USD Index - Into the Retracement Zone

The USD Index has corrected sharply lower since it topped out in early June, posting 8 consecutive weekly lower closes adding up to just over an 8% decline in that time. Whilst on the face of it, there seems little love for the USD right now, there are some signs that suggest traders should be on watch for a possible reversal.

Firstly the Head and Shoulder pattern formed through May and June has reached its target. (See chart below).

Secondly the USD index has moved into a Fibonacci Cluster Zone. This is an area of four Fibonacci retracements from four different significant low points to the June 2010 high. (See chart below)

The next chart shows shows how the USD index has moved into a price area that acted as congestion on the way up during February through April this year. This congestion band covers a wide price range, however given the Fibonacci cluster mentioned above, it may not penetrate much further into this zone.  Also notice how there are some early signs that momentum maybe turning up as price moves lower, suggesting this may be forming 'Bullish Divergence. (Click on chart to enlarge).

The next chart shows the USD index at the 174 day simple moving average line. The 174 day sma line has acted as support to large downward corrections of each of the previous strong moves higher since 2004 (Highlighted by the Green arrows on chart). On each occasion the price rejected the 174 day sma, the USD index made strong subsequent advances. [ I have no idea why this particular sma should be significant, other than the fact that 2/3rds of a full trading year is equal to around 174 days.]

One further point; the Large Multi-Year Inverse Head and Shoulder pattern on the USD Index remains a possibility (See chart below) despite the recent setback. However, I also want to draw attention to the major downward trending line (Red line on chart below), which has acted as pivotal resistance on a number of occasions over the past 40 years. This line was always unlikely to yield on a first attempt, but on the two occasions it did eventually yield, the index had initially corrected in the region of 7 - 7.5% before pushing up towards this line again. - The current correction is around 8%, which just keeps it in the ballpark. -- However to play 'devil's advocate', any further correction much below current levels should reduce the chances of a break up through this resistance line and would also suggest the Major Inverse Head and Shoulders pattern may fail.  I would also like to point out that today's monthly close has confirmed a strong Bearish Monthly Candle pattern known as an 'Evening Star Pattern' (See lower chart). Note: the index also produced one of these patterns in late 2008, but that pattern failed to follow through.

(Click on Chart to Enlarge)

It is my Humble opinion that the current level on the USD index may prove to be a bit of a battle ground. I would not be surprised to see a reversal from these levels, at least in the short-term, with its magnitude determining whether it evolves into something much larger. - Should on the other hand USD index continue to decline and break much lower than the current level, it is likely that it could portend further weakness, with this area becoming the first support area of a bigger downtrend.

EURUSD - Interesting Comparison.

The charts below show the EURUSD daily in Q4 last year (Top chart). - The lower chart shows the Current EURUSD 8 Hourly chart. The failed Triangle breakout in December 09, and today's strong break up out of the triangle, look strikingly similar.  - Am I guilty of pattern hunting? who knows? indeed it may be too early to say we are in for a similar outcome, however this breakout has occurred right within the 1.3100/1.3150 window I suggested as a target zone for the EURUSD a few weeks back, the chart used back then can be seen here. - Significantly it is just shy of the 38.2% retracement of the entire move lower since the December top. Whether this is a major top or an interim top, this level should provide tough resistance. - Note: The Nov-Dec 09 top was also strong resistance in the form of 78.2% Fib resistance of its entire prior 12-month rally.

A quick note on the SP500. This afternoon's price action has seen a strong rejection of the 200 day moving average at 1114, and the significant 50% retracement at 1115. The correction higher over the past few weeks, appears to have unfolded as a Wedge shape pattern, this is potentially a bearish development. On the other hand the large correction lower since late April also unfolded as a potential Bullish wedge pattern. - This pits these two opposing forces against each other over the next few days. - I believe the battle ground may occur around 1065-1080, with the outcome possibly being decisive for near-term direction.

Further to this, the next chart shows the above opposing wedge patterns in the bigger picture. I have also highlighted a similar set-up, which occurred in 2007. It may be that this 2007 price behaviour is repeating itself. I will keep an eye on this to see how this evolves, as this may have 2 major connotations for the much bigger picture. - Firstly that if the Bull/Bear battleground I have highlighted at 1065/80 can hold, there may be  another approximate 100 point advance. However, if that occurs, then it is possible that this may then set up the S&P for a much bigger fall later following the termination of that rally. Furthermore, that fall could be the precursor to something far more serious as we enter the fall (no pun intended - seriously).
(CLICK ON CHART TO ENLARGE)

Sp500 - My system retains Bullish Environment posture.

Much has been written regarding the 50/200 moving average crossover on the SP500 in recent weeks. The 50/200 sma crossover produced a bearish signal in early July. Since that signal the SP500 has rallied strongly, there is nothing that unusual in this, the 50/200 crossover is a lagging indicator and it is not uncommon for adverse moves to occur after a signal. - The chart below shows the recent crossover; it is noteworthy that the SP500s rise has been constrained twice by the 200 day sma since breaking through it to the downside in May. Although my outlook for the SP500 is currently bullish, this bullishness will be tempered if the price fails to clearly break above the 200 day sma soon.

In relation to the 50/200 moving average crossover, I have looked back at its track record since 1970 (A generous 40 years worth of data). In that time it has produced 40 signals, 22 winners and 18 losers, in other words just over half the signals have been successful, not a particularly impressive performance. In terms of returns, its annualised return has been around 6.82%, which is better than a 'Buy and Hold' strategy during that time, though only just (I have calculated simple annualised return on Buy and Hold at 6.24%). The return also exceeds the return had an investor placed his money at the US 3 year Treasuries rate on a rolling annual basis (6.68% according to my calculations), though again only marginally better, and not great considering the amount of drawdown and uncertainty suffered during that time, relative to such a safe investment.

Further to this, for the past couple of years I have been monitoring my own system which I use to gauge whether we are in a Bullish or Bearish environment for the SP500.  The model is similar to the 50/200 in that it is a lagging indicator, however it differs in a number of ways. For a start it is a momentum indicator of the 50 day simple moving average. I then have a number of entry and exit rules for bullish or bearish signals, in addition a neutral signal can also be created. I do not use this system as a trading system, since like the 50/200, it is a lagging not forward looking indicator, and is therefore liable to significant adverse swings, which could seriously damage the wealth of a leveraged trader such as myself. However, I do use it to gauge the overall trend environment of the market, and will always be aware of the trending environment as indicated by my system. -  For the record, had I used it since 1970 as an investment tool, its performance would have been significantly superior to the 50/200 crossover method. It has generated 32 signals in that time 15 winning signals and 5 losing signals, a 75% success rate winners to losers (The remainder have been neutral signals, although they have been for shorter periods, just over 2 months on average.).  The annual average return would have been 8.48% (Though this does not include interest on balances during neutral periods, which would have slightly increased the return).

The last signal generated by my system was early July 2009 when it turned bullish. Throughout the past three months of negative price action it has remained in bullish mode, though being a lagging indicator it would anyway take its time to turn neutral or bearish. Despite being in bullish mode, it currently is in an oversold position, and moving lower, which highlights a risk of turning bearish, however the market would need to start turning seriously lower over the next week or two to generate a bear signal. Unless that occurs soon it will likely continue to signal a bullish environment.

The first set of charts below shows the SP500 over the past decade or so, with my indicator below. The coloured areas on the chart shows the nature of the environment (bullish/bearish/neutral) as indicated by the system.

The next chart shows the SP500 on a log-scale since 1970, with the coloured areas on the chart reflecting the nature of the environment (bullish/bearish/neutral) as indicated by the system.

Finally below is  a table showing some performance statistics for the system, compared to the 50/200 crossover method, 'Buy and Hold', and an investment at the 3 Year Treasury rate.

Some thoughts on the SP500, EURJPY and Risk-on. Plus RBS trade idea.

US equities took a breather yesterday, and though I believe daily charts continue to support the recent bullish breakout, the failure to make a meaningful assault on 1130, shorter term momentum divergence patterns, plus rather poor volume, all hint that we may see some further consolidation and possibly warrants a little caution.

The Eurostoxx 50 has broken above the upper line of the symmetrical triangle which I referred to in Monday's post (see here), though thus far it is balking at resistance at the Mid-May and Mid- June highs at 2793.5 and 2787.5, these levels may prove pivotal, and until they are broken, a period of consolidation may ensue below these pivots.

With regard to the risk-on trade possibly coming back into favour, I first referred to this in a piece a couple of weeks ago (this can be seen here). Since then the aversion to the PIIGS countries has strongly receded, the large July funding issues have been overcome, CDS prices have dropped significantly, and the spread of PIIGS bond yields over German Bond yields has eased for all countries but Greece, though even the Greek spread has settled down into a range. The charts below show the 10 year v Germany yield spreads for the PIIGS since the start of 2010. (CLICK ON CHARTS TO ENLARGE).

Another measure of risk aversion has been the EURJPY fx cross. The EURJPY dropped sharply earlier this year as the flight from the Euro and risk took hold. Over the past couple of months this appear to have been forming a base, and in the past 24 hours it has attempted a push above the upper boundary of this basing pattern (Rounded Bottom Pattern). The top chart below show the bigger picture of EURJPY over the past 3 years, highlighting the 2 periods of  'Risk Aversion'. The lower chart is a close-in look at the past year.

One note of caution: I keep alive the possibility that this apparent bottoming process, with regard to risk, could morph into a new bearish phase. - Though I do not favour this outcome, as of yet none of the major risk-on trades have cleared or significantly cleared key pivotal or psychological levels. For example 1.3000 on the Euro is clearly a key psychological level for the market, more significantly the sharp drop following the announcement of the Greek bailout occurred from around 1.3100, I also have some key levels around 1.3100/1.3150 which I consider pivotal. The above mentioned Eurostoxx levels are pivotal as is 1130 on the SP500, many other risk-on trades remain close to key pivotal levels but have yet to have made a clear break. 

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Finally a quick look at an individual Stock trade idea. RBS has been a bit of bellwether for the Financial Crisis over this side of the pond. The top chart below shows the Weekly performance since 2006. I have highlighted a possible Ascending Triangle pattern formed over the past couple of years, though this is not yet complete. The chart below that shows BT (British Telecom) for the years 1999 through to 2007, this was a bellwether stock for the Telecoms and IT crash of the early 2000s. I am trying to show how RBS is evolving in a similar way to how the BT price evolved as a base in the years following the Telecom's crash.  
(CLICK ON CHARTS TO ENLARGE).

Looking closer at the basing phase on BT (See chart below); when the price broke above the triangle top, after a lengthy period of consolidation, the stock eventually climbed towards the triangle target and then the base of a significant consolidation zone, - before eventually falling away.

The next chart (see below) shows a closer look at RBS. The price behaviour is similar, and may portend a similar evolution to the BT chart. However there are two significant differences: Firstly the RBS 'Ascending Triangle' pattern is potentially a more bullish pattern than BT's 'Symmetrical Triangle', since resistance at the top of the 'Symmetrical Triangle' pattern is pushing lower, whereas this does not occur with an 'Ascending Triangle' pattern. - Hence any RBS breakout may be more bullish than the tortured breakout which occurred on the BT chart: Secondly, there is a large 'vacuum' of resistance above the RBS triangle which occurred as a result of the price downdraft in Oct 2008. - If the RBS price can clear £0.72 then £0.85 it could see the opposite effect of the downdraft, whereby the price rises rapidly (though not as rapidly as the decline).

Of course the above is all largely academic at this stage, and will remain so until the top of the triangle pattern at £0.60 has yet to be broken. The current price is around £0.50 and still £0.10 points shy of this key level, so it has some work to do to get there. However, I like this trade as it provides a potential nice Risk/Reward. The downside is £0.11 (stop below the recent low). The upside target, if it breaks £0.60 (where one could also add), would be £1.07 for the Triangle target, making a gain of £0.57 (Risk/Reward 5.7/1). Potentially though it could move much higher to the highlighted resistance lows around £1.40/1.50, or even to around £2.00 where the downdraft in October 2008 began, offering a much greater potential Risk/Reward.





 

1970s redux.

On a number of occasions over the past couple of years I have been drawn to the strong comparison between the past decade's price action on US stocks and the similarity to the 1970s price action. I was recently reminded of this in an article on the excellent blog 'BestOnlineTrades.com', which can be seen here.


The chart below shows these 2 similar periods on the SP500 on a Log scale.

Within these consolidations there are 2 very similar periods, these being the 1974 Bear market and the subsequent rally, and the 2008 bear market and the subsequent rally . These have been highlighted on the chart below.

A closer look at these periods shows the similarities continuing (This can be seen on the 2 charts below). In the period following the very sharp bear markets of 1974 and 2008, on both occasions prices posted very strong rallies back to near where the sharpest declines in the prior bear markets began. Following that, prices then suffered an approximate 38% correction ( I am assuming here that the recent decline to lows early this month have ceased.). If these similarities were to continue, it would suggest that the SP500 could continue to climb out of this correction and eventually make new recovery highs beyond the April 2010 high, over the next 6 - 12 months, before eventually succumbing to more sideways/downward pressure. -- If I were to suggest an eventual target for gains, I guess somewhere in the 1300-1400 area, with 1350 being my most likely target.  I think the catalyst for further gains from here would be a clear break over 1130. On the downside, I would not like to see 1070 breached, with sub-1040 again bringing the bearish case strongly to the fore.  
(CLICK ON CHARTS TO ENLARGE)

One final point: - I am not laying out a case for us being in a similar economic and political climate to the 70s, this is not the case, particularly when it comes to inflation or interest rates. However what is similar is that the 1970s were a time of extreme economic uncertainty, in many respects, and the 1974 recession was associated with a very deep bear market, not unlike the 2008 bear market, I have shown this in the chart of US GDP posted below. Looking at this and the above, makes me wonder whether the above mentioned dip in the US stock market in 1975 was connected to fears of a double dip recession?

SP500 update and Eurostoxx 50

The SP500 continued its recent bullish run and made a clear break Friday over the declining trendline that marked the top of a Falling Wedge pattern. Whilst I now favour gains in the weeks ahead, it is crucial that support at 1070-1100 holds. I remain slightly cautious, given the less than friendly fundamental backdrop, however it is often said that 'Markets climb a wall of fear'. - IF the SP500 can hold the crucial 1070-1100 area, then I fancy a test of the 100 day sma around 1128, which will also coincide closely with the June 1131 high. This 1128/1131 zone may prove to be a key pivot for the next couple of months...

I have also had a look at the Eurostoxx 50 chart. This is a cap weighted Index of 50 blue-chip stocks from within the Euro area. The top chart shows the past 2 years price action, I have also posted (bottom) a chart showing the past 20 years [to get some perspective]: - The price action shows a consolidation phase for almost the past year, which appears to have unfolded as a large Broadening (Expanding) Triangle or 'Megaphone pattern'.  Recent price action has seen a messy consolidation in the lower half of this pattern. This index has however now approached critical resistance, as highlighted by the 100 day sma, and the declining top line of a symmetrical triangle.- I believe a solid break over this resistance would favour a run up to the highs from Dec09/Apr10, on the contrary a failure to clear this resistance would not be looked upon too well and should see a drift or plunge back towards the lows of the past couple of months.
(CLICK ON CHARTS TO ENLARGE.)

S+P on verge of Breakout + German 10 Year Yield

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).

S+P - Bullish Candle Formation - Trumped.

Yesterday's post emphasised a potential bullish Candle formation, together with a Bullish Engulfing pattern. Today's price action completely neutralised and undermined this pattern, in the process completing a Bearish 2-day formation known as 'Dark Cloud Cover'. - Sometimes a failed or quickly repelled pattern or formation can be a strong indicator of market direction.  Thus in the absence of decent coin to toss, it may be worth a punt on tomorrow's action continuing lower.

otherwise

S+P Update - Bullish Candle Formation.

Today's price action on US equities has produced a Bullish '3 inside up' Candlestick formation . '3 inside up/downs' usually consist of a 'Harami pattern' followed by a strong move on the 3rd day of the formation in the opposite direction of day 1 of the Harami. Though the literature with regards to these suggest they are usually end of trend patterns, I have found them useful at the end of short corrections. The are also strongest when they are combined with another Candlestick signal, and this one has the third leg of the pattern as a 'Bullish Engulfing' candle.  I have attached below, the chart of the S+P500 highlighting this pattern.

This along with price action, leads me to think that the bearish scenario I highlighted yesterday is highly unlikely to follow through, and that a Bullish outcome is becoming a stronger possibility, if this can overcome 1100 this week. 

EURGBP revisited and updated.

Last month I posted a big picture overview of EURGBP, my conclusion favoured a move to much lower levels. (That posting can be seen by clicking here) . For about a week it looked right, since then it has flown back the other way, big time. I have decided to revisit this analysis to see what I may have overlooked and then try and estimate where this pair may be heading next.

My earlier analysis, assumed that the breakdown was from a Multi-Month 'Reverse Symmetrical Triangle' or 'Double-Top', and hence that the pair was likely to plummet towards significant targets. I guess I may overlooked a couple of major points:

• Firstly that these are such long-term patterns, that it was a touch presumptuous to assume we would head towards targets in the short-term. 
• Secondly, that often (though not always), breakout from patterns will be subsequently re-tested. 
• Thirdly, that the pair was running into major congestion support from the period around 2008, large congestion areas, such as this, will often check moves progression.

In light of this I have looked at the EURGBP again:  this has led me to believe that the breakout from the topping pattern, which occurred in Q2, was valid, and that significantly lower levels lie ahead over the next several quarters, with targets around 0.7500.-  However, in the shorter-term, the move in recent weeks is corrective and may well take this pair higher back to breakout levels near .8680, though this correction could quite easily fall short of that level though, with a broad resistance band anywhere from .8400-.8800. - A move over .8800 will lead me to move to a neutral stance, and will bring the bullish possibility back into play, which will gain strength above .9000.  - Shorter-term the possibility of a move towards the breakout level of .8680 remains on the cards, though for me it is a contra-trend move now, and should be seen in light of that. Pullbacks should find support around .8400/20 and a rebound from around here would provide the upside with some impetus.  - However, be aware that a break back below .8300/20 would strongly favour a re-test of June's low in the mid-0.8000s. 

I have added my more detailed analysis below which led to the above conclusions:

Starting with the monthly chart. (The Monthly EURGBP chart is shown below - Clicking on it will enlarge it). - The sharp reversal off the low of last month has led me to ditch the idea that the last 2 years had formed a 'Double-Top' Pattern, however the 'Reverse Symmetrical Triangle' pattern is still very much alive, and a test and failure at or around the breakout level near 86.80 in coming months, may be the catalyst to an eventual move to lower levels.  - One other possibility which I have to however include, though I do not favour, is that the pattern of the past couple of years may be a Flag Pattern, this would suggest that an eventual breakout above 0.9000 would lead to significant new highs well above parity. - On this chart I have highlighted the congestion zone from 2008, and this is likely to continue to support moves down to and around the .7700 - .8100 zone. - I have also highlighted a couple of significant formations within the Triangle in the form of Monthly '3 Black Crows' patterns. These are potentially strong reversal/bearish indicators, with the second pattern occurring with the triangle breakout. On the next chart below I have shown Volume (on a weekly basis) during the formation of the 3 Black Crow Patterns, this shows a strong pick up in volume during the duration of these patterns, as well as on the breakout of the symmetrical triangle. This should be supportive of the idea that these patterns are significant. - Note, also that the recent correction higher has been on declining volume, which  suggests that this latest upmove may be corrective.

Looking at the Weekly chart (See below), the Triangle can be seen in more detail. The breakout of the triangle occurred around 0.8680, though there was a lot of price action around the breakout, which may act a congestion resistance to this recent upmove. The correction of the past 5 weeks has already pushed into this congestion band, which broadly encompasses 0.8400 - 0.8800.  This broad range includes 2 significant Fibonacci retracements @ 86.09 and 87.36, as well as the .8680 breakout and the triangle baseline at .8720-.8750 over coming weeks. It also includes the 40 and 68 week SMAs (lower chart), both of which are turning down, and are likely to act as overhead resistance . - Note : Currently monthly and weekly momentum are generally neutral and do not really provide any significant clues..

Finally looking at the daily chart, (See below and Click on to enlarge). This throws up some detail missing from the longer period charts. The breakdown into June's low took the shape of a sharp declining wedge pattern. The price low saw clear bullish divergence, and the break of the top line of the wedge pattern was accompanied by break in the declining momentum trend on both RSI and MACD. This favoured the sharp correction which has occurred.  - What is also evident is the inverted Head & Shoulder pattern on the daily chart. This Inverted Head and Shoulders pattern may continue to exert upside influence on the pair, targets using traditional measurement methods are .8771, which is close to the upper band of weekly congestion. The Inverted Head & Shoulders pattern could be a big clue as to where direction heads next. I would not be surprised to see the neckline of this pattern re-tested, this is around .8420. If it does re-test, then this would favour a continued push higher towards its target, though I think the larger bearish picture from the longer-term charts would weigh on it, probably keeping it from reaching its full target. - If however a re-test fails to hold the base of the right shoulder around .8313 then this would suggest that the downside is back in play with a good chance of a re-test of June's low at a minimum. RSI Momentum has reached overbought, though this is not at extreme levels and should not act as an impediment to further gains.

S&P500 - Bearish scenario re-awakens,

After the big rally last week, Monday to Thursday, Friday's price action did an awful lot of damage completely eradicating the four previous days gains. In the wake of this, I have decided to dust-off one of my old bearish scenarios, which I had previously suggested were on life-support. - Before that however,  last Friday's posting on 'Risk-off 2' prompted a couple of old friends to call me up, both suggested that whilst I had made a decent observation, the situation is very different this time round. Whereas in spring 09 the market was very oversold, with intense pessimism, and a vast amount of stimulus and fiscal expansion. This time we markets are far less oversold, there is less (but growing) pessimism, and many governments are moving to reverse recent fiscal expansion. This would, they both suggest, tend to favour markets exiting the recent consolidation, which I have termed 'Risk-off 2', opposite to the direction at the end of 'Risk-off 1', essentially suggesting that 'Risk-off 2' continues.

Moving on to my aforementioned 'old bearish scenario', one of my contentions in the past few months, was that the price behaviour of the US equities has been similar in many ways to the price behaviour in 2008, albeit on a smaller timescale (Daily as opposed to Weekly). The bounce however from the July low at 1010 had moved higher than I expected, hence that is why I labeled this scenario as on 'life-support'. Friday's price action, had however re-awakened this comparison. - The chart for this comparison can be seen below. On this comparison, the drop down columns emphasise the key turning points and how they have occurred at similar junctures on both charts during the price progression. The similarity of the price behaviour should be apparent, in order to account for both the 'Flash-Crash' and the stronger bounce last week, I have labeled these as anomalies. - These overlays sometimes work since 'the past has a habit of repeating itself', although it is more appropriate to say it rhymes rather than repeats. -- This week is likely to be crucial in-terms of whether this comparison does continue, or whether it is finally laid to rest. - Looking at, what happened next, in the 2008 chart, suggests that price action should continue to rollover following last week's top and then plummet in a cascading fashion like a stone. If indeed the daily 2010 chart does repeat the 2008 weekly chart, then some extraordinary price action lays ahead this week, more particularly towards the end of this week, with a potential target in the low 800s. - This is a big call I know, hence I will add a caveat, and that is that I think a move of this nature is a long-shot, however in-terms of risk reward, if the SP500 stays shy of last week's highs, it does offer a nice potential risk/reward trade, with a possibility that even should it not follow through, the market could still be lower at the end of this week/early next week.

 

Risk Off - Is it coming to an end?? + GBPUSD FX update.

Over the past few weeks I have outlined a number of possible bearish scenarios, and more recently I have posted some possible more bullish outcomes. The market has now taken us to a neutral/pivotal zone where direction is likely to be determined by which ever side of this zone makes a solid breakout. I believe 1070 - 1100 defines this pivotal zone for now. - In the meantime I have outlined two further pieces of analysis which argue both the possible bearish scenario and make a case for a more bullish outcome.

Firstly I have decided to look purely at the trend, as defined by the direction of highs and lows at reaction points. As the chart below shows, the past 2 months has seen a series of lower lows and lower highs since the end of April. This simple analysis supports the notion that the SP500 may have entered a downtrend in the past 2/3 months. - Until and unless 1130 is exceeded, this would suggest the odds favour a move to lower levels.

With regard to the more bullish possible outcome: The recent risk-off episode appears to have largely abated over the past couple of weeks. Stock markets have rallied, European currencies have rallied versus the USD and some of the periphery European yield spreads versus German yield spreads have eased. I have noticed looking at a number of charts, strong similarities over the past couple of months with the previous risk-off episode at the end of 2008/early 2009 in the wake of the Lehman's collapse, albeit generally on a much smaller scale. I will highlight this with a series of charts, in these charts I have defined the Post-Lehmans risk-off period as 'Risk-off 1', and the more recent period in the wake of the ratcheting up of the Greek crisis as 'Risk-off 2':

Firstly - Equities via the SP500 Index. (Top Chart) , UK FTSE (2nd Chart)

 

Then via FX in the form of the USD Index (Top Chart), AUDUSD (2nd Chart), AUDJPY (3rd Chart), EURJPY (4th Chart).

This can also be seen in may yield markets: German 10 year yields. (Top chart), US 10 year yield (2nd Chart), Spread of Belgium v German 10 Year Yield Spread (3rd chart) and 2 Year German Swap Spread (Libor v Gov yield) (Lower Chart),

 

The comparisons are not exact, and clearly other factors particular to each asset class or currency have their own effect. For example the USDJPY has behaved very differently, and commodities have also not shown a similar pattern. but by and large there is a strong similarity across a number of markets between the 6 month period following the Lehman collapse, and the past 2 and half months in the wake of the Greek crisis.

What does that mean going forward. Personally I believe in the short-run (over the summer) I guess it favours further reversal of the flight away from risk: In other words further recovery in stock markets, further USD weakness, and a slight backing up in longer yields. Beyond that the outlook is cloudy, though I struggle to see how markets could remain buoyant in the face of strong deleveraging headwinds.


Further to my GBPUSD update yesterday (That analysis can be seen at the bottom of yesterday's posting by clicking here) . The currency pair surged further yesterday, and the odds still favour some more upside, however it is likely to face some tough resistance around 1.5500/50.  This is where there some old highs from April are lurking, and is just below the 50% retrace of the downtrend which began last November.