EURUSD, AUDCAD and SP500.

Yesterday proved to be a damp squib in the end as markets limped in to the month end. The consolidation of the past few days continues, interestingly the EURUSD may be pointing the way towards to a positive resolution for markets, though this remains finely balanced bigger picture, shorter picture, it looks like it is reaching a climax over the next couple of days.

EURUSD

I have been banging on for a few days now that we may have a Failed Head + Shoulders pattern, in particular a comparison between the short-term chart on the EURUSD and a similar pattern over the much longer period from 2002 to 2006 is interesting. I have posted both charts below: With the current 4 hourly set-up top chart and the 2002-2006 set-up lower chart.

 (Click on charts below to enlarge)

 

The major similarities are as follows:

• Clearly Defined Head + Shoulders Patterns. - Longer term chart saw a Failed Breakdown in late 2005, the current chart appears to be having a similar breakdown failure.
• Both breakdown low points saw Bullish Price v Momentum Divergence.
• The Right side of the Head + Shoulders Pattern evolved as a Falling wedge Pattern. The break up was re-tested in early 2006 on longer chart, and similarly tested past couple of days,
• The failed breakdown on the EURUSD in 2005/2006 evolved as an inverted Head + Shoulder pattern, this has also been occurring this time around. 

If this follows through as per 2006, this could initially see a push to at least the low 1.3000s, (and it seems to be happening this morning, as I write the EURUSD has surged from 1.2740 to 1.2770. ) this could have implications for other risk markets.

AUDCAD

Over the past couple of weeks I have touched on the AUDCAD FX cross, my last posting regarding this pair can be seen here. Over the past week, this pair has made a further push higher, and in the past 24 hours this has made a solid push through the big resistance which has capped all year. - See chart below. - As can be seen on the chart, there was a large flag pattern on this fx pair created November through July, this has broken up, and re-tested the break. - The recent break up suggests a move higher to almost parity from the current 0.9575 may be on the cards in the next few months, with the recent broken resistance just below 0.9500 likely to become key support.

(Click on chart below to enlarge)

SP500

I have covered the SP500 over the past couple of days, and whilst I favour a bottoming process may be occurring, this is not yet clear and would be happening in the face of a large overhead Bearish pattern. However, if the bullish resolution were to continue on the above FX charts, this could spill over into equities. Firstly, a bullish move on the EURUSD would reflect a move away from risk aversion, secondly there has been quite a strong link between direction of EURUSD and AUDCAD and the SP500 in the period since the financial crisis really took hold in 2008. -- This link has not been constant, and at times the direction of these markets have diverged, however it is during these periods of divergence that these currency pairs appear to have exerted their greater influence on the direction of US equities. (See the chart below). I am aware that there are dangers in drawing conclusions from just a couple of data points, hence I am not placing strong reliance on this chart, however I think it is useful to keep this as a possible indicator within the overall backdrop that completes the much bigger picture.

 (Click on chart below to Enlarge) 

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)

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.