EURUSD - WEEKLY CANDLE SET-UP WARRANTS CAUTION.

The EURUSD weekly canclesticks has produced a Bearish Harami pattern on the weekly charts.

 

A Bearish Harami pattern has the following key features:

  • Day 1 is a long positive-day bodied candle continuing an established uptrend.
  • Day 2 is a small bodied-candle whose range is within (or mostly) the first days body, above its midpoint.
 
I would not use this as a reversal signal in itself, but it does hint to the possibility of a small set-back or perhaps further extended consolidation. Bearish Haramis tend to be relatively moderate signals on their own, however it is worth keeping an eye on subsequent price action which could produce a further signal.

In range bound markets this formation will occur frequently with little significance. But if this pattern occurs after a protracted uptrend it is of greater importance. If this does turn out to be a reversal pattern the high of the two candles will likely turn into a significant resistance level.

My own view is that the breakout of the high 1.42s/1.43 of recent weeks is likely to be highly significant if it can be maintained, however, given its significance, it was always likely to be tested several times around the break. Initial support will be in the high 1.42s/1.43. A break could see a test back to the 1.4000 area, however I favour any moves below 1.42/1.43 being short-lived. - Of course, given fresh concerns around the Euro, I can not rule out a deeper correction, and given the number of new longs on the recent break to the upside, we may have a much deeper reversal, with the risk of the recent break being a false break.

USDJPY

I am throwing the towel in on my long USDJPY view of now. I believed it had turned the corner in recent weeks, and while this may still be the case, I am back to neutral on this for now.

EURCHF

Has struggled of late, helped by lingering concerns over the Euro, and as long as worries persist, I guess this will continue to meet sellers on rallies. I think it still may be forming a 'Double Bottom' pattern, but the jury remains out, unless a confirmed break over 1.3210/20 occurs.

BUND

Bounced beautifully off of last weeks Morning Star signal, may still have more upside, though I am aware of resistance around 121.70, and more particularly in a broad band from 121.41-121.89.

Bund - A reversal ? + FX Updates,

BUND

Interesting price action the past few days. The pattern formed over Friday - Tuesday looks like a possible reversal pattern, or at least a meaningful correction pattern. - The pattern is a 'Bullish Morning Star' pattern, these are usually pretty reliable, though the tech analyst caveat of 'follow-through required' should be added. Of course as all traders know, in the real world, if one waits for follow-through one may miss it, whereas if one acts now, the pattern may turn out to be a dud with no follow-through. - That my friends is why it is called risk-taking. 

Of course this signal is coming up against a very strong and powerful downtrend, which could easily overwhelm it; short-term resistance is at the Thursday/Friday gap at  120.56/63, above here the odds of at least a meaningful correction grow stronger. - It is worth noting, that this week's low is very close to the 38.2% correction of the 2008 to 2010 rally at 119.63. This may add to the idea that we are due a correction. Also supporting this view is the weekly RSI momentum set-up, with this recent low producing 'Bullish Divergence'. In addition RSI momentum has produced an Inverse Head & Shoulder pattern. - I am aware this is an unconventional way of looking at momentum set-ups, however I have noticed similar occurrences occasionally at previous major reversals, such as the 2007 and 2008 lows (highlighted on weekly chart).

Below shows an illustration of a 'Morning Star' Pattern, the current daily chart showing this pattern, and the weekly chart showing RSI.

FX Update

EURUSD - The breakout of the 1.4280/1.4300 last week has followed through well so far.
1.4280/1.4300 should now act as support for pullbacks..... I think a push to the high 1.4000s remains on the cards.

EURCHF failed to follow through on the upside, though I still think the 'Double Bottom' pattern formed on the weekly remains a favourable development.
Support on the downside is 1.2930/50 and then 1.2840. A clean  break of 1.3200 is needed to confirm the large Double Bottom pattern, with upside targets at 1.4000.

USDJPY. I think we have a valid upside break on this pair, however this move lower is straining that view.

I feel it needs to probably hold the mid/low 83s, if so then I still fancy a run at the upside, below 83 may however cause a re-think.

Key levels against traditional low yielders CHF and JPY, and morning update, EURUSD on the cusp.

Over the past 2/3 weeks the tide has turned sharply against the the traditional safe-haven low yield currencies CHF and JPY. Last week I highlighted that these in terms of EURCHF and USDJPY are both close to making serious moves higher.

Overnight ( I write this at 10.30 pm UK time) the USDJPY has marginally breached key resistance, I think a day-time break and hold needs to be seen to add weight to this break. Also EURCHF is pushing the double-bottom break line at 1.3205, a clean break of this line could see a sharp rally to close to 1.3900. - I guess will need to see the outcome of the ECB before such a key level is given any serious work.

See charts attached.

 AM Update - Wednesday 6th April.

 EURUSD is on the cusp of a major breakout, which could see a sharp move towards high 1.4000s. the 1.4285/1.4300 is something I have banged on about for a while. This held the first major test, however currently it is pushing right into it. - A sustained break, could be the catalyst for a move to the high 1.4000s in coming weeks/months, and the catalyst for a bigger move longer-term. - Obviously tomorrow's ECB will be a factor on whether it can break, or hold a break.

The Hanging man looks in and EURCHF possible big reversal.,

The SP500 'hanging man' post of a couple of days ago generated some interest amongst some of my contacts, with opinion fairly divided as to what this signifies... It looks to me that the pattern is a done deal, though well this is bullish or bearish will only be determined in coming months. My favoured option is short-term it is bullish, suggesting a re-test of the recent high (with a possible marginal new high), but longer-term I feel this will likely be a major topping area. -- but the jury is out for now.

EURCHF

The top chart is the EURCHF daily, note how it has recently broken a significant downtrend. In addition a potential pattern forming appears as though it may be a major double bottom (of the rare 'Eve and Adam' double bottom format; for further info, including why it is called this, click here). The lower diagram shows an example of this sort of pattern.  - Note confirmation would be a clear break over Feb's high at 1.3205, with a poential target near 1.3900.

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.

Payroll Day & Eurozone Spread Widening.

Today is all about US payroll numbers. its gonna be big,,, but how big.... that is the question..... The reason its gonna be big, as everyone knows is the census worker hiring. The average guesstimate according to Bloomberg is 536,000, however there is a large range from various analysts around this number ranging from the low 200,000s to the mid 700,000s. - I am always amazed that this number is given so much credence by markets, a number that is calculated using so many statistical adjustments, and that is revised so many times over the coming months, so much that its initial release is often meaningless, and yet it probably gets more focus in markets, and more initial trading reaction than just about any other data release on earth.

The markets over the course of this week seemed to have entered a period of calm, relative to action through May. The SP500 had its smallest daily trading range yesterday since late-April. EURUSD continues to gyrate in a spiraling downward fashion within its recent 1.2150-low 1.23s range. USDJPY has been gaining slowly on a less risk adverse environment, perhaps helped by the political situation in Japan, this may have helped calm currencies which reside on the other side of the carry, such as CAD and AUD. So it seems that near-term direction no wmay hinge on a number which is calculated using a somewhat contentious method, which is going to be distorted by a very heavy one-off adjustent, and which will be probably be revised several times over the coming months.

Meanwhile, it is worth a mention that periphery Europe spreads have been widening again over the course of this week. The Spain v Germany 2 yr spread has widened to 225bps and 10 yr spread has widened out to almost 190 bps, that is respective gains of 45 and 37bps over the past week. Other spreads have been widening too; Italy, Portugal, Ireland and Greece have started to rewiden, even France has widened so far this week from 26 - 39 bps, the largest weekly move since 1995. This may well be the early stages of the next phase of the Sovereign Debt crisis, with larger more significant European Countries becoming affected. -- Further to this I have posted a couple of charts below, the first chart is the 2 Year Spanish Gov Bond Yield weekly with 50 week moving average. In Technical Analysis parlance, this may have traced out a 'Rounded Bottom' or 'Frying Pan bottom' pattern, which could portent significant gains in yields in coming weeks. - Below that I have shown how a 'Rounded Bottom' pattern formed on Greek 10 year yields in the latter half of 2009, and how this evolved into the significantly higher yields (somewhat of an understatement) through this year.

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.

Mad as a Box of Frogs.

'Mad as a Box of Frogs' describes these markets of the past few days. Currencies, Stocks, Commodities have been all over shop this past 24/48 hours. Overnight, the currency markets saw some huge swings. - Of note the AUDUSD moved sharply lower, hitting 80.72, tagging the 38.2% fib retrace of the entire 18 month rally into 2010, it then posted a 3 big figure rally in a few hours before settling down (relatively speaking). EURCHF has possibly been the most significant mover however. The SNB spent virtually all last week defending the 1.4000 area, their 'line in the sand', then in the past 2 days they squeezed the EURCHF massively higher. Overnight it almost hit 1.4600, since then it has retreated back below 1.4400. It will be interesting to see if what the do today, particularly following comments yesterday from the SNB's Danthine, stating that there were 'no limits to FX intervention'. There are reasons why I believe the EURCHF rebound significant in the immediate environment, which I will elaborate on below.

From a trading stance, I have maintained a short position on the June SP futures this past week, which has helped get my year back on track, following a spate of small disasters through April. Whilst I am of the opinion that we are in the early stages of the next leg of a significant bear market in stocks, I believe we are at risk of a short sharp correction from around current levels. I have posted 2 sets of charts below, the first chart shows the SP500 index over the past 18 months. This shows a line of support connecting a series of lows since Oct last year. It is my belief that this line is critical, and whilst I expect it to succumb I do feel that it may hold a first attempt, which would favour a short sharp correction higher

The second set of chart shows the EURCHF and the SP 500 over the past couple of years. I have highlighted the 2 previous sharp bounces higher in the EURCHF in Oct 2008 and March 2009. It is noteworthy that in both cases the SP corrected sharply higher, whilst I appreciate that 2 data points do not prove anything, I think it is an observation worth noting.

With regard to my trading yesterday; whilst satisfied with my action on the SP500, I am somewhat disappointed with my trading performance on the Bund. Having bought on the break up yesterday through 127.60, I felt we could see a move up into the mid 128s. However, I decided prematurely to get out at 127.80 anticipating a return towards the break-out, which would then be followed by a move sharply higher into the 128s. Well the return to break never occurred and the Bund rallied sharply higher into the 128s, without me on board. Finessing can sometimes be expensive.