AUDUSD Is the top in? or new highs to come??

Last week (16th May) I posted a blog that posited that a rare big picture pattern on the AUDUSD was possibly nearing completion. This was based on a highly speculative view based off a somewhat mysterious and rare pattern, called a '3 peaks and a Domed House'. The original blog can be seen on the following link, together with a spectacular example of this pattern at work on the Phili Bank Index .http://hometraderuk.blogspot.com/2011/05/aud-highly-speculative-view.html.

If I have correctly identified this pattern, and if it follows through and completes as per the ideal pattern, this would suggest that the ultimate consequences for AUDUSD (and by association all risk) would be dire, with a return quite possibly to the lows of 2008/9.

If on the other hand I am guilty of fitting the pattern onto the market (and it would not be the first time), then the above is nothing more than complete nonsense.

Returning to the pattern;  my original blog suggested that either the high was in and now lower levels lie ahead, or we still have one more high to come. Nothing has yet changed in that view, I think it remains in the balance, though my hunch slightly leans towards the high being in, however if not then possibly a high will occur at some point during June/July.

The shorter term picture on the AUDUSD shows two conflicting patterns on the chart, which highlight this dichotomy. These can be seen on the 2 charts below. The top chart is the bearish option, with a 'Head and Shoulder' type pattern. The lower chart is the bullish option, with a falling wedge pattern highlighted. I believe this time next week we will have a clearer picture.

One thing is for certain,,, over the next couple of months all will be revealed.




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EURUSD - Interesting Comparison.

The charts below show the EURUSD daily in Q4 last year (Top chart). - The lower chart shows the Current EURUSD 8 Hourly chart. The failed Triangle breakout in December 09, and today's strong break up out of the triangle, look strikingly similar.  - Am I guilty of pattern hunting? who knows? indeed it may be too early to say we are in for a similar outcome, however this breakout has occurred right within the 1.3100/1.3150 window I suggested as a target zone for the EURUSD a few weeks back, the chart used back then can be seen here. - Significantly it is just shy of the 38.2% retracement of the entire move lower since the December top. Whether this is a major top or an interim top, this level should provide tough resistance. - Note: The Nov-Dec 09 top was also strong resistance in the form of 78.2% Fib resistance of its entire prior 12-month rally.

A quick note on the SP500. This afternoon's price action has seen a strong rejection of the 200 day moving average at 1114, and the significant 50% retracement at 1115. The correction higher over the past few weeks, appears to have unfolded as a Wedge shape pattern, this is potentially a bearish development. On the other hand the large correction lower since late April also unfolded as a potential Bullish wedge pattern. - This pits these two opposing forces against each other over the next few days. - I believe the battle ground may occur around 1065-1080, with the outcome possibly being decisive for near-term direction.

Further to this, the next chart shows the above opposing wedge patterns in the bigger picture. I have also highlighted a similar set-up, which occurred in 2007. It may be that this 2007 price behaviour is repeating itself. I will keep an eye on this to see how this evolves, as this may have 2 major connotations for the much bigger picture. - Firstly that if the Bull/Bear battleground I have highlighted at 1065/80 can hold, there may be  another approximate 100 point advance. However, if that occurs, then it is possible that this may then set up the S&P for a much bigger fall later following the termination of that rally. Furthermore, that fall could be the precursor to something far more serious as we enter the fall (no pun intended - seriously).
(CLICK ON CHART TO ENLARGE)

SP500 update and Eurostoxx 50

The SP500 continued its recent bullish run and made a clear break Friday over the declining trendline that marked the top of a Falling Wedge pattern. Whilst I now favour gains in the weeks ahead, it is crucial that support at 1070-1100 holds. I remain slightly cautious, given the less than friendly fundamental backdrop, however it is often said that 'Markets climb a wall of fear'. - IF the SP500 can hold the crucial 1070-1100 area, then I fancy a test of the 100 day sma around 1128, which will also coincide closely with the June 1131 high. This 1128/1131 zone may prove to be a key pivot for the next couple of months...

I have also had a look at the Eurostoxx 50 chart. This is a cap weighted Index of 50 blue-chip stocks from within the Euro area. The top chart shows the past 2 years price action, I have also posted (bottom) a chart showing the past 20 years [to get some perspective]: - The price action shows a consolidation phase for almost the past year, which appears to have unfolded as a large Broadening (Expanding) Triangle or 'Megaphone pattern'.  Recent price action has seen a messy consolidation in the lower half of this pattern. This index has however now approached critical resistance, as highlighted by the 100 day sma, and the declining top line of a symmetrical triangle.- I believe a solid break over this resistance would favour a run up to the highs from Dec09/Apr10, on the contrary a failure to clear this resistance would not be looked upon too well and should see a drift or plunge back towards the lows of the past couple of months.
(CLICK ON CHARTS TO ENLARGE.)

S+P on verge of Breakout + German 10 Year Yield

In a post a few weeks back I alluded to the possiblity of a failed Head and Shoulder pattern in a similar set-up to a failed Head and Shoulder pattern in Mid 2009. (That posting can be seen here). At the time my view was leaning heavily bearish, since then however this Bullish 'Failed Head & Shoulder' pattern has become a much stronger possibility. In addtion this pattern has morphed into a Bullish Wedge Pattern, which though it has not yet broken out, is pushing very close to resistance (a move over (and ideally a close over) 1100, will break the cycle of Lower Highs since late April). The charts below show the mid 2009 set-up and the current set-up. - Note: Failed Head & Shoulder patterns are amongst the most reliable of patterns, with a break above the top of the Right Shoulder (1131) being the potential breakout point. - Also noteworthy is the momentum set-ups for RSI and MACD both similar on both charts. 

Turning to German 10 Year yields, these have been central to the recent crisis in European Sovereign Debt, and by implication closely linked to the sell-off since late April in US stocks. German 10 Year yields were a safe-haven throughout this crisis, as fears regarding the credit worthyness of the PIIGS increased, and investors sought sanctuary in Bunds (German 10 Year Yields) and anything but the Euro. I have over the past couple of weeks made reference to how there seems to be a basing in the German 10 Year yield occurring, and how this is shaping up to look very similar, albeit smaller, than the basing in early 2009. This is continuing, and looks like it may be be starting to breakout to the upside in yield terms (downside in Bund futures). The top chart below shows the German 10 Year Yield over the past few years, with the 2 periods I have referenced highlighted. Whilst fears persist regarding the on-going weakness of the US economy, the fears regarding the Euro Sov Debt Crisis definately appear to be waning, particularly with increasing signs that the German economy, 'the engine room of Europe', faring better. This can be seen in the lower set of charts, which show German IFO Business Climate (Which was released this morning at a very strong 106.2) and German GDP (up to Q2). -This may also continue to favour the EUR over the USD in comng months. (Note : Click on charts to enlarge).

SP Index , EURUSD, and German 10 Year Yield.

The advance in US equities continued apace yesterday, the SP500 index has now had 6 solid days of gains. However, it is now running against some key levels which may check its advance in the short-term, and could even be pivotal in the bigger picture. These can be seen in the chart below: The top of the wedge and the 50 day SMA both coincided with last night's close around 1095/96, additionally short-term momentum studies (60 & 30 minute) are showing some minor divergence up here.  Also the round number 1100 possibly adds some weight to this, particularly with the 76.4%  SP Sep 10 future retracement at 1099.5.

Looking further ahead; yesterday I discussed the possibility of the NYSE advance-decline line signalling further bullish move in US equities (Click here to see this post). Today I present a chart showing the SP500 together with its advance-decline line. The SP500 advance-decline line has broken above its the upper boundary of its declining channel, which may be a bullish signal, however it would need a clear break and close over the equivalent price line to add any weight to this. I have also re-emphasised the similarity of the  price pattern over recent months with the a smaller price pattern last May - July. It is noteworthy that the Adv-Dec line for these 2 patterns are also moving in a similar fashion.

Moving on to the EURUSD (Click on chart below to enlarge), over the past couple of days  the downtrend line from the December's high has been breached, this adds to the possibility of a deeper retrace towards a cluster of targets near 1.3100. However arguing against this is considerable resistance in the form of the neckline of the Multi-year Head & Shoulders pattern (See lower chart). The neckline of this pattern occurs in the 1.2720/1.2750 zone, which continues to cap this for now. - Note a break of the neckline would not necessarily kill this Head & Shoulders pattern,  it would need to a major corrective move over many weeks before its potential downside threat is lessened .

Finally a look at the German 10 year yield. The top chart below shows another pattern similarity, again on different scales. This suggests growing possibility of a turn higher (lower in the Bund future) in yields possibly towards 2.86%. This would fit in with a scenario in these highly correlated risk-on/risk-off markets of higher stocks and a higher EURUSD. This move higher is supported by Bullish momentum divergence on the weekly German 10 Year yield chart (See Lower Chart). Further to this, I will add that the break out of the base in Mar 2009 was co-incidental to the low in the stocks, however also note how tortured price action was before finally squeezing higher. If this repeats it may go through a similar process, before finally breaking higher.

The next few days will be critical. With key earnings reports and options expiry on equities coming up, and some key pivotal level as mentioned, I would not be surprised if we were to see some corrective activity over the next few days. How far this goes will be key as to whether the next few weeks turn more bullish, or whether my prior bearish scenarios, which I have termed as currently on life-support, manages to make a return.  

Goodbye Bear - Hello Bull ??? !!! ???

My stop on my Bearish view of equities in recent weeks has been 1075 on the S+P500, this does not mean it is dead, however it on at best life support. In the meantime I have started to explore the bullish side of the case. - Last week I alluded to the bounce and the possibility of a larger bullish move (Click here to see) , at the time I saw this as stating the bullish case, but still favoured the downside. I realise we may be in a headfake, after all Mr Market likes to make it as hard a possible to make money out of him, and a headfake would certainly fit with that.

Further to the above, something worried me when I looked at my analysis showing various Equity markets last week. in the post titled 'Equity Topping Patterns - Everywhere' (quite ironic really). I had tried to justify what I thought were Head & Shoulder confirming patterns in various Global Equity Markets. However I now think I was guilty of trying to make non-confirming patterns fit as confirming patterns. As I look at the various overseas markets again, I believe that most of them may have actually been taking the form of a falling Wedge pattern, these are actually Bullish continuation patterns. Furthermore on the next day, when I looked at the possible bullish case for US stocks, which I refered to above, I stated this may also be forming a bullish wedge. (FWIW I also hate downward sloping necklines anyway on Head & Shoulder patterns such as the NYSE and SP500 have).

In light of this I have decided to look at the Advance-Decline line on the NYSE. I have posted 2 charts below. The top chart is the NYSE cummulative Advance-Decline line, the second chart is the NYSE Composite Index for the matching period. (CLICK ON CHARTS TO SEE ENLARGED)

The ultimate level of the Advance-Decline line is not an issue for me, though such a huge divergence between new all-time highs on one index and not the other is slightly baffling. - No the issue for me is what happens at corrections in the Advance-Decline line. If one looks at the above an upward sloping correction, it is usually consistent with a bear market, and a downward sloping correction is usually consistent with bull markets. Obviously at the turn of a trend this is going to be crucial since there will be conflicting signals. The recent move lower in the NYSE advance-decline line appears to me now to be a correction. In fact one can go further in saying that it appears similar but the opposite to the correction at the bottom of the downtrend in late 08/early 09. - This would be interesting, since if it did unfold as such, it would imply ; a) a test of the recent highs from April and quite possibly a break though there b) That this past couple of months, may actually be part of a larger topping process which has a few more months left to go...

Just to re-iterate. I am now neutral. My bearish analysis of recent weeks has served me well, however it may soon be past its 'sell-by' date. I am looking at a potential bullish scenario. I will elaborate on this in further posts. - If my analysis does prove to be correct, then this may have major implications for the 'Risk-on' v 'Risk-off' trade across varying markets.

S+P - 'The bounce' and AUDJPY

My post yesterday assumed the bounce I had looked for the prior day had failed, and whilst I stated that the conditions for the bounce were still in place, I considered the possibilities of this bounce occurring remote. - Well yesterday the bounce occurred, leaving me totally bitch-slapped.

Where does this leave my bigger picture analysis and my current bearish bias? As I stated on Tuesday a bounce to around 1060/65, (so far it has just exceeded this at 1067.8) would fit in with the bearish scenarios I had painted. However, in my analysis and my trading, I always like to look at the alternative view, in fact I consider this essential. The chart below presents the S&P futures for the past 16 months. I have emphasised on this chart that we may have a Bullish Falling Wedge Continuation pattern. Often these patterns start off looking like a reversal 'Head & Shoulders' pattern, however the 'Head & Shoulders' fails to follow through after breaking the neckline and the pattern morphs into a Bullish Continuation Wedge. An earlier example of just this can be seen on the same chart during the period from May through to July last year. -- Interestingly this would also imply that the we have a failed 'Head & Shoulders' pattern, a signal which is far more reliable in a predictive and risk/reward sense than an actual 'Head & Shoulders' pattern. The trigger for this would be a move above the top of the Right Shoulder, (Approx 1131 for the S+P500 Index). Note, we also have potential Bullish Divergence on both the RSI and MACD. Note: A break over 1100 would favour the falling wedge pattern.
Personally I still favour the Bearish scenario though I am certainly amenable and open to the above set of circumstances. I will outline why I still favour the bearish scenario with the use of some more charts:

The following charts show the Dow Jones in 1961/62, 1986/87, 2003-2008(weekly) and the current pattern. I think all 4 charts show a similarity in the way they have formed. The grey drop-down columns show similar key inflection points during the set-ups. If the current set-up continues to evolve along similar lines to the other 3 periods, then the odds would favour a sharp bearish move ahead. Just below this is a chart showing the Dow Jones Industrials, 1950 - 2010 on a Log Scale. - This chart shows where each of the 4 charts appears in the bigger scheme of things.
A close look at the charts will show that I have circled on each chart the crucial period of crossing the neckline, in all three prior cases there was hesitation around this time, with some to-ing and fro-ing at this crucial juncture. Below I have posted more charts which look more closely into the crucial phase in each chart at the equivalent period to where the US equity indices are now. - These are highlighted below using the S&P rather than the DOW. (Please bear with me on the ordering of my charts, I had one or two few many beers last night and my head is a bit fuzzy).

What can be clearly seen from the above charts is that in all three prior formations (1962,1987,2008), as well as struggling to clear the key Head & Shoulder Neckline, rather like the earlier chart I posted, they also had potential bullish scenarios in place in the form of potential Bullish Continuation Wedges together with Bullish Divergences on momentum. -- Hence there is a very strong similarity between these set-ups and the current set-up. Of course this time it could be different, after all we are only talking 3 previous data points, and there is no law which says this time it can not be different.

However, I one final point, which slightly throws my main premise into doubt, depending how one looks at it. Referring back to the above charts showing the Dow Industrials on a Log scale back to 1950, I have highlighted with blue boxes where each of my four Dow Charts sits in the greater scheme of things. The three prior patterns which I referred to (1962, 1987 & 2008) started at all-time highs, furthermore after the sharp drops from those highs the next leg of a bull market occurred which took the index to subsequent new all-time highs. On this occasion we have not started at an all-time high, nor has the last drop continued to a new index high. This is just an observation, and I personally do not favour this last argument, however I thought it was worth pointing out.

Summing up, the next few days and week are probably crucial if my current bearish bias is going to be maintained. Above 1075, I think I will have strong doubts, over 1100 I will start shifting to a bullish bias, above 1131 that bullish bias will have a strong conviction...However, if this current move up can stall around current levels, and start to decline through next week, then I think the ultra bearish scenario of a sharp move en-route towards last March's lows becomes a much stronger possibility.

One further point, last week I posted about the strong synchronisation between equities and the AUDJPY, plus the AUDJPY Death-Cross and the AUDJPY bear flag. (The post can be seen here). Today the cross rebounded to the Flag base line and has since rejected this level (See chart below). This was a slightly deeper move than I anticipated, however as long as this caps the cross then this would eventually favour a resumption of a move lower, with a break 71.90 probably being the trigger for a much deeper move.