A pivotal week ahead.

The past week or two have been very taxing; as a trader I often tend to give money back at times of market consolidation or ends of trends, last week proved no exception (though thankfully not too much was returned). My trading stance is usually fairly short-term, anywhere from intraday, to a several days or even a couple of weeks, though generally the bias in my trading may last several weeks or even months. My posts over the past 7 days hinted at some sort of pause/correction in the risk sell-off which transpired through May, to be honest I thought there was a possibility that the markets may post a somewhat deeper retrace than they have. This leads me to think that (unless markets post a rapid rebound from last Friday's lows) the downtrend in risk since the end of April is somewhat stronger and more-deep rooted than I had thought, and significant new lows lay in wait.

Looking at FX / Bond Yields / Stocks, I think the coming week could be a make or break week. My own bias is leaning to a break, with the last 2 weeks a failed attempt to hold some crucial supports. I will elaborate with the use of some charts. Firstly the USD index, this is sitting just below the neckline of a major monthly inverse Head and Shoulder pattern. A successful break and hold over the neckline (88.50 v Fridays close of 88.23), could target close to 109 over the next couple of years. - Of course that is not a trade for a short-term trader such as myself, however it is always important as a trader to understand the much bigger picture. - Hence, with regard to the USD, I believe we are at a key inflection point where the USD strength of the past 6 months could evolve into something deeper, and more permanent.

My next chart shows US 10 year Govy yield. This shows a potential 'Double Top' at 4% over the past year. The 'Double Top' low, on a daily closing basis resides at 3.20% (Friday's close was 3.23%), a break below here would suggest a potential target over coming months around 2.34%. Also significant, and probably a final line in the sand would be 3.05%, this line held as resistance during Feb/Mar 2009, and as intraday support late 2009, and the recent May low. - I do qualify this by saying that there is a risk to this forcast, in that a Global Sovereign Debt crisis could send USD yields much higher, although I do think (for now at least) that US govt debt is going to be seen as a safe-haven and potential yield earner.

Should the potential moves to new highs on the USD index and to new lows on the US 10 Year actually transpire, then in my mind this would be indicative of greatly heightened deflation fears. - The effect of deflation would be to lead to further repricing of all assets in USD terms, hence commodities would likely suffer ( including Gold - at least in the short-term), and most if not all currencies would weaken versus the USD, with stocks weakening significantly. - This leads me onto the final chart; the SP500. This S&P is sitting on a critical (and probably final) support line, Friday's price action closed bang on the red support line on the chart below. -- A very interesting and possibly pivotal week lies ahead.