Is the Euro close to breaking out?

The Euro has traded in a wide sideways band for up to four months now. Trying to predict direction has been somewhat difficult in the recent turmoil of the past few months. I am sensing a possibility that we may be close to breaking out on the upside. - The next two charts will highlight my reasoning. - It is worth viewing this in the context of my previous couple of postings .

The first chart shows EURUSD weekly candles.

The second chart shows the EURUSD with a possible 'Cup & Handle' continuation pattern formed over recent weeks. - I am a touch cautious on the validity of this pattern for reasons stated on the chart, but I still feel that it should be given some consideration.

Below is a pictorial representation of an idealized 'Cup and Handle' pattern, or click on this link for further description.:

UPDATE to SP500 comment

Further to the weekend comment on the SP500. Yesterday the futures rebounded exactly off the 61.8% retrace. - If it turns out that the Cup and Handle pattern I have identified is valid, then often the handle sees a retrace of  1/2 - 2/3rds the height of the handle, with 61.8% being the ideal stopping point. Of course given the volatility and the fact that 61.8% is often a support zone, this does not confirm anything yet, but it does keep the bullish idea alive.

S&P500 Comment. - 'They don't ring bells at tops'.

'They don't ring bells at tops' is an old market adage. However, there are sometime pointers to tops or temporary tops. US equities may just have produced some pointers.

The first chart below is the weekly S+P500. Note how yesterday we hit the key Fibonacci 76.4% retracement. Also notice how momentum ( RSI and MACD) have failed thus far to confirm the recent high. This is at this stage a warning flag, rather than a clear sign of a correction, however warning flags are usually the best one ever gets, or as the saying goes - well I'm not going to repeat it, just see the headline.

The second chart is the Daily Candle chart, this too has some interesting developments - See below:

• Firstly the 3 trading days, prior to yesterday saw a rally with progressively smaller candles. This formed a pattern called an 'Advance Block'.
• Yesterday 'Bin Laden' day, may have been one of those euphoric 'blow-off' type days, and interestingly left a 'shooting-star' candle in its wake.

Neither of these signals alone are usually major reversal signal, however combined and occurring at a major Fib retracement, they may well provide a stronger signal than normal.

One final note: the pattern formed over the past 3 months, appeared to be a 'Cup and Handle' Pattern. Readers may have noted that I am very fond of this 'not-so-well-known' pattern. However, I have remained highly cautious of this particular pattern on the SP500, mainly because of the sharp 'V' shape of the cup. The literature on 'Cup and Handle' patterns warns one to be cautious of 'V' shape cups.

Also for the record, I have personally been thinking that the SP500 may start to struggle around 1370/80, thus it will be interesting to see how this unfolds from here. If a reversal does unfold from here, I am guessing it may initially move back towards 1330/40ish. In the bigger picture 1330/40 may prove to be a pivotal area. On the other hand a meaningful move beyond 1370 could mean significant further highs to come.

GBPUSD seems to be heading for 1.7000/1,7200

Last week GBPUSD finally broke above the congestion area which has been constraining it over recent weeks. It is my opinion that so long as it can now hold over 1.6300 (with the usual caveats of short term dips below), then I believe it is headed for a move to the key pivotal 1.7000/1.7200 area.

The monthly chart below shoes how pivotal the1.70/1.72 area has proved over the past 15 years: Areas such as these often have an almost magnetic affect.

The weekly picture backs up this view (see below).

• GBPUSD broke above a strong declining resistance line in early Feb and has since been battling to consolidate that break, whilst at the same time mostly remaining above the line, which has now switched to support.
• In addition the pattern formed over the past 6 months appears to be a 'Cup and Handle' type pattern, with the past two months forming the handle to this pattern. This suggest that the breakout of the past couple of weeks may be meaningful, with 1.6300 now switching to significant support, and upside targets in the low 1.7000s. 

Thus as long as 1.6300 can hold (minor and short-lived breaks excluded), then I think the odds favour further upside in coming weeks.

Cable(GBPUSD) is this a major breakout ?

- Shorter-term GBPUSD possibly heading for move to 1.7000/1.7150 in next few weeks, if current break up holds.
- Longer-term GBPUSD hugely pivotal at 1.7000/1.7150. I currently believe this area will cap it, however a clear break above could see move to 1.9000s through 2011 and 2012.

 The long-term GBPUSD FX (Cable to us old timers) chart appears to have made a significant break up. Recent weeks have seen the pair swinging about wildly as it tried to confirm and test what appears to be a major reversal triangle break out. The push higher of the past 2 days appears to me to confirm that we may have a valid triangle breakout here. In addition to this, the internal pattern, formed over the past 2 years appears to be another good old 'Cup and Handle' pattern.  - There is even the possibility of a major 'Double-Bottom' pattern, which would be confirmed over 1.7000. - The most significant feature however of this for me, is the breaking of the sequence of falling 'Significant Peaks' since the high in Nov 2007. All these signs point towards this being a major breakout of a significant nature. - (See Upper chart)

The big level is going to be around 1.7000/1.7150. The second chart shows how pivotal this level has been over the past 20 years. There has been 8 major approaches at this level from both below and above. The first being the month after the UK's exit from the ERM in 1992 (I remember that well). On that occasion, GBPUSD spent a month dancing with the 1.7000 level, before spectacularly breaking lower through it.  Since then this level has on 5 occasions acted as key resistance/support leading to significant retraces,and on 2 occasions it has broken through spectacularly. (Though it is worth noting that both occasions of spectacular breakthroughs on the longer-term charts, saw the initial approaches on daily charts rejected for 4 and 2 weeks respectively). - Also worth noting is that the 200 weeks Simple Moving Average is currently at 1.7096. The 200 week sma has also often acted in a pivotal nature over the past 20 years (See third chart below). The confluence of this with the pivotal zone at 1.7000/1.7150 only increases the significance of this area: On the one hand I believe it may act as a magnet in coming weeks, on the other hand it will act as a major hurdle and possibly a barrier if it gets there.

 

Is this the major bottom that the patterns above possibly suggest?

If I am honest, and counter to what I have written above, I don't think it is, or rather I think the balance of probability is against it. -  I believe 1.7000/1.7150 is likely to check the advance (though can not exclude a stop induced spike). This area is such a key level, that I doubt GBPUSD will have the head of steam needed to clear it. - I also have one or two reservations about the patterns I have described above: I prefer major reversal patterns to be contextually small relative to the major moves preceding them. If one looks at the major 'Head and Shoulder' pattern at the top from 2006 - 2008, this was relatively small compared to the move before it. Whereas the bottoming patterns I have identified are huge in time and price relative to the prior move. Further, I am a touch dubious of the 'Cup and Handle' pattern due to its clear 'V' shaped pattern. - Nonetheless, the break of the 'Significant Peaks' is to me hugely important, though it does point to the downtrend being over (for now at least), it does not signify a definite change to a longer-term uptrend, rather it suggests either a move to an uptrend or a move to a large longer-term sideways range.

In truth, time will tell, the patterns suggest a real possibility of a major advance, my feeling is that 1.7000/1.7150 may be a hurdle too far. - However, if GBPUSD can make a clear break through that pivotal level, then there is a real possibility that GBPUSD is looking for a continued move into the 1.9000s.

Shorter-term, barring a major new shock, or a real surprise budget, I believe the odds of a continued move towards 1.7000 over the next few/several weeks is strong, caveat - staying above the 1.6000 area.

One final point: At my last bank we called 'GBPUSD' (and 'Short Sterling' for that matter) 'The Widowmaker'. There was a reason for that.... I'l leave you on that note.....

EURUSD - Island of calm in the eye of a storm.....

It almost seems rude to even look at the EURUSD with so much madness elsewhere. Ironically enough my usual focus over the years have been Fixed Income and Equities, and yet whilst those have been trading with huge ranges, I find myself in the relatively (for once) calm world of EURUSD.  I'll keep it short and sweet, it seems the range is 1.3850 - 1.4050, a meaningful step outside that may provide the next major directional clue, and possibly a major directional move will ensue after that.  - My idea with the Cup & Handles fractals stays alive, although yesterday's afternoon price action has erased the 30 minute element.

Before I go, a quick look at USDJPY last night : - Something you don't see a lot.

EURUSD update

This is interesting. It appears to be some sort of fractal pattern with Cup & Handles all the way down from weekly (Which is not really a true C&H pattern) in reducing time levels to 30 minutes. ----  It suggests to me that Bulls and Bears are lined up strongly on either side. Bears are comfortably sitting with overhead resistance behind them in the low 1.4000s. Bulls on the other hand have been growing stronger on each pullback.

A break, and a strong one at that, may be close. Readers of my recent posts will have been aware that I favour the upside, however, failure to break up soon will probably lead to rapid liquidation by bulls, with a  move lower toward 1.3450/1.36 before any significant support occurs. .

EURUSD - UPDATED VIEW

The tragic events of recent days, have led to some incredible volatile markets (this always seem so trivial looking at this in terms of markets when so many have and are suffering, I only hope matters do not deteriorate and the suffering is lessened as much as possible). The EURUSD continues to gyrate wildly just below key resistance in the low 1.4000s.

With regard to my recent calls, any number of options remain open, I have highlighted these on the chart below. Currently I see four potential scenarios at present. I have listed these below in order of what I currently consider most likely.

1) A 'Cup and Handle' pattern has formed over the past months. This pattern has the potential to produce a swift move higher in the EURUSD towards the high 1.4000s. - This view I consider the most likely currently (Note : the little caveat on account of markets being mad right now).

2) A new addition to my recent views, is that we are still forming of have formed the 'Cup' of a possible larger 'Cup and Handle' pattern. - One argument in favour of this is how much lower the right lip of the cup is than the left on the above scenario. ( Note: It is not unusual for the the right-lip to be below, or sometimes even above, the left lip of the cup).   If the Cup is still forming or nearly formed, then it is quite possible we get a dip to around 1.34/1.36, over the next month or so. (The recent bearish divergence on momentum suggests this is possible.)

3) Neither of the above, however as the strong downward pressure from the resistance at 1.4050, and the possible resistance line at around 1.4250 combined with the prior high around 1.4280, battles against the recent strong upward trend, a wide range forms with no real direction. I do not favour this scenario, but can see it possibly unfolding, eventually most likely followed by a clear upward break once the overbought diverging momentum has unwound.

4)  None of the above, but strong downward pressure from the 2008 - present down-trend caps this Euro at either 1.4050 or 1.4250, and sends the market lower,eventually leading to much lower levels. I think this is the least favoured scenario, but not out of the question. (Note: It could occur after a break higher which fails to hold)

With regard to the past couple of day's price action. On the face of it, these support the bullish argument; two sharp moves lower but in both cases the moves lower rejected (at least as I write).

However, the diverging daily bearish momentum I mentioned in a recent posts still overhangs this, and the potential rising wedge pattern, now appearing to have formed, both warrant caution, particularly with the overhanging downtrend resistance.  

For what its worth, my own hunch is that this is very close to take-off. The bears failed to win-out last week, and over the past two days twice they failed to win out. If this can make a sustained break through 1.4050 then I fancy a strong run up to the high 1.4000s over the next 4 - 6 weeks. On the other hand a break back below 1.3850 (for more than a few hours) and particularly 1.3800 would once again throw this view into doubt.

EURUSD - Possibly change in direction?.

The EURUSD bullish 'Cup and Handle' pattern, which has been very much in my focus the past few weeks, is looking rather troubled. The breakout last week stalled quickly at the weekly resistance line which connects weekly closing highs from summer 2008, late 2009, and the high in late 2010. (See upper chart below). This morning the market has broken below the 1.3850/60 breakout level, (so far this is only a minor breach), however the longer it is maintained, and the deeper it moves, the greater the likelihood that this is a significant failure. Further to that, there is rising trend-line support just below current levels around 1.3805, a breakthrough here combined with the Bearish Divergence on the daily RSI and MACD, could spell the death-knell for the 'Cup and Handle' pattern. (Though, just as a caveat, the breakout of this type of formation, is often a tortured affairs, and a dip like this, followed by a 'screw-you' rally, is not untypical). - If however, this does turn out to be a failed 'Cup and Handle' pattern, the failure could have serious consequences for a much deeper pullback to the low 1.3000s.

Bund Update - Re Cup and Handle pattern.

This morning has also seen a failure in the bearish Bund 'Cup and Handle' pattern, I highlighted a couple of days back. This could also be significant in the short-term, with a risk of a move back up to trend-line resistance around 122.85/90.

MID-DAY UPDATE. 
EURUSD languishing above 1.3805, and below 1.3850.   Not much conclusion yet...
Bund failed to hold the morning's gains, and is close to 121.80 again. The original bearish Cup and Handle scenario is still a possibility on the Bund, as is the failed C and H at this stage. Right now, the inability to hold over 122.00 so far is not encouraging, but lets see where subsequent price action heads.

Possible Inverted 'Cup & Handle' pattern on the Bund. (EURUSD UPDATE)

With my EURUSD Cup & Handle pattern, fighting to stay alive (so far so good), I have found what appears to be another Cup & Handle pattern (This time an inverted one on the Bund future). Whilst the risk risk of looking like a total mug (Apologies for that, too much Starbucks today) if this one don't work I have highlighted it on the chart below.

The breakdown level (On a sustained basis) should be around 121.20, with target if that holds at around 119.20.  As I say with these patterns can be flakey, I'd say around 50% success rate, but the risk reward in my opinion makes it worth a punt. i.e. Stop at 122.00 Short around here, currently 121.48, target 119.20 with a trailed stop. That is 50 points risk for 230 points reward on a 50/50 bet, well 50/50 if it breaks and hold 121.20, probably slightly less currently, but I'm sure you get my drift.

With regard to the EURUSD Cup and Handle of the past few weeks, it came back today and re-tested last week's breakout, if this is going to be a successful pattern, that level around 1.3850 (I'd allow an over extension slightly) needs to continue holding and then act a springboard for the potential gains well into the 1.4000s.  If it fails to hold 1.3800 I'd have to seriously doubt the pattern, and will consider the possibility of much lower levels ahead.

EURUSD 'CUP + HANDLE' PATTERN UPDATE.

The large Cup and Handle pattern (See chart below) which I have been watching form over recent months on the EURUSD appears to have completed with the sharp move up during the latter stages of last week. Now is the crucial stage for this, does it shoot straight up towards the measured target around the high 1.4000s, or at least some way towards that? Or does it come back and re-test the break at 1.3860 (Or even overshoot)? - I favour the likelihood of a re-test of the break at some point, this would actually be the more healthy option for continued strength.

One has to also consider the possibility of this being a false break prior to a sharp correction (No one ever said this was easy). Critical resistance is being approached on the longer-term patterns. 1.4040/50 is a daily closing resistance (See posting from Feb 28) and 1.4285 is the prior high in the downtrend since 2008, both these levels could be key.


Personally I favour the move to the high 1.48s in the next few months, but cannot help thinking we may still see some interesting price action, which has the potential to tease rather than please in the next couple of weeks.

USDJPY BASE - FAILING, and EURUSD update.

Over the course of recent weeks I have suggested that the USDJPY may have been basing, however price action over the past week leads me to think that this call was wrong.

The chart below highlights this: Of note are the :
Failed Head & Shoulder breakout: - This has implications, particularly if the low of the right shoulder is breached (around 80.90ish).
Possible Bearish Continuation Triangle: - This is still forming, so not yet confirmed, a sustained break through approx 81.30 would strongly favour this.

The downside triangle target would be around 77.50/78.00. However there is very strong support around the key 80 area (Psychological and previous lows from 1995 and 2010. , and at 79.00 from the declining monthly support line from 2004.


One final note on the USDJPY, which adds to my conviction of the bearish side of this trade: In the past few weeks Japan Long-term Sovereign debt was downgraded by both S&P and Moodys, despite this the JPY has remained strong versus the USD. This suggests that uncertainty around this issue is now on the back-burner, which seems to be JPY favourable as opposed to detrimental.

I can not rule out that all this price action may still be part of a very erratic and larger base, however I am saying what I see right now.

EURUSD update: - The CUP & HANDLE Pattern conviction from my last few posts continues to grow. Key for this view will be price action around 1.3850. Some profit-taking would be expected here, however what happens in the wake of that will be key. A sustained break could see this soar, a failed break however could put the nail in the coffin of this. - Also bear in mind that just above 1.3850 is a significant declining resistance line around 1.3950/75 which could also be key (See below).

EURUSD UPDATE 22 FEB 2011

Interesting Times - Some completely mental price action today.

In-light of the previous post from Friday re: the possible Cup & Handle (or other potential Bullish Set-ups). If today's rebound from the early morning (Europe morning) sell-off is maintained, then this should strongly favour (favor if you're across the pond) the bullish scenario. It will be interesting to see how this unfolds, further erratic price action would not be surprising, but assuming the rebound mostly holds and the price can start to move above last week's highs, then the case for the bullish outlook will continue to grow in strength.  - I have added a chart showing today's candle and how it  kissed the top of the recently formed wedge.

Note; from my experience of 'Cup & Handle' patterns in the Fixed Income markets, the price action during the formation of the Handle can be notoriously erratic and fickle. The handle represents an area where a serious battle is being waged between bulls and bears, and stop-running/false breaks are not uncommon. It is worth noting, that incomplete/failed patterns can be useful indicators themselves, as they highlight where the directional power is.

EURUSD - Bullish Cup and Handle forming ??

This is one of those incidences, where I am here to be shot down. In this case I am highlighting a potential chart pattern well before it is completed. As any tech analyst knows, this is always a dangerous activity.

The pattern I am talking about, is a potential Bullish 'Cup and Handle' pattern. -  It is worth noting that this is against a contra trend of lower peaks in the EURUSD since 2008 on the weekly, so it has some heavy work ahead of it in order to follow through on the upside, this could contribute to some erratic price action in the weeks ahead. 

The chart below shows the Cup and Handle pattern I am referring to.

 And here is the longer term weekly chart which shows the uphill battle it faces.

 

CUP and HANDLE PATTERN.

Some further info on 'Cup and Handle' Pattern. The illustration below shows a typical set-up. Note this is usually a continuation pattern. 

The chart below shows an example of a successful 'Cup and Handle' pattern. This is the German 10 Year Yield chart from 2006 - 2007.

GBPUSD (Cable) maybe be preparing for a decent move.

The GBPUSD spot fx (cable) rate has made steady gains of late and looks as though it may be gearing up for a possible breakout to the upside. What I like about this is that it also appears to have formed a pattern within a pattern, when this occurs moves can sometimes be dynamic.

The pattern within the pattern is as follows:

1) The larger pattern is the Weekly 'Descending Expanding Triangle' pattern formed over the past 15 months, which may actually be part of a big double-bottom pattern. The actual pattern bears a strong resemblance to the bullish pattern formed on the AUDUSD over the past year, which was covered in detail in the 17 Sept post which can be seen by clicking here. An illustration of the ideal formation can be seen here:

2) The secondary pattern, which has formed as part of the breakout of the above pattern is a Cup + Handle  on the daily chart. Cup + Handle patterns do not necessarily have the greatest success record with regard to pattern reliability, however what I like about them is that they offer excellent risk/reward ratios. The stop level is usually quite close to entry, whereas the upside (if the pattern is successful) is often relatively large. The following illustration highlights an idealised Cup + Handle pattern.

Put the two together, and there is potential for a decent move if this can hold over 1.6000 on a sustained basis. The chart below shows these pattern on the GBPUSD.

There are one or two reservations with this: Firstly and principally the weekly 'Descending Expanding Triangle' pattern does not follow in the wake of a large trend, the prior move is short trend which itself is a reaction off a low following a very large decline. Typically these patterns follow strong sustained trends as per the AUDUSD example. I also prefer these patterns to have largely tracked along the upper line at fairly even spacing, the GBPUSD pattern has touched (or nearly touched) the upper line on four occasions prior to breaking out, however the gap between the third and fourth was very large. -- Perhaps I am being picky, ideal patterns are very rare, however I feel these points are worthy of a mention. The Cup + Handle pattern does look textbook though, and as long as this can sustain itself over 1.6000 (allow a spike or two lower), then this favours a move to around 1.6700.


A quick note re: the SP500: Despite a strong move at the open it once again failed to maintain and hold a move higher, and it also failed to maintain an afternoon push lower, once again closing slap-bang in the middle of last weeks daily closing 1182-1186 range. - dull, dull, dull.

GOLD at a key juncture possibly.

Of all the Markets which have confused me during my time as a trader, the one which has baffled me the most and has probably floored me more than any other is Gold................ I don't profess to be an expert on Gold, infact a quick look back at the few Gold trades I have done over the years will confirm just that.... However, I do look at Gold and start to wonder exactly how high it can go, given its quite amazing gains over the past decade, particularly in light of the performance of most other asset markets during this time and considering the deflationary winds blowing across the major western economies. I am not however going to try and debate reasons for and against buying or selling Gold, this is covered in depth in a million or so blogs and news services elsewhere, however I am going to post a few charts, which I hope may shed some light on where I think Gold may be heading...

Firstly I will show 2 sets of fractal patterns, one with Bearish possibilities and the other with a potential Bullish outcome:-

The first set of chart show a series of Rising Wedges embedded within each-other, rising wedges are potentially bearish patterns.

The second set of charts show the Gold over the same period, however this time I have identified each pattern as a series of Bullish 'Cup & Handle' patterns.


The third set of charts shows the performance of Crude Oil 2007 and 2008, together with a similar set-up on the weekly Gold chart. I will admit, that if one looks closely at the two charts, there are many differences, however I am trying to capture the essence of the moves, which on both charts show two converging arcs of support and resistance.
My head says the arc converging from the left should win, and turn Gold sharply lower, however there is no reason why this could not break in favour of the sharply rising arc, particularly as this arc has a longer duration. If this were to break to the upside, it could quite possibly project Gold sharply higher. Either way, I think soon we will see a sharp move.

I will confess, at this stage I have no idea which side will win, however I think it worth watching a break of either 1200 and 1300 for the next significant move....

Risk on ???

The 'Inverse Cup & Handle' possibility which I mentioned yesterday looks dead in the water, although at one stage last night it did look a good possibility but now its dead... --- Moving swiftly on, this morning it seems that we are moving away from risk-off -- at least for the next few hours/days.... The 'risk-off ' trade of the past several weeks has been characterised by several key features in various asset markets: - Strong declines in major global stock markets, interbank lending rates (Libor) rising, strong USD, JPY and Gold + weak EUR, German and US bonds making strong gains, spreads of Non-German European Bonds widening v German Bond Yields, to name but a few... - However, it appears this morning that a number of these features have turned/ or are turning / or are threatening to turn... Below is somewhat of a chart-fest highlighting these various markets.

Firstly - The USD Index - this has seen very strong gains in recent weeks, however it is running into a major resistance line. - In the bigger picture this is the Neckline of a huge multi-year Inverse Head & Shoulders pattern, in the shorter term however it is major resistance. - Additionally, there is significant divergence between gains in recent weeks and momentum as measured by the RSI and MacD indicator. Taken together this warns of potential reversal or consolidation.The EURJPY has been watched very closely as this has had a very strong correlation with the move lower on the S&P. At first glance this is showing less sign of reversing than some of the other markets, the downtrend is still strong, however RSI and MacD is diverging from this price action. - In addition Monday's low at 108.08 was an exact Fibonacci 76.4% correction of the entire entire rally from 2000-2008, and was also .06 ticks shy of 1.618x the move from Oct 2009 to the intermediate low in Feb 2010.

Pressure on Interbank lending seems to have eased over the past couple of weeks, the rise in Libor has been minimal or stopped altogether in the past few days, whilst Libor futures which had been moving in synch with equities until late May, has seen strong gains since then. This can be seen in the following chart.
Also note how spreads within Euroland v Germany have started to sharply contract. The following 2 charts show Spain and Italy 10 year yields v German 10 year yields.Finally equities. First is the IBEX. this has been particularly badly hit in recent weeks. However, there are signs signs that this may (and I re-iterate the word 'may') be turning. The recent low was within a whisker of the 2/3rd retracement of the March 2009 - Jan 2010 rally, momentum is bullishly diverging, and thus far the breakout of the descending triangle pattern is showing signs of a failure, which could see a reversal. Today and by the latest tomorrow, should shed some further light on whether or not this is a failed breakout. - If it is a failure, this should see the Ibex making some decent gains.

The next chart is the AUSUSD v the SP500 since late April. Yesterday I highlighted how the AUDUSD spot seems to have been leading the Sp500, if this is still the case and the AUDUSD manages to hold onto its strong gains of the past 24 hours, then this would favour a strong move higher in the S&P.


In conclusion. The above charts are posted as evidence that the risk-off episode we have been within over recent weeks may be due to correct. I am not going to commit myself to saying this will happen, only there is a lot of evidence piling up against it. I also do not say this as the end of the overall risk-off trade, only that we may see a few days or even a few weeks whereby the market is able to gain some stability. I will also point out some caveats; the moves of the past 24/48 hours could be minor corrective moves which have or will soon have run their course, in addition most markets or risk assets still remain close to recent extremes. Also I would have liked to see the USDJPY perhaps moving a little higher towards the high 91s. Either way I think the markets face a couple of interesting days.

A tease or a squeeze ? Something to keep an eye on - Current retracement may be part of Inverse Cup & Handle Pattern..

The retracement higher this morning on the S+P Futures seems to be gathering steam. - However, it is a possibility that this pullback higher is part of a bearish continuation pattern. - I have highlighted this in the charts below. - The pattern I am talking about is an 'Inverted Cup + Handle' pattern. In standard Technical Analysis these are powerful continuation patterns. -- however they come with a 'Strong Government Health Warning' : Anticipating patterns early in their formation can be highly risky: - Firstly, it may be an incorrect analysis, secondly even if the analysis is correct, there is no guarantee the pattern will be successful. - Most analysts advise against taking the trade prior to pattern completion.

- The charts below show the pattern on the AUDUSD Spot and the SP June Future. - Below that is an example of a successful 'Inverted Cup + Handle' pattern on the weekly Bund Future a few years ago. --- FWIW AUDUSD is pushing the upper boundaries of the maximum Hammer retracement. -- If however the AUDUSD can make a 'sustained break' over 8330/40 (with 8370/80 the absolute limit on a spike), and likewise the S+P can break and hold over 1070/75 (absolute spike limit 1080/85) the notion of an 'Inverted Cup + Handle' pattern may be dead in the water.With regard to the above analysis, I have used the AUDUSD because it has synched extremely well with the move in US stocks since late April. In fact it has been a good indicator of when a move in the S+P June 10 is likely to succeed or fail. I have posted two charts below, highlighting how the AUDUSD has diverged as key turns from the S+P future. The synchronisation has occurred as both the AUDUSD and Stocks are 'Risk-on trades', however I am not sure why the AUDUSD has been leading the S+P500 at key turns, I can only assume perhaps it displays less emotion and more rationality. - Note - at some point the AUDUSD/S+P500 synchronisation/divergence is likely to end, however if the current 'Risk-off' episode continues, then this pattern is may remain for some time.

SP500 Inverse Head & Shoulders Pattern - ????

There has been a lot of talk over the past 2/3 trading days regarding the Inverse Head & Shoulder pattern on S&P futures. Head & Shoulders patterns are one of the most familiar patterns to traders, I also know from personal experience, that they can be one of the most frustrating. Many a time I've found myself jumping on a neckline break, only to be frustrated (I've also found myself committing the cardinal sin of trying to anticipate the break). Breakout failures however can often be more instructive than successful breakouts, not only do they have a tendency to rapidly wipe out the gains(losses) of that pattern, they often move well beyond the extremes of the pattern.

I've posted 3 charts below. - The top chart is the current SPM0 intraday, showing the current Inverse Head & Shoulders pattern. Below that is two examples from the SP500 of prior Head & Shoulders patterns. The first of these two shows the recent top on the S&P500, this was a successful Head & Shoulders. The lower chart shows the S&P500 from last May/June, this appeared at first to be a classic Head & Shoulders top, however the breakdown failed wiping out any losses during the formation of the pattern and the breakout, before making further substantive gains. I believe there is a strong possibility that this recent inverse Head & Shoulders pattern may fall into the category of a failed break, which could lead to significant further losses for the SP500 and US Stocks.Further to the above it is worth noting that the recent episode of Risk aversion across a wide range of markets, which began in late April/Early May, could be about to reassert itself following the pause/correction of the past week. A number of markets have returned to test key levels. Both the Dow Industrials and the S&P500 broke through the 200 day sma the week before last, since then they have both corrected back towards the 200 day ma. The AUDUSD (See below) appears to have completed a large 'Double-Top' pattern, breaking though the neckline of the double-top, however last week's price action saw a return to the breakout of this level. Also Sep10 Eurodollar Futures (See Below) broke down from a rising support line on the 20th May, dropping sharply to 98.865. Since then the future has rebounded to test the breakout of the rising trendline at 99.25, however the future now stands at 99.125.
There have been a number other markets returning to key break levels, including the CAC and the AUDJPY cross. Certain other risky assets have barely made a correction - EURUSD and IBEX to name but two, which really does not bode well for these two. EURUSD is back to the twin lows of mid 1.21s, and may well be breaking out of an Inverted 'Cup & Handle' pattern, I fear a sustained break through 1.2100 here could see rapid losses to 1.15/1.16 area.
I think an interesting week lies in store.