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.