EURJPY FX

With markets likely to track time this week ahead of next week's slew of news. It is an opportunity to look at some other areas of interest within the wider markets. Today I will look at the EURJPY FX cross, as there may some interesting action occurring here.

The first chart is the multi-year weekly chart. Currently the major trend remains lower, however momentum is strongly divergent here; momentum as measured by the RSI and MACD on the recent 2010 low is well above the momentum levels recorded at the low of 2009. This does not mean a break-up through the declining trend-line or a trend change is due, direction is primary and momentum is secondary, however it is suggesting it is a reasonable possibility. In addition I want to emphasise the strong similarity between the price action and momentum developments over the past 2/3 years, and the period in the mid-1990s when this currency pair made a major low.

 
The weekly charts thus appears to offer some interesting possibilities. The daily chart below can add some further clues, though nothing decisive at this stage. The first thing to notice is the large Expanding/Broadening Triangle formed over the past five months. (See notes and illustration below regarding Broadening Formations - btw the example described refers to a broadening top but it is also valid as a broadening bottom, particularly in currencies where we are comparing two currencies, rather than an asset.)

 
John J.Murphy in his book 'Technical Analysis of the Financial Markets' (in my opinion - the Bible of Technical Analysis) shows a diagram of an idealised Broadening Formation. (See image above).Murphy goes on to say - "This situation represents a market that is out of control and unusually emotional. Because the pattern also represents an unusual amount of public participation, it most often occurs at major market tops (Bottoms). The expanding pattern, therefore, is usually a bearish(bullish) formation" . With regard to volume during the formation of the pattern Murphy says -“The volume pattern also differs in this formation.  In other triangular patterns, volume tends to diminish as the price swings tend to grow narrower.  Just the opposite happens in the broadening formation.  The volume tends to expand with the wider price swings.”

Coming back to the EURJPY we thus have a weekly set-up where the downside is still in charge, but strong corrective influences are at work. And a daily chart showing a strong reversal pattern, however within this pattern is still the possibility of one more dip lower, and/or the possibility, as with all patterns, that the patterns does not actually work. I would also like to add that the price is pushing against the downtrend, which adds some tension to the situation, a continued rejection of the downtrend would favour the dip lower scenario, whilst a sustained break of the downtrend, would be a signal that further strong gains may be in the pipeline.

Finally, the short-term chart also has an interesting little pattern. I show this on the 6-hour candle chart below. The pattern is a Sideways/Declining 'Expanding Wedge' , these can produce quite explosive upside moves. I do have some reservations about this particular example though; the slope of the upper line is more pronounced than I like to see in these patterns, typically I like the upper line to be close to horizontal or at least a gentle downward slope, however the proximity of the major downtrend line may be influencing this. I would also like to add that the trading signal to go long on a break of this pattern would be a move over 113.94 the last high in this pattern (however, it is worth bearing in mind that the major downtrend line intersects aroind 114.50), with a stop placed dependent on other factors. I would not suggest going long unless 113.94/114.00 occurs, particularly as very short-term, yesterday's price action produced a bearish '3 Black Crows' pattern, which may produce downside follow though in the next couple of days.

One final thing with regard to this trade. A look back at the weekly chart suggests to me that if the down-trend line is broken, then the upside potential could be very large and relatively rapid. This suggests to me a very good risk/reward trade. If the break-up were to occur without the low of the past 24 hours being broken, then we are talking about a long instigated at 114 with a stop at 112.40, and potential upside target of 140.00. The risk would be 160 points, the potential reward 2600 points = Risk reward ratio 16.25:1. And no carry cost.

The JPY crosses and the SP500

On Friday I mentioned that my bias on the SP500 is to the upside based on the weight of Technical Arguments, however I also said that I have not been participating in this rally as I had a number of concerns.  I did not think Friday's payroll produced a set of data worthy of the reaction, though the market seems to favour poor data almost more favourably than better data as it suggests more likelihood of QE2.

One other concern I have, which I did not mention last week, is the most recent performance of the EURJPY and the AUDJPY FX crosses. I consider these two crosses as key barometers of risk-on v risk-off. They fell sharply with the stock market in 2008 and rallied well in early 2009 as the stock market turned, though the EURJPY rally fizzled out through the remainder of 2009. Through this year their moves have been quite well correlated in direction (if not magnitude) with moves in the SP500, however as the SP500 has rallied recently, these two crosses have started to stall out again. This can be seen on the next couple of charts, the first charts show the SP500 v EURJPY, note how the price has fallen out of the recent rising channel on the EURJPY, the second charts show the SP500 v AUDJPY, the AUDJPY has been in a big sideways consolidation for three weeks now.

I make these points as observations at this stage rather than suggesting we are about to go into full scale reverse on the SP500. The AUDJPY though is interesting in particular, and I think any sustained breakout of this consolidation may offer some clue as to which way the SP500 may head, and should therefore be watched closely.

Just to reflect my confusion as to the bigger picture, I am posting the some charts of 5 year Credit Default Swaps form Italy,Spain, Ireland and Greece. These seem to be suggesting that fears with regard to these may be easing, given the recent Euro strength this is probably not surprising, still if this continues it should suggest less risk aversion. It is however possible that fears surrounding the PIIGS issue could be a red herring, as in general this has not had a high correlation with the fortunes of the SP500 other than during the period of May-June this year.

EURUSD main trend may have turned? same for EURJPY + USDPY updats

EURUSD WEEKLY

Yesterday's strong jump in the EURUSD in the wake of the FOMC statement has seen a couple of key levels breaking on the EURUSD chart. This may be suggestive of a larger Bullish move in the pipeline over coming weeks and months. - The top chart below shows the Weekly EURUSD in the much bigger picture. I have highlighted the significant divergence with the MACD and price at this years low. In addition I have also shown the 40 Week Simple Moving Average, this can be seen to have been a pretty reliable indicator of trend on the EURUSD. The second chart below is a close-up of the Weekly Candle chart, the break of the 40 week SMA can be seen more clearly as can a Head + Shoulder type formation on the EURUSD, with the Neckline broken overnight. - In order for these signals to be gain validity I would like to see this break up hold through to at least the weekend.

 EURJPY WEEKLY

The EURJPY is also seeing a number of Bullish signs. The top chart shows the Long-Term weekly EURJPY chart. The recent low has also produced significant Bullish Divergence between the major lows of the past few years. The lower chart shows a close-up of the Weekly Candle Chart, I have highlighted a Falling Wedge pattern on the EURJPY, which has seen a breakout over the past couple of weeks, this has strong potential as a significant reversal pattern. Finally I have highlighted a break of the downtrend in momentum on both the RSI and MACD, although I always consider momentum as secondary indicator to price, breaks in the trend in momentum can still be catalysts for significant moves when accompanied by a price pattern or set-up. 

USDJPY Update.

The USDJPY has come back to test the breakout of the July - September descending channel @84.70/75 after failing to take out the 86.00 level, it has since moved a little further hitting a low at 84.52. Whilst I consider this a re-test, I would have liked to have seen 70/75 hold, I now consider the 84.38/40 area as key intraday support, this is the 50% retrace and the intraday highs on the 10th/13th Sept before the drop to new lows and the intervention rally.  - A failure to rebound back above at least 85.00 in the next day or so, would lead me to question my more Bullish view, whilst a move over 86.00 would bring the Bullish scenario very much back into play.

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.

FX update and the SP500 1970s redux revisited.

FX UPDATE

First a quick update on yesterday's FX comments: The inverted 'Head and Shoulders' pattern on the short-term chart of the EURUSD failed to follow through on the upside. It is possible, that the EURUSD is building the right shoulder of more substantial inverted Head and Shoulders pattern on the short-term charts, however, I would caution that trading rooms the world over are littered with the ghosts of traders who tried to anticipate uncompleted Head and Shoulder patterns.  ----  Looking at the USDJPY this posted a small rebound yesterday, however it needs to make something more concrete and larger if my weekly 'Piercing pattern' idea is going to have any chance of being successful. ----- Finally looking at the EURJPY:  I suggested yesterday that this may have some short-term bullish potential. However, I have posted a chart which warns what could happen if the EURJPY rebound fails to materialise, or even makes a small rebound but then fails to follow through.  The chart below shows the 8-hourly EURJPY through 2010.  The two periods of circled price action are from earlier this year and from the past week,  both display very similar set-ups. - Just to add a caveat; this time around the EURJPY has been within a long sideways consolidation phase, with the most recent down-move possibly being a correction from the top towards the base of the consolidation, whereas in the earlier period, the EURJPY was clearly trending lower.

(Click on chart to enlarge)

SP500 1970s REDUX REVISITED


A few weeks ago I posted a blog titled  '1970s redux', the original post can be seen by clicking here.  Today I am posting charts which show a more in-depth look at the two periods being compared.  - The insert below compares the weekly charts of 1967 - 1976 versus 1997 - 2010. Whilst the time frames differ, the overall behaviour of price direction and action has unfolded with a strong similarity. In fact the only period when price direction notably diverged was the period just after the 1973 peak and just before the 2007 peak, when the direction became virtual mirror images. The Blue near-vertical lines are meant to highlight similarities in key turning points, whilst the Blue meandering line (drawn rather badly) is meant to highlight the co-ordinated direction of both charts.

(Click on chart to enlarge)

The next chart takes a closer look at the price action over the past few years, with the comparable period from 1973 - 1976. Once again, the price action is taking a similar course. Further to this, in the past few months the consolidation has unfolded not unlike the consolidation in 1975. Note some other similarities: The rallies of 1975 and 2009-2010 both retraced around 60% of the preceding very sharp declines. The corrections of the late 1975 rally and the recent correction of the 2009-2010 rally, both stopped at around a Fibonacci 38.2% .- I do not tend to use this sort of analysis as my method of predicting future price moves, however I do not dismiss it either, preferring to keep it lurking in the background as a form of reference.- What it does suggest, is that if this similarity in performance were to continue, then a move to the upside would seem more likely in the coming months. Before further consolidation or corrective activity unfolds.

Before I finish, I would just like to re-iterate what I said in my original post: - I am not laying out a case for the current period being a similar economic and political climate to the 70s, particularly when it comes to inflation or interest rates. However what is similar is that the 1970s were a time of extreme economic uncertainty, and the 1974 recession was associated with a very deep bear market, not unlike the 2008 bear market.

EURJPY Possible short-term base, and a strong divergence warnings on the weekly.

The EURJPY has broken above a sharply declining trendline, and the recent low has occurred with strong Bullish Momentum Divergence on the RSI and MACD.  - This currency pair may also be forming a Double Bottom, with potential towards the low 113s if it can break and hold over 111.11.  This could be relevant to the the Equities market, given the close correlation of the SP500 and this currency pair.  - See 4-Hourly candle chart below. The EURJPY broke down from 113.00 at the same time that the SP500 broke down from the high 1120s.

Jumping from the very short-term picture on the EURJPY to the much longer picture. The chart below is the weekly chart, this is showing very strong Bullish Divergence, I have highlighted two prior occasions where this currency pair is displaying very strong weekly Bullish Divergence, as an example of how crucial this could be. Saying that, I do not take this Divergence as a buy signal, however it does warn that when a weekly buy signal occurs, the EURJPY could make a very strong counter-move.

(Click on chart to enlarge).

Some thoughts on the SP500, EURJPY and Risk-on. Plus RBS trade idea.

US equities took a breather yesterday, and though I believe daily charts continue to support the recent bullish breakout, the failure to make a meaningful assault on 1130, shorter term momentum divergence patterns, plus rather poor volume, all hint that we may see some further consolidation and possibly warrants a little caution.

The Eurostoxx 50 has broken above the upper line of the symmetrical triangle which I referred to in Monday's post (see here), though thus far it is balking at resistance at the Mid-May and Mid- June highs at 2793.5 and 2787.5, these levels may prove pivotal, and until they are broken, a period of consolidation may ensue below these pivots.

With regard to the risk-on trade possibly coming back into favour, I first referred to this in a piece a couple of weeks ago (this can be seen here). Since then the aversion to the PIIGS countries has strongly receded, the large July funding issues have been overcome, CDS prices have dropped significantly, and the spread of PIIGS bond yields over German Bond yields has eased for all countries but Greece, though even the Greek spread has settled down into a range. The charts below show the 10 year v Germany yield spreads for the PIIGS since the start of 2010. (CLICK ON CHARTS TO ENLARGE).

Another measure of risk aversion has been the EURJPY fx cross. The EURJPY dropped sharply earlier this year as the flight from the Euro and risk took hold. Over the past couple of months this appear to have been forming a base, and in the past 24 hours it has attempted a push above the upper boundary of this basing pattern (Rounded Bottom Pattern). The top chart below show the bigger picture of EURJPY over the past 3 years, highlighting the 2 periods of  'Risk Aversion'. The lower chart is a close-in look at the past year.

One note of caution: I keep alive the possibility that this apparent bottoming process, with regard to risk, could morph into a new bearish phase. - Though I do not favour this outcome, as of yet none of the major risk-on trades have cleared or significantly cleared key pivotal or psychological levels. For example 1.3000 on the Euro is clearly a key psychological level for the market, more significantly the sharp drop following the announcement of the Greek bailout occurred from around 1.3100, I also have some key levels around 1.3100/1.3150 which I consider pivotal. The above mentioned Eurostoxx levels are pivotal as is 1130 on the SP500, many other risk-on trades remain close to key pivotal levels but have yet to have made a clear break. 

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Finally a quick look at an individual Stock trade idea. RBS has been a bit of bellwether for the Financial Crisis over this side of the pond. The top chart below shows the Weekly performance since 2006. I have highlighted a possible Ascending Triangle pattern formed over the past couple of years, though this is not yet complete. The chart below that shows BT (British Telecom) for the years 1999 through to 2007, this was a bellwether stock for the Telecoms and IT crash of the early 2000s. I am trying to show how RBS is evolving in a similar way to how the BT price evolved as a base in the years following the Telecom's crash.  
(CLICK ON CHARTS TO ENLARGE).

Looking closer at the basing phase on BT (See chart below); when the price broke above the triangle top, after a lengthy period of consolidation, the stock eventually climbed towards the triangle target and then the base of a significant consolidation zone, - before eventually falling away.

The next chart (see below) shows a closer look at RBS. The price behaviour is similar, and may portend a similar evolution to the BT chart. However there are two significant differences: Firstly the RBS 'Ascending Triangle' pattern is potentially a more bullish pattern than BT's 'Symmetrical Triangle', since resistance at the top of the 'Symmetrical Triangle' pattern is pushing lower, whereas this does not occur with an 'Ascending Triangle' pattern. - Hence any RBS breakout may be more bullish than the tortured breakout which occurred on the BT chart: Secondly, there is a large 'vacuum' of resistance above the RBS triangle which occurred as a result of the price downdraft in Oct 2008. - If the RBS price can clear £0.72 then £0.85 it could see the opposite effect of the downdraft, whereby the price rises rapidly (though not as rapidly as the decline).

Of course the above is all largely academic at this stage, and will remain so until the top of the triangle pattern at £0.60 has yet to be broken. The current price is around £0.50 and still £0.10 points shy of this key level, so it has some work to do to get there. However, I like this trade as it provides a potential nice Risk/Reward. The downside is £0.11 (stop below the recent low). The upside target, if it breaks £0.60 (where one could also add), would be £1.07 for the Triangle target, making a gain of £0.57 (Risk/Reward 5.7/1). Potentially though it could move much higher to the highlighted resistance lows around £1.40/1.50, or even to around £2.00 where the downdraft in October 2008 began, offering a much greater potential Risk/Reward.