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.