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.

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?