Tuesday 31 August 2010

Hhhhmmmmmm Getting Interesting.

Well, after a day away from the market (UK Public holiday yesterday), it appears as if Friday's moves never happened. The SP500 rapidly gave up Friday's big jump, as did the EURUSD, and the JPY crosses (Seems like the BOJ are not really interested in a stronger JPY). -  Last week I had been highlighting some bigger picture bearish patterns across a number of markets: US Equities with the huge multi-month 'Broadening pattern', the same on the AUDJPY cross as well as the symmetrical Triangle over recent months, and the recent Head + Shoulders patterns on the EURUSD within the bigger picture Bearish trend. - The 4 charts below highlight these bigger picture set-ups: The first chart shows the big Broadening Pattern on the SP500, the second chart shows an Andrews Pitchfork on the EURUSD, which highlights the bigger downtrend (Credit for highlighting this AP to the excellent Chartramblings blog), the third chart shows the recent Head + Shoulders pattern on the EURUSD and the final chart shows the big bearish Broadening Pattern on the AUDJPY and the recent Symmetrical Triangle.
(CLICK ON CHARTS TO ENLARGE)


Against all these were shorter-term price action which suggested possible short-term reversals, which I hinted could morph into bigger corrections. - I discussed the SP500 on yesterday's posting (see here), the EURUSD had been struggling to make a clean breakdown of the recent short-term Head + Shoulder pattern, the right side of this pattern has unfolded as a 'Falling wedge' pattern and the recent low occurred with Bullish Momentum Divergence (See above). Meanwhile the AUDJPY continues to consolidate within the range of the past couple of months, and last week bounced off the support from the symmetrical triangle line near 74.00.  --- The quick failure of these markets to maintain Friday's rally, leaves these shorter term scenarios in a very weak position. Unless these markets can hold on close to current levels and start to rebound in the next few days, then I fear that we could see some real ugly price action soon with the bigger picture trends coming into play.  


Sunday 29 August 2010

SP500 Update.

On Friday, I produced a post regarding the major bearish 'Broadening Patterns' hanging over equity markets, this included a large selection of charts showing various global markets (That can be seen here). The day before I had a posting which suggested a possible short-term bottom (See here). --- This echos a similar ocurrance from the beginning of July when I did something very similar, on the 7th July I posted a set of charts showing various markets from all over the world displaying topping patterns, yet the day before I had posted an article suggesting a correction due (can be seen here). The 6th and 7th of July turned out to be the final part of the bottoming process that led to a 100+ point rally over the next few weeks. -- Basically I spotted a potential short-term reversal pattern, then when it immediately failed to follow through I had my doubts and went all bearish, only to have been correct in the first place. The market can play wonderful tricks on the mind sometimes.  - Well it is possible that the same process is taking place. 

Looking further at the July low and the past few days, the set-ups bear very strong similarities. The set-ups are as follows:
  • Day 1 is a Hammer (or Hammer Type Candle).
  • Day 2 is a large Bearish Candle (The high of Day 2 is higher than Day 1) .
  • Day 3 Produces a Double Bottom with Day 1 (Slight new low in July), then a Bullish Engulfing Candle with higher highs than both Day 1 and Day 2.
Thus we have 2 potential Bullish Reversal Candle patterns, firstly a hammer candle, then a Bullish engulfing candle.  Furthermore these have created a potential 'Tweezers Bottom'.

This can be seen on the following chart :

Elsewhere there are various other signs hinting that we may have a bottom for this current move. The following chart highlights significant Bullish Divergence in both RSI and MACD. Also as I previously pointed out, support held at a line connecting the April high and the interim July high, which is the upper line of the large Q2 'Declining Wedge' pattern. This low was also significantly the fibbonacci 76.4% correction of the July - August rally.  - In addition both the RSI and MACD momentum indicators have produced strong declining trendlines over the past six weeks, the RSI trendline has broken, the MACD line is close to breaking. If price action breaks its declining trendline in co-ordination with breaks of the declining momentum trendlines, this could produce a strong counter-rally. - I have seen this sort of price and momentum behaviour in the past, the lower chart shows a previous example of this which occurred on the Continuation Bund future last year.



Finally I refer back to my early August post regarding Falling Wedges (this can be seen here). I mentioned that this could be a large continuation type wedge, though it was unclear whether it could alternatively be a reversal type wedge pattern. Nothing has happened yet to solve this particular puzzle, however in the past I have seen the continuation type wedges come all the way back to test the upper wedge line, which is exactly what has happened. Though this resolves nothing, it is something which I will keep an eye on, since if this does turn out to be the continuation type wedge, it would mean that the SP500 is at least likely to revisit April's high.

Overall my prior post regarding the 'Broadening pattern' still remains valid, however it is a very large pattern formed over the past year, and as I previously mentioned it could and will possibly continue to act as a Dark Cloud hanging over the market in the much bigger picture. Short-term though this market could post a surprisingly strong rally, I also however think that last week's low is now a major pivot, should the market fail to rebound strongly from here, and makes a sustained break below last week's low, then the market could drop very sharply. - In the absence of this, a strong rally could ensue, back towards the high of early August, and should this break, then the odds will shift in my opinion to a re-test of April's high.

Friday 27 August 2010

Broadening Patterns : SP500 + World Equities Bigger Picture.

Yesterday proved to be a day of consolidation across many markets. Even then, US equities managed to surrender any gains, and finish close to the lows of the previous day. - Equities remain very much on the defensive, in light of this I thought I would take a step back from the looking at the near-term picture, and see how markets look from the distance.

The chart below is the Weekly SP500 Index with volume. I have highlighted the pattern that I consider the dominant feature of this market, it is a 'Broadening' pattern [also known by many other names - 'Expanding Triangle', 'Megaphone pattern', 'Reverse Triangle', etc.], which has formed over the past year. - This is one of the most complex and hardest type of patterns to trade. Identification of the pattern is often not immediately obvious, in many cases various other patterns and set-ups appear to be occurring, which add to the confusion by creating many cross-currents. - I think anyone who has tried to make sense of the Equity markets in recent months may identify with that. - Even when the pattern has been successfully identified, trading it is not easy, unlike many other patterns it does not present Low Risk/Reward set-ups. 

Note on the chart above, how the 'Broadening formation' also occurred at the 2007 top.

John J.Murphy in his book 'Technical Analysis of the Financial Markets' (in my opinion - the Bible of Technical Analysis) shows a diagram of an idealised Broadening Formation. (See image below).

 
Murphy goes on to say - "This situation represents a market that is out of control and unusually emotional. Because the pattern also represents an unusual amount of public participation, it most often occurs at major market tops. The expanding pattern, therefore, is usually a bearish formation" . With regard to volume during the formation of the pattern Murphy says -“The volume pattern also differs in this formation.  In other triangular patterns, volume tends to diminish as the price swings tend to grow narrower.  Just the opposite happens in the broadening formation.  The volume tends to expand with the wider price swings.”

The current pattern on the SP500 pretty much accords with Murphy's idealised description, with one exception; the lower line on the pattern is not downward sloping, but is slightly upward sloping. This is not an issue in my opinion, as it is the character of the formation that is important, it may also be that this is a feature of broadening formations on equity markets, as was the case in 2007.


Broadening Patterns (or variations of them) also appear on a a number of other US and Global equity markets over the past year.  This can be seen on the following group of charts: -
 (Click on charts to enlarge)
DOW INDUSTRIALS
DOW TRANSPORTS
NASDAQ
EUROSTOXX 50
NIKKEI
BRAZIL BOVESPA
AUSTRALIA ASX 200

As with most of my analysis, there is usually a caveat, and in this case there are two: Firstly, I see price patterns not as predictors of future price action, but rather as probability set-ups. Thus there is always a chance that a potential reversal pattern does not follow through and lead to a reversal. Secondly, as has already been mentioned, this particular price pattern is more complex than most, and patience and a close watch on the shorter-term set-ups are essential if one is going to profit from this. - Nonetheless, this is a strong Bearish set-up, and it is prevalent across a wide range of markets. - Shorter-term, as I mentioned yesterday, there may be some consolidation if Wednesday's low can hold, however this bearish pattern should continue to hang over the market like a Very Large Dark Cloud.

_________________________________________________________________________________

Finally as per the previous couple of Fridays, I will leave you with something for the weekend..... This time it is a more unusual, slightly quirky offering.  -- You will either love it or hate it.......... Me -  I love it.

This is the 'Ukulele Orchestra of Great Britain' does 'Nirvana'.






Have a good weekend :-)




Thursday 26 August 2010

EURUSD Follow up. + the Bund, and SP500 update.

EURUSD

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.    


 

Wednesday 25 August 2010

EURUSD Head + Shoulders, SP500 and AUDJPY.

Over the past few days the EURUSD FX pair has broken down through the neckline of a Head + Shoulders top pattern. The Head + Shoulders top pattern is one of the most familiar Technical Analysis patterns, though I also find that it can be one of the least reliable, possibly because it is so familiar. I do however have a few concerns with regard to this breakdown, and though I would prefer to be on the short side for now, I would also watch for the risk of a failed breakdown.

The Diagrams below show the typical type of set-ups associated with Head + Shoulder patterns. The basic set-ups are a 'Head + Shoulder Top' at the end of an uptrend, or an 'Inverted Head + Shoulder' ( 'Head + Shoulder Bottom') following a downtrend. There are also the 'Failed Head + Shoulder' patterns, these, in contrast to the traditional H+S patterns, are overlooked by many, yet are amongst the most reliable of patterns when they occur.
 

The chart below shows the EURUSD FX current 8 Hourly Chart. I have highlighted the current Head + Shoulder pattern, and an Inverted H+S pattern from May/June. One of the reasons for my concerns is the potential  Bullish Momentum Divergence which has occurred with this move lower. Note how there was no Bearish Divergence when the break of the neckline occurred on the prior inverted H+S. - It must however also be remembered that Momentum is a secondary indicator, and price direction takes priority. The EURUSD currently remains in a downtrend, and is bolstered by the break and re-test of the H+S neckline today, plus the recent flight from risk. However, I believe that unless the EURUSD takes a sharp turn lower over the next day or two, therefore overcoming this potential Bullish Divergence, then there is a decent possibility that this could morph into a 'Failed' pattern.  - (Mid-morning update. In the wake of strong German economic data, the EURUSD has shot up to 1.2710 (currently), resistance from the neckline of the H+S occurs at 1.2730/35. If the EURUSD can break over here and hold the break, then the odds move strongly towards the Failed H+S pattern, - initial target would be the top of the right shoulder in the low 1.2900s, a break over the top of the right shoulder, would strongly favour a move back to the early August high. - Note, if the EURUSD is not able to successfully break over the neckline at 1.2730/35, then the downside remains favoured.).
(Click on Chart to Enlarge)

Following the sharp moves lower on risky assets over the past 24 hours, the risk is firmly towards further losses in the SP500. I covered the main arguments for and against the SP500 in Friday's post, which can be seen by clicking here.  

Friday's post also mentioned that the AUDJPY cross, which has a good correlation with moves in US equity indices, looked technically in very poor shape, and maybe forming a Bearish 'Symmetrical Triangle' pattern within the lower half of the larger Bearish pattern. Since then this has moved sharply lower, and yesterday hit the lower side of this potential Bearish 'Symmetrical Triangle' pattern. A breakout through here would be a very Bearish development, with a measured target around 64.00 (See chart below). The breach of a the shallow rising momentum trendlines on the RSI and Momentum, is a potential warning shot that a breakdown in price may be due to occur.
 (Click on Chart to Enlarge)

Tuesday 24 August 2010

My Top Trading Books

I have just ordered a new copy of  'Market Wizards', I lent my old copy out to someone, only to forget who I lent it to, and then not had it returned. - However this has prompted me to decide to compile a list of my Favourite 'Trading/Financial Market' related books. The list includes books which I consider related to trading in any number of ways, some obvious, some less so. As well as my favourite (Top 10) books, I also have written a list of books I consider influential in some way, though for one reason or another they did not make my Top 10. -  By the way you may notice a bias towards market psychology and individual trader psychology. - Here goes:


My Top 10 List - In no particular order :

- Market Wizards (And the New Market Wizards) - Interviews with Top Traders. By Jack D. Schwager. This is the Daddy of all trader related books.  - If you have never read this, read it. If you have read it, well read it again. 

- Reminiscences of a Stock Operator. By Edwin Lefèvre. This 1923 book is a biographical account of legendary trader Jesse Livermore. I consider it a must read for anyone interested in trading. Not an easy read, partly due to its age, but with patience the reader will see why it is a classic of Trading Literature.

- The Wisdom of Crowds. - Why the many are smarter than the few. By James Surowiecki. Though not directly related to the markets, this book touches superbly on mass crowd psychology, which is so essential to understanding the way Markets and Technical Analysis works.

- Liar's Poker. By Michael Lewis. This excellent book is a tell-all of Lewis's experience as a Bond salesman at Salomon Brothers in the late 80s. It helps to understand the culture of the big banks and brokering houses in the late 1980s. This culture never died out, and was in my opinion a major factor in the great financial crash of recent years. 

- The Inner Game of Tennis. By W.Timothy Gallwey. Though pertaining to tennis and written almost forty years ago, the psychological lessons learnt from this book are so relevant and applicable to the art of trading. - Forget all those other self-improvement 'How to be a billionaire in a week' type books, take my word from it, this is a brilliant book. - It may improve your tennis too.

- Any book by Malcolm Gladwell: This is cheating really, as it covers four different books, plus none of the books are actually Market or Trading related. However, every time I read a Malcolm Gladwell book I seem to be able to take away something which I can then apply to further my understanding of market psychology,  trader psychology, or some other facet which I can then apply to better understanding myself or my own trading. For the record Gladwell's four books are; 'The Tipping Point', 'Blink', 'Outliers', 'What the Dog Saw: And Other Adventures'. - These are an enjoyable, easy to read, but nonetheless thought provoking, insightful, and extremely well written series of books.

- Who Moved My Cheese By Dr Spencer Johnson : This is one of those small self-improvement business books, which makes use of metaphor. Not everyone's cup of tea, and not related to trading but far more general. I found it incredibly useful at a time when I needed it.

- Forecasting Financial Markets, The Psychological Dynamics of Successful Investing. By Tony Plummer. A book from the late 1980s which delves into trying to understand Markets and Market analysis in relation to crowd psychology. Some chapters are a touch meandering and waffling, but overall a book which I thought was a brilliant piece of work.

- Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders. By Curtis Faith. Really enjoyed this book, written by the most successful of Richard Dennis's Turtles. What I really took away from this book, was less what he revealed about the systems, or the Turtles techniques, but far more what he wrote regarding the mindset of the successful trader.

Bringing Down the House: The Inside Story of Six MIT Students Who Took Vegas for Millions. By Ben MezrichOnce again a book with no direct links to trading, however as all traders know, gambling and trading are two different sides of the same coin. This book is an enjoyable read, and I found much there one can take away from and apply to trading.  


List of Market/Trading Related Book's I have read, which I consider influential or which I enjoyed one way or another, but did not not make my favourites list:

-  Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Application. by John J Murphy.
-  Japanese Candlestick Charting Techniques. by Steve Nison
-  The Black Swan. By Nassim Nicholas Taleb.
-  The (Mis)behaviour of Markets. By Benoit B. Mandelbrot.
-  Risk - The Science and Politics of Fear. By Dan Gardner.
-  Against the Gods - The remarkable story of Risk. By Peter L.Bernstein.
-  Breakthroughs in Technical Analysis. Edited by David Keller.
-  Just One Thing. By John Mauldin.
-  The Mind of a Trader. Alpesh B.Patel
-  Bubbles and how to Survive them. By John P.Calverley.
-  Bailout Nation. By Barry Ritholtz.


Other Books of note which I have not yet read, but plan to:

- The Crowd, a study of the popular mind. Gustave Le Bon.
- Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude. By Mark Douglas.
- Japanese Candlestick Charting Techniques, Second Edition by Steve Nison.
- The Way to Trade, by John Piper.

If anyone has any further suggestions, these would be greatly received.





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Monday 23 August 2010

SP500 holds in there. AUDCAD fx update.

The SP500 managed to just hold on within key support. On Friday I stated that the Bullish View was on life support, well it just about clung on posting a hammer candle on Friday. The SP500 front futures contract 2-hourly chart (see below) shows the SP500 has managed to hold on to some key trendline levels, and also displays some other further supportive factors. These are as follows:-

- A declining support line from the lows of the past couple of weeks (This line when extended backwards can be seen to have acted as support and resistance over the past 4 months).
- Secondly, note how the low on Friday touched the base of an Andrews Pitchfork.
- Thirdly, the low has managed to just hold above the low of the week of the breakout, from the May - July declining wedge.
- Furthermore, the low on Friday occurred at just over the 50% Fib retracement for the entire July - August rally.
- Also Momentum is supportive, the 2 hourly chart shows clear bullish divergence on both the RSI and MACD.

Though I am not at this stage advocating a bullish resumption, on a pure risk reward basis, the SP500 may be worth a buy around here, with fairly tight stops.
(Click on chart to enlarge)

Friday's call on the AUDCAD FX cross, will go down as one of my less successful calls. Looking back at it, I actually find myself guilty of the mistake of reaching a conclusion of the shorter-term picture, whilst not referring to the bigger picture. This chart below shows the weekly AUDCAD FX cross. This actually shows a far more bullish picture, with the move in the past year appearing to be a Broadening/Flag pattern, with the move over the last couple of weeks appearing to be a re-test of the breakout. I did refer to this area as potential support which had to be overcome, however in light of the pattern I have identified, this support would appear to be even stronger. Resistance remains the area just below 9500, which has capped all attempts to move higher since late Jan 2010, a sustained move above here would be extremely bullish with potential to 100 at a minimum.
(Click on chart to enlarge)

Friday 20 August 2010

SP500 update and AUDJPY , AUDCAD and EURUSD.

Yesterday's sharp sell-off in equities has gone some way towards tipping the scales in favour of the Bearish Case. - The Clash of the two wedges, which I have been banging on about for a few weeks now, is not quite over, but we seem to be close to a resolution.

Just to reiterate the case I have been making for a more bullish outcome. This argued that the large falling wedge from April through to July had broken up, and that the correction lower in the past two weeks was a retest of this breakout, if this were to hold, then would suggest a bullish resolution. - Though this did not in my opinion fit in with how I saw the bigger picture, I had put forward certain supporting analytical material, which might help bolster this case, including a comparison with the 1970s market, see Tuesday's post, and the fact that my own longer-term trend following system, (See post here) failed to confirm a bearish signal during the May-July correction. This bullish scenario is not yet dead, but is currently on major life support. Also some would argue that the ultra low rate and yield environment is supportive for equities, I actually think it reflects fears to weak growth and or deflation, which is not favourable for stocks.  (Added this afternoon, I have noticed that the NYSE Adv-Decl line for stocks failed to make a new low on yesterday's price low, similarly the S&P Adv-Decl line also failed to make a new low. This may provide a few crumbs of comfort for the bulls). 

The case for the bears, was based on the fact that the 'Rising Wedge' from the July low, was bearish, and that the larger Wedge pattern was a failed 'Bullish Falling Wedge'. - Support for this case was helped by the sharp breakdown last week from this rising wedge. It is also helped by the failure to make a higher high this month, falling just short of the June high, and the test of and failure to make a sustained break over the 100 day simple moving average. This argument is also supported by the 2009 - 2010 rally failing at the 61.8% correction of the 2007-2009 decline, and the Death Cross of the 50 and 200 day simple moving averages. Elsewhere, continued under-performance of various risky assets, weak and weakening US economic data, and in my opinion the fears driving long-term rates lower, all argue in support of the bear case.

The chart below shows some of the above points. The support zone from the breakout of the Falling Wedge is around 1070. I believe that a sustained trade below here favours a further push towards the July low at a minimum. - The index is yet to have made a close below 1070, or to have traded for any extended period below this zone, which just about keeps the bullish scenario alive. However, the odds now appear firmly stacked towards a bearish resolution. 
(Click on chart to enlarge)

The next chart shows the strong correlation of certain FX markets versus the SP500 over the past 5 years. The chart shows the SP500 top window, the AUDJPY FX cross middle window, and the EURJPY cross lower window. The EURJPY looks extremely week, whilst the AUDJPY seems to have a very close correlation with the SP500.
(Click on chart to enlarge)

AUDJPY FX

The next chart shows the Daily AUDJPY fx cross over the past couple of years. This shows a number of developments which hint at a bearish outcome. -
     - The rally through 2009 - 2010 took the shape of a Bearish Rising Wedge, the breakdown in May has been retested twice and held.
     - Since late 2009 the market has formed a Broadening pattern, this is usually a reversal pattern, though these patterns can be very complex, and the failure to break down thus far may still keep bullish hopes alive..
     - The sharp move lower in early May broke through the 100 day sma, and the cross has since remained below here, twice re-testing it.
      - The AUDJPY has consolidated since May and may be forming a Symmetrical Triangle Pattern, if this is the case, which ever side this breaks out of is likely to see a strong move. Having occurred in the lower half of the broadening pattern, and following a sharp move lower, leads me to think that this is more likely to favour a bearish break out. 
 (Click on chart to enlarge)


AUDCAD FX

The top chart is the Weekly AUDCAD cross. - This appears to be on the verge of a possible move lower. The top chart shows a Weekly 'Bearish Engulfing Candle' last week. In addition this occurred close to the 61.8% fib correction of the Nov09 - Jun 10 price drop, and at a key resistance level which held the topside of price action from Jan through to May.

The daily chart (Lower chart below) shows a number of bearish developments. The rally since early June has been in the shape of a Rising Wedge. In the past week the price has broken the base of this rising wedge. Additionally the past couple of weeks appears to have unfolded as a Head and Shoulder Top. - There is some support from the old downward sloping trend-line, which the cross broke above a couple of weeks back, failure to break back below here could be damaging for the bearish case.

Note: this weekend sees the Australian general election, so there could be some noise ahead on the Aussie crosses.
 (Click on chart to enlarge)

 (Click on chart to enlarge)


EURUSD FX

Finally the EURUSD appears to be on the verge of a breakdown. Here is the 2 Hourly Candle chart. Showing a clear Head and Shoulders pattern, with a minor neckline break this morning. If this is confirmed and holds, it has potential down to the low 1.20s.
 (Click on chart to enlarge)




 Finally something for the weekend.... Bruce does the Clash's 'London Calling' - Hyde Park, London, 2009.






Thursday 19 August 2010

US 10 YEAR YIELD with MACD - Looking for clues.

I have been of the opinion that the US 10 year yield is heading towards around 2.20% and possibly lower for some time now. It is a topic I have covered several times in the past few months. However, a look at the MACD momentum picture, has got my attention. The yield has moved sharply lower over the past few weeks, however, the MACD has been if anything moving sideways to slightly higher. This is classic 'Bullish Divergence' [ Bullish Divergence = Lower lows in price and higher lows in the MACD], divergences between the MACD and price can prove to be very effective in identifying potential reversal in price movement. The chart below shows the current situation, with the divergence clearly highlighted. - I have looked back along the US 10 year for examples of previous price action of a similar nature.  The second and third charts below show 2 previous periods of similar behaviour from 1992 and 1995. In the 1992 incidence a sharp correction took hold pretty quickly, whilst in the 1995 incidence the yield went through a meandering bottoming process involving some minor new lows, before a sharp correction took hold. I would say that of the two, the 1995 comparison probably bears a greater similarity to the current price action.





I will however qualify the above:
    - My first qualification is that I believe momentum is always a secondary indicator, whereas price movement and trend take priority, and currently this continues to head sharply
lower. However a potential warning flag should be raised. -
    - My second qualification is by posting a chart (See Top Chart below) which completely contradicts everything I have been saying above. It is a chart of the Japanese 10 year yield from 1999 - 2001.  I have highlighted a period where a similar MACD and yield divergence took place. However, in this instance the MACD divergence failed to lead to a reversal and the downward movement in yield actually accelerated (This also shows my point above regarding price trend taking priority over momentum). - What is also a little scary is that the period from 1999 to 2001 on the Japanese Yield chart bears an uncanny resemblance to the period on the US 10 Year Yield chart from late 2008 to the present. 
    - My third qualification comes from looking at the Weekly chart with MACD (See Bottom Chart below). On the two previous occurances of daily Bullish MACD divergence, highlighted above (1992 and 1995), the weekly Yield and MACD were also Bullishly diverging, however this is clearly not the case on the current weekly chart, where MACD continues to head lower with price.



In summary the situation is thus; the MACD indicator is posting a possible warning sign that a reversal or correction may be due, however the indicator can occasionally give a false signal, in those cases the price or yield will fall to a significant new low, this may be one of those occasions.

Posting contradictory analysis is perhaps not to helpful on the face of it, however I think it important to present arguments for and against. Knowing both sides I believe makes analysis of the market and final decision making more robust. My preferred analysis, is that US 10 year yield will continue to head lower, though a sharp correction is possible. A failure to post a sharp correction, or a correction cut short, could however see  yields not only head lower, but could see a move towards a collapse type situation. We live in  interesting times.

Wednesday 18 August 2010

FX update and the SP500 1970s redux revisited.

FX UPDATE

First a quick update on yesterday's FX comments: The inverted 'Head and Shoulders' pattern on the short-term chart of the EURUSD failed to follow through on the upside. It is possible, that the EURUSD is building the right shoulder of more substantial inverted Head and Shoulders pattern on the short-term charts, however, I would caution that trading rooms the world over are littered with the ghosts of traders who tried to anticipate uncompleted Head and Shoulder patterns.  ----  Looking at the USDJPY this posted a small rebound yesterday, however it needs to make something more concrete and larger if my weekly 'Piercing pattern' idea is going to have any chance of being successful. ----- Finally looking at the EURJPY:  I suggested yesterday that this may have some short-term bullish potential. However, I have posted a chart which warns what could happen if the EURJPY rebound fails to materialise, or even makes a small rebound but then fails to follow through.  The chart below shows the 8-hourly EURJPY through 2010.  The two periods of circled price action are from earlier this year and from the past week,  both display very similar set-ups. - Just to add a caveat; this time around the EURJPY has been within a long sideways consolidation phase, with the most recent down-move possibly being a correction from the top towards the base of the consolidation, whereas in the earlier period, the EURJPY was clearly trending lower.
(Click on chart to enlarge)

SP500 1970s REDUX REVISITED


A few weeks ago I posted a blog titled  '1970s redux', the original post can be seen by clicking here.  Today I am posting charts which show a more in-depth look at the two periods being compared.  - The insert below compares the weekly charts of 1967 - 1976 versus 1997 - 2010. Whilst the time frames differ, the overall behaviour of price direction and action has unfolded with a strong similarity. In fact the only period when price direction notably diverged was the period just after the 1973 peak and just before the 2007 peak, when the direction became virtual mirror images. The Blue near-vertical lines are meant to highlight similarities in key turning points, whilst the Blue meandering line (drawn rather badly) is meant to highlight the co-ordinated direction of both charts.
(Click on chart to enlarge)

The next chart takes a closer look at the price action over the past few years, with the comparable period from 1973 - 1976. Once again, the price action is taking a similar course. Further to this, in the past few months the consolidation has unfolded not unlike the consolidation in 1975. Note some other similarities: The rallies of 1975 and 2009-2010 both retraced around 60% of the preceding very sharp declines. The corrections of the late 1975 rally and the recent correction of the 2009-2010 rally, both stopped at around a Fibonacci 38.2% .- I do not tend to use this sort of analysis as my method of predicting future price moves, however I do not dismiss it either, preferring to keep it lurking in the background as a form of reference.- What it does suggest, is that if this similarity in performance were to continue, then a move to the upside would seem more likely in the coming months. Before further consolidation or corrective activity unfolds.




Before I finish, I would just like to re-iterate what I said in my original post: - I am not laying out a case for the current period being a similar economic and political climate to the 70s, particularly when it comes to inflation or interest rates. However what is similar is that the 1970s were a time of extreme economic uncertainty, and the 1974 recession was associated with a very deep bear market, not unlike the 2008 bear market.

Tuesday 17 August 2010

EURJPY Possible short-term base, and a strong divergence warnings on the weekly.

The EURJPY has broken above a sharply declining trendline, and the recent low has occurred with strong Bullish Momentum Divergence on the RSI and MACD.  - This currency pair may also be forming a Double Bottom, with potential towards the low 113s if it can break and hold over 111.11.  This could be relevant to the the Equities market, given the close correlation of the SP500 and this currency pair.  - See 4-Hourly candle chart below. The EURJPY broke down from 113.00 at the same time that the SP500 broke down from the high 1120s.

Jumping from the very short-term picture on the EURJPY to the much longer picture. The chart below is the weekly chart, this is showing very strong Bullish Divergence, I have highlighted two prior occasions where this currency pair is displaying very strong weekly Bullish Divergence, as an example of how crucial this could be. Saying that, I do not take this Divergence as a buy signal, however it does warn that when a weekly buy signal occurs, the EURJPY could make a very strong counter-move.
(Click on chart to enlarge).




EURUSD Short-term and USDJPY - Possible Weekly Reversal Candle.

The EURUSD has posted a very good recovery over the past 2 days, having bounced from within the 1.2722-1.2777 zone which I highlighted as support last week (can be seen here ). Short-term charts are showing a possible 'Inverse Head and Shoulders' pattern, with a target at just over 1.3000, the pair needs ideally to hold over 1.2850 for this to stay in play.  On the other hand, a sustained move back below 1.2820 opens up the possibility of a re-test of last week's low. - Bigger Picture, the outlook remains uncertain for now, though the 1.2720 support could be pivotal, the longer it can hold on above that level, the greater the chances of the EURUSD posting a more meaningful recovery. See chart below for EURUSD.


Last week I highlighted that there were some signs of a potential USDJPY reversal. The USDJPY managed to close the week above 86.00 despite posting a low at 84.73, its lowest level for 15 years. However this move over 86.00 has proved very short lived, with a quick move back to the low 85.00s. - Nonetheless, last week's price candle did produce a potential reversal candle, which suggests a chance of a deeper correction may be on the cards, though unless this can bounce quickly, it will remain a low possibility.

- The weekly candle produced was a bullish 'Piercing Line' candle. However a decent close this week would be needed to confirm this. A failure to produce a higher weekly close, or a move back below 85.12 (76.4% retrace and this morning's low), would probably mean this was a failed signal.  The insert below describes a 'Piercing Line' candle whilst the upper weekly chart below shows the occasions where 'Piercing Lines' occurred on the USDJPY over the past 5 years. Note I have differentiated between Piercing Lines which hit a new low, and those which did not produce a new low. - Piercing lines which did not hit a new low tended to produce weaker corrections. - I have also included 'Bullish Engulfing' candles, which are the bigger and stronger brother of 'Piercing Lines'. - One reservation regarding the candles involved in last week's Piercing Line, is that they were relatively small compared to all the other examples, which may reduce the effectiveness of the signal.
  (Click on chart below to enlarge)
The next chart is a close up of the above chart for 2010.


Monday 16 August 2010

The SP500 game continues, PIIGS spreads widen. plus a comment on Japan 10 Year yield.

In the great SP500 game, the question for me is whose side will I join, the Bulls or the Bears? - Currently, I am not committed, though I have been ever so slightly leaning towards the bulls; favouring this recent sell-off as a deep correction, though my conviction in that is very unsure, and growing more unsure by the day. - Lately the failure to hold even the smallest rebound is concerning. - I do not have line in the sand for this at the moment, though in my head I do consider the 1050 level as crucial.

A number of other markets are flashing warning signs, and the rush to the exits from risk is once again speeding up. - I have posted some charts below, which I think are worth looking at and watching. - I am going to start with the Euro Sovereign Debt Issue; fears regarding the PIIGS countries had eased over the early part of the summer, but the past couple of weeks have seen these fears grow again. The charts below, show the spread between each PIIGS country 10 year Government Bond Yield and the benchmark German 10 year Government Bond yield.




The next set of charts are some key FX markets, which have been good guides during the Risk-on v Risk-off battles of recent months and years. The top chart shows the AUDJPY, this currency pair has correlated will with moves in the SP500 in times. The second chart is the EURJPY currency pair, and the lower chart is the EURUSD. All three charts show the flight from risk this past week, though in my view they do not yet show a strong pointer as to whether this is merely a correction, or the start of something bigger. I would like however to point out the MACD on the AUDJPY and the EURJPY, the MACD appears appears to be rolling over at the zero line on both these charts, which is one development which may reflect bearish potential. Note: I do not consider this as a leading technical indicator, but something to be watched.- I have highlighted the previous time this occurred on the EURJPY at the end of April. 


The next set of charts show 10 year government bond yields for the Japan, Germany and the US. These are traditional safe havens from risk and key indicators of future growth prospects and inflation. All three yield levels have dropped like a stone in recent weeks. Japanese Government Bond yields are currently yielding 0.95%, the last time they were this low was in 2003, when they were rebounding from a low of 0.38% yield. These charts to me are very worrying, they reflect a strong flight from risk.


On the subject of Japanese Government Bonds. The yield on these is less than 1 per cent. - That is to say that you can own a chunk of government debt from a country which has a Debt to GDP ratio of close to 200%  - ( yep TWO HUNDRED PER CENT) - and get a return of 0.95% per annum for the next 10 years.  - Just for the record the Greek debt to GDP ratio is around 130% (about 2/3rds of Japans), and it is being dealt with and underwritten by the ECB.  - I am not advocating buying Greek debt, and I know there are many many reasons why Japan debt is looked upon so favourably,,,, but I am sorry,,, is that not a bubble just waiting to be popped??. --- and therein, in my opinion, is one of the reasons why smart investors the world over wish to own Gold.... --

BTW --- It is quite possible that the low yield environment may actually provide a prop for the equity markets, or they may be reflecting such dire economic conditions, that equity market eventually tumble too. I guess the next couple of weeks will provide further little clues.

Friday 13 August 2010

SP500 and USDJPY updates

I am still no clearer to having a strong feeling with regard to the near-term direction of the SP500. I always preferred a breakdown from the rising wedge of the past month, however, it was how deep the breakdown would go, and how it performs post-breakdown, which for me was likely to be the key to subsequent direction. - The breakdown has actually been very deep, however thus far it still falls within the category of a re-test of the large 'Falling Wedge' breakout. Price action in the next few days is going to be crucial. - If 1050 gives way, (allowing for a possible spike), then the game is up for the bulls. If however, it can hold 1050-1080, and recover back over 1110, then the odds shift back in favour of the bulls, with a clear break over 1131 suggesting further highs ahead.

The following charts show one reason why I consider a break of 1050 as significant. The top chart shows the 2007/2008 SP500 'Top' preceded by the strong four year market rally. This rally was well supported by the 68 week Simple Moving Average (SMA). - The 2007/2008 top formed as a 'Falling Wedge' pattern, but the breakout of this wedge was cut short at this 68 week Simple Moving Average (SMA), which had turned from support to resistance.  - The lower chart shows a very similar pattern of behaviour with regard to the SP500 2009/2010, albeit with the 100 day SMA instead of the 68 week SMA. - The strong 2009 - 2010 rally, was supported (roughly) by the 100 day SMA, this has been followed by the recent Falling Wedge. However the breakout of this pattern has been cut short at the 100 day SMA, which has turned from support to resistance.





A quick look at the recent price action shows yesterday was a possible pivotal candle, this can be seen on the following chart. - The candle was a small 'Hammer' like candle with a gap down from the previous day's strong bearish candle. I do not think a strong rebound, given the strength of Wednesday's bear candle is likely near-term, however if yesterday's low can hold and the market pulls back slightly over the next few days, then it sets up some interesting possibilities. On the other hand if the gap yesterday remains open and the market breaks and holds through yesterdays's low, then dark clouds are gathering.

Finally a quick look at the USDJPY, which I touched on yesterday. - The USDJPY did manage to produce a strong pullback yesterday following the previous day's bullish hammer, this has created a 'Morning Star' type pattern, which is potentially a strong reversal pattern. - The chart below is the 4-Hourly candle chart of the USDJPY, the 'Falling Wedge' pattern can be seen clearly on this, I have also pointed out a series of lower highs from late July. - If this is going to reverse, then this series of lower highs has to be broken, and then a break and hold over the top of the Falling Wedge at around 86.60 must occur. Bigger picture, the trend remains lower, however there are some signs of a potential short-term reversal. Though I will add that a reversal would be unlikely to be maintained if equities get hit and a flight from risk occurs.- Even then, there is no rule that says the JPY cannot weaken as stocks move lower, particularly if, as may be happening, the BOJ are starting to jawbone it lower, or considering intervention.



And Finally..................


Something for the weekend. - I love this, it is Slash playing the Godfather theme...  Have a great weekend.










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