart, - the Bund is a Future based on the German 10 Year Government Bond. In addition I should also give consideration (though less so) to the current Bund future contract in its own right, in this case the Sep 10 Future. -- The top chart below shows the Bund Continuation Future and the Triangle I have focused on for the past couple of days. The 2nd chart shows the German 10 year yield chart (it moves inversely to the Bund), the chart below that shows the current Bund Future contract. -- Both charts are showing slightly differing continuation patterns to the Continuation Bund Future. The German 10 year yield shows a Bear Flag pattern, which has thus far held, the Sep 10 Bund future chart shows a Bull flag pattern, which too has thus far held and which remains well short of breaking. -- In conclusion I deem the break over the past couple of days as suspect, though not failed yet. However, for me a break and hold over the critical 129.46/54 area is pivotal going forward, until then, and particular in light of the Doji Candlestick produced yesterday, a risk of a deeper setback to the low to mid 128s remains possible. - Though I will add that decent dips should provide buying opportunities, as I still favour a significant upside break as a probable sooner or later.
The Bund Future appears to be breaking out of a Symmetrical Triangle, this would appear to suggest strong bullish potential in the coming days and weeks (German 10 year yields much lower), the chart below shows this Triangle pattern. The breakout level is 129.21 (Note: the bund is now trading at 129.35) and the measured target for this breakout is significantly higher at 132.20. In addition the breakout is supported by a break of the falling momentum trend-line on both the RSI and MACD.
With regard to the measured target above, I cannot rule out the possibility that this could go further than the suggested measured target. A look back at the weekly Bund chart over the past 20 years shows two similar price and momentum set-ups to the current set-up. The chart below shows the current set-up on the weekly, including the price set-up and the momentum set-up. The two subsequent charts show the previous similar set-ups, one from 1995 and the other from 2002.
With regard to the recent drop in US Treasury yields and simultaneous rally in equities. There seems to be a few commentators questioning this, they suggestthat US stocks should be dropping as yields drop, the rationale being that the drop in yields is a reflection of a weak economy, particularly given the already very low yield levels. Fundamentally I can not argue with this, though for now I continue to hold a bullish bias on equities. This bullish bias is based off my take of the technical picture, however I will add that I am only short-term bullish, and this view could change easily with a change in the technical environment. - Further to this, the following chart shows that there is nothing unusual in the SP500 rallying as US 10 year yields drop sharply. The green drop down columns show periods where US 10 year yields dropped sharply as the SP500 rose, in the past six years. If I were to second guess why this is happening, my best bet would be that the low yields are looked on as favourable for stocks, a situation that may be accentuated if the Fed initiates a QE2 programme. However I guess that if low yields do not help stimulate the economy, then US equities will eventually move lower.
As an aside, with yields moving lower, the USDJPY weakening, the stronger EURUSD and Stocks rising, it appears the correlation of Risk-on and Risk-off assets seems to be breaking down.
In a post a few weeks back I alluded to the possiblity of a failed Head and Shoulder pattern in a similar set-up to a failed Head and Shoulder pattern in Mid 2009. (That posting can be seen here). At the time my view was leaning heavily bearish, since then however this Bullish 'Failed Head & Shoulder' pattern has become a much stronger possibility. In addtion this pattern has morphed into a Bullish Wedge Pattern, which though it has not yet broken out, is pushing very close to resistance (a move over (and ideally a close over) 1100, will break the cycle of Lower Highs since late April). The charts below show the mid 2009 set-up and the current set-up. - Note: Failed Head & Shoulder patterns are amongst the most reliable of patterns, with a break above the top of the Right Shoulder (1131) being the potential breakout point. - Also noteworthy is the momentum set-ups for RSI and MACD both similar on both charts.
Turning to German 10 Year yields, these have been central to the recent crisis in European Sovereign Debt, and by implication closely linked to the sell-off since late April in US stocks. German 10 Year yields were a safe-haven throughout this crisis, as fears regarding the credit worthyness of the PIIGS increased, and investors sought sanctuary in Bunds (German 10 Year Yields) and anything but the Euro. I have over the past couple of weeks made reference to how there seems to be a basing in the German 10 Year yield occurring, and how this is shaping up to look very similar, albeit smaller, than the basing in early 2009. This is continuing, and looks like it may be be starting to breakout to the upside in yield terms (downside in Bund futures). The top chart below shows the German 10 Year Yield over the past few years, with the 2 periods I have referenced highlighted. Whilst fears persist regarding the on-going weakness of the US economy, the fears regarding the Euro Sov Debt Crisis definately appear to be waning, particularly with increasing signs that the German economy, 'the engine room of Europe', faring better. This can be seen in the lower set of charts, which show German IFO Business Climate (Which was released this morning at a very strong 106.2) and German GDP (up to Q2). -This may also continue to favour the EUR over the USD in comng months. (Note : Click on charts to enlarge).
The advance in US equities continued apace yesterday, the SP500 index has now had 6 solid days of gains. However, it is now running against some key levels which may check its advance in the short-term, and could even be pivotal in the bigger picture. These can be seen in the chart below: The top of the wedge and the 50 day SMA both coincided with last night's close around 1095/96, additionally short-term momentum studies (60 & 30 minute) are showing some minor divergence up here. Also the round number 1100 possibly adds some weight to this, particularly with the 76.4% SP Sep 10 future retracement at 1099.5.
Looking further ahead; yesterday I discussed the possibility of the NYSE advance-decline line signalling further bullish move in US equities (Click here to see this post). Today I present a chart showing the SP500 together with its advance-decline line. The SP500 advance-decline line has broken above its the upper boundary of its declining channel, which may be a bullish signal, however it would need a clear break and close over the equivalent price line to add any weight to this. I have also re-emphasised the similarity of the price pattern over recent months with the a smaller price pattern last May - July. It is noteworthy that the Adv-Dec line for these 2 patterns are also moving in a similar fashion.
Moving on to the EURUSD (Click on chart below to enlarge), over the past couple of days the downtrend line from the December's high has been breached, this adds to the possibility of a deeper retrace towards a cluster of targets near 1.3100. However arguing against this is considerable resistance in the form of the neckline of the Multi-year Head & Shoulders pattern (See lower chart). The neckline of this pattern occurs in the 1.2720/1.2750 zone, which continues to cap this for now. - Note a break of the neckline would not necessarily kill this Head & Shoulders pattern, it would need to a major corrective move over many weeks before its potential downside threat is lessened .
Finally a look at the German 10 year yield. The top chart below shows another pattern similarity, again on different scales. This suggests growing possibility of a turn higher (lower in the Bund future) in yields possibly towards 2.86%. This would fit in with a scenario in these highly correlated risk-on/risk-off markets of higher stocks and a higher EURUSD. This move higher is supported by Bullish momentum divergence on the weekly German 10 Year yield chart (See Lower Chart). Further to this, I will add that the break out of the base in Mar 2009 was co-incidental to the low in the stocks, however also note how tortured price action was before finally squeezing higher. If this repeats it may go through a similar process, before finally breaking higher.
The next few days will be critical. With key earnings reports and options expiry on equities coming up, and some key pivotal level as mentioned, I would not be surprised if we were to see some corrective activity over the next few days. How far this goes will be key as to whether the next few weeks turn more bullish, or whether my prior bearish scenarios, which I have termed as currently on life-support, manages to make a return.
The retracement higher this morning on the S+P Futures seems to be gathering steam. - However, it is a possibility that this pullback higher is part of a bearish continuation pattern. - I have highlighted this in the charts below. - The pattern I am talking about is an 'Inverted Cup + Handle' pattern. In standard Technical Analysis these are powerful continuation patterns. -- however they come with a 'Strong Government Health Warning' : Anticipating patterns early in their formation can be highly risky: - Firstly, it may be an incorrect analysis, secondly even if the analysis is correct, there is no guarantee the pattern will be successful. - Most analysts advise against taking the trade prior to pattern completion.
- The charts below show the pattern on the AUDUSD Spot and the SP June Future. - Below that is an example of a successful 'Inverted Cup + Handle' pattern on the weekly Bund Future a few years ago. --- FWIW AUDUSD is pushing the upper boundaries of the maximum Hammer retracement. -- If however the AUDUSD can make a 'sustained break' over 8330/40 (with 8370/80 the absolute limit on a spike), and likewise the S+P can break and hold over 1070/75 (absolute spike limit 1080/85) the notion of an 'Inverted Cup + Handle' pattern may be dead in the water.With regard to the above analysis, I have used the AUDUSD because it has synched extremely well with the move in US stocks since late April. In fact it has been a good indicator of when a move in the S+P June 10 is likely to succeed or fail. I have posted two charts below, highlighting how the AUDUSD has diverged as key turns from the S+P future. The synchronisation has occurred as both the AUDUSD and Stocks are 'Risk-on trades', however I am not sure why the AUDUSD has been leading the S+P500 at key turns, I can only assume perhaps it displays less emotion and more rationality. - Note - at some point the AUDUSD/S+P500 synchronisation/divergence is likely to end, however if the current 'Risk-off' episode continues, then this pattern is may remain for some time.
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