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. 

 

Stock Markets Churning, Euro area weakness probably currency related.

Markets continue to churn, in a rather ugly fashion. The SP500 briefly broke below 1130 yesterday on poor volume and follow through was lacking. Elsewhere shares in EURO area countries have been moving lower over the past few days, however I stress EURO area as opposed to Europe, the UK index has not drifted off with European shares. This suggests that we may be seeing a reaction to the stronger EURO rather than anything more concrete.  The charts below emphasise this point. The top chart shows the German DAX future relative to the SP500 since the beginning of April, with the EURUSD FX chart directly below. Note how both indices dropped more or less in tandem through May, however towards the end of May, the DAX started to outperform the SP500, probably helped by the EURUSD weakness. This out-performance on the DAX has been maintained since then, however the recent EURO strength maybe the reason that over the past few days the out-performance of the DAX may be starting to lessen.

The next 2 charts show the EUROSTOXX 50 index and the UK FTSE index, note how the EUROSTOXX has been moving lower in recent days, whilst the FTSE has maintained recent levels. The third chart below shows the EURO FX rate versus the UK pound (GBP), the Euro has seen good recent strength here too. This backs up my view that the recent under-performance in EURO area stocks is probably more closely linked to Euro strength than anything else.

 

EURGBP , EUROSTOXX, SP500 .

A couple of weeks ago I did an analysis of EURGBP, (that can be viewed by clicking here) . I concluded that EURGBP was probably heading lower medium term, though short-term there was a possibility of a deeper correction higher, but that the correction could end anywhere in the 0.8400 - 0.8800 zone. -  Since then it has corrected lower (Currently .8270), I now believe there is a strong possibility that the correction higher and re-test of the breakout of the large 2 year reversal triangle may be complete. (The chart below shows this).

The next chart shows the action since the early year breakout in closer detail. The re-test move through May to July appears to have unfolded as an 'Inverse Head + Shoulder' pattern. However the move over the past couple of weeks, suggests this is a failed Head + Shoulder pattern, with today's move below the low of the Right Shoulder strongly favouring a move lower if it can be sustained.  - In addition the pattern over the past month has also unfolded as a Head & Shoulder top pattern, which has broken down today. --The conjunction of these two patterns, the 'Inverse H+S', and the 'H+S top', could inject some dynamism into this move lower.  (See chart below).

Looking at equities now. Last Thursday and Friday morning's move lower appears to have been completely retraced, as I write (Pre-US market open). The first chart below is the Eurostoxx 50 (current level 2790), last week I commented that a breakout of its Symmetrical Triangle pattern would favour a move to the early year highs (that chart can be seen here). The breakout occurred, though I probably should have given more credence to the resistance from the May and June highs and the 200 day sma, which coincided at around 2793/2800. However, the move at the end of last week re-tested the Triangle breakout, and the stoxx50 is now again pushing up to critical resistance at 2800. This is the key pivot, and a break and close through here could be very bullish. (See chart below).

Moving on to the S&P, last week's move appears to have been a re-test of the Bullish falling wedge. The low was almost exactly at the same level that the index broke up through the falling wedge upper line (See chart below). Assuming last Friday's low is not broken, I feel the S+P500 should continue moving higher for now, with a re-test of the June high at 1130 a good possibility this week. A break above there, should see further gains, although how dynamically this possible move unfolds is likely to be the clue as to whether the S+P sees significant gains back to at least the April highs. The other alternatives currently under consideration, and which remain possible are:
a) A stumbling move back to the mid to upper 1100s, before another relapse:
b) Prolonged sideways actions around recent levels, with a resolution being a breakout of any extended sideways range.
c) Another failure below 1130, and a break through last weeks lows, which favours a re-test of July's 1010 low.

One final point. My current favoured view of further S+P gains, does not appear to sit comfortably with the USD index analysis I posted on Friday which suggests a possible reversal of the USD index lies ahead. That is a circle which may need to be squared. However, a look back at recent history suggests it may not be such an unrealistic possibility. November 2009 through to April this year, the USD Index post gains of about 10% whilst the S+P posted a near 20% rise. - Something to watch....

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.





 

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.)