Equities - the path of least resistance appears to be up.

For now at least the path of least resistance for equities appears to be up. Whatever the reason or rationale, buyers are currently in control, and until this changes, it would be safest to assume there are further highs ahead. The consolidation of recent weeks appears to have finally ended,and it would appear we are now making a thrust away from this, indeed this move appears to be occurring across a number of markets, which adds credence to the idea of further gains ahead. The charts below echo this point, the first set of charts show a selection of US equity indices, the second set of charts show the DAX index and Eurostoxx Index futures this morning.

The next chart shows the VIX index, this appears to have made a break below a large Descending Triangle over the past few months, this drop in volatility below support should be a favourable development for equities.

 

The last chart is the old laggard, the KBW Bank Index, this still lags the rest of the market, however interestingly it is very close to completing an inverse Head + Shoulders continuation pattern, a clear break up through 48.00 (it closed marginally through here last night) would suggest this may finally start to join the Bullish party. 

 

US EQUITIES

 Equity indices have reached key levels. The SP500 index is running into 1130/1132 key resistance band, I favour the first shot at this area as likely to see an initial failure, however I have to consider that there is a risk we could see it burst through here leading to heavy stop action, or we could see a small stop induced break and failure.  Bigger picture however, I think there are increasing bullish signs and a successful break over 1132, either now or after an initial setback, will I believe be a signal for further gains in the weeks and months ahead. I do however consider all options open, and can not rule out that a failure here could be the beginning of a sharp decline which could accelerate below 1090. 

My view that we may be heading higher eventually relates to the price action and the pattern formed over recent months. - I posted an article back on the 3rd August (can be seen by clicking here.) where I suggested that the larger formation occurring could be a Falling Wedge pattern which may have a bullish outcome. In support of that I posted the following chart, where I identified different types of Falling Wedge patterns (This is a repeat of earlier exercises I have carried out in Fixed Income markets).

A list of the four types of 'Falling Wedge' can be seen by clicking here. At the time I identified the pattern forming as a 'Type 2 - Falling Wedge', though I did add the following caveat - 'Just to add a layer of confusion (The market does not like to make it too easy). Though I have labeled the recent wedge as a 'Type 2', it is not out the question that it is a 'Type 3' or even part of a larger non-wedge pattern.'  - Price action since then has if anything re-enforced my belief that we have a 'Type 2' pattern, if this turns out to be the case, this would suggest that we should have a bullish resumption, with a strong possibility that we are heading back to the highs of April at a minimum. - By the way though my confidence in the 'Type 2' call is increased, the above caveat still remains. - The chart below show the current pattern labeled as a 'Type 2 Wedge', I have also shown below that the two previous 'Type 2 wedges' from 1998 and 2006.  - Note the 2006 example bears a stronger resemblance to the current pattern.

Further to the above this Type 2 Falling Wedge pattern can be seen across a host of US Equity Indices. The following charts shows the Dow Industrials, Nasdaq and NYSE index.

 

The Bank Index (See Chart Below), did start to follow its own path on the last low, however it appears that this may have moved back to becoming a 'Type 2' set-up, this is one to be watched...

The Dow Transports Index also shows a similar set-up, however price action created a Type 1 rather than a Type 2 Falling Wedge, this also tends to have a Bullish Resolution (See chart below).

At present none of the above indices have yet made a break above the previous high from early August. This should be watched, since a clear and sustained break over these levels are likely to be the confirmation needed to suggests higher levels ahead, a failure (which I think is most likely short-term) will be lead to further consolidation for now or possibly a deeper decline (which I favour as least likely).

Elsewhere there are other signs which I believe continue to point to an eventual favourable resolution for US equities. The chart below shows the VIX Index v the SP500 index over the past few years, the VIX index continues to trend lower in a similar way to how it moved in early 2009.

Finally a number of key FX markets, which have been strong barometers of Risk-on versus Risk-off over the past few months continue to shows signs of potential bullishness suggesting a return to Risk-on may be on the cards. The top chart below is the EURCHF, the trend remains lower, however there is strong bullish momentum divergence between the low of July and the September lows, as well as within the recent September low. This may be flagging up a risk of a correction higher in the EURCHF cross. The lower chart shows the AUDJPY cross, this has been one of my favoured risk barometers, this has made a decent breakout of the symmetrical triangle, suggesting further gains ahead.

 

 

Finally the AUDUSD has a potentially very Bullish 'Big Picture' pattern, this can be seen on the chart below the Pattern is a 'Right Angled Expanding Triangle'. This suggests a strong bullish move eventually for the AUDUSD.  A rising AUDUSD, is something I equate with 'Risk-on'. - However, short-term, it is up against strong and significant resistance, in the same way as the SP500 and other US equity indices. I would be very surprised if the AUDUSD was to make a successful break over this resistance on a first attempt for many months, particularly in light of the 6+ big figure rally over the past three weeks, without any real consolidation or correction.

 

 - To summarise. I feel that the technical outlook for US equity is starting to look brighter, I am seeing what I consider increasing signs of an eventual Bullish resumption for the next several months (though I still feel that this will be a precursor to a much more severe eventual bearish move). In the short-term I still feel a corrective setback may occur, though possibly on a failure at 1132 or on a stop induced breakout above 1132.

Equities Topping Patterns - Everywhere

My post yesterday highlighted the risk of a short-term bounce, everything was setting up for a 'key-day reversal'. Well the bounce as it happened was very very short-term, the indices made it to the neckline of the Head & Shoulders pattern which broke last week before falling away. Though the S+P futures, did manage to complete a weak 'key-day reversal', this was not confirmed on the S+P500 index itself. Looking ahead some of the conditions still exist for this bounce to re-occur, however I think the odds have become remote for now. Looking at the bigger picture, though recent days' price action has show indecision, refering back to some of my earlier posts, I feel we may head lower soon, and possibly much lower.

Beyond that, I have decided to see how the bigger picture looks across a wide variety of markets. One of the maim tenet's of Charles Dow's original 'Dow Theory' was that of confirmation. Dow believed that a directional move or trend in the Dow Industrials Index could not occur unless the Railway's average (The Dow Transports Index) was moving in the same direction. If they diverged, then this called in to question the sustainability of the trending move. - The world has moved on since then, there are far more markets, covering specific sectors, or different size of market capitalisation. To that end I have looked as charts across a broad spectrum of indices, these can be seen below. All charts have a similar topping formation and each one has recently broken to the downside. To me this is strong confirming evidence, which adds weight to the major topping pattern, the Head & Shoulders, which should portend significant lower levels in the weeks and months ahead.
Beyond the US markets, it is also worth looking at global markets. The following charts show a selection of major G7 markets. What is clear here is once again we have similar topping patterns, though the German DAX offered a variant of the Head & Shoulders and has not yet made a new low for the recent phase (nor have a number of other markets within the EURO bloc).

The next set of charts move beyond the US and G7 countries and look at a variety of markets symbolic of Asia, South America and Commodity countries. Once again the major topping pattern is evident in all three charts. The Hong Kong markets has produced another variant of the Head & Shoulders pattern, this is probably because of the strong Chinese influence, - Chinese stocks indices seem to march to a very different beat. - As was the case with the German market, these have yet to make new lows for the recent move, however they all appear to have a strong downward bias.