GBPUSD Spot - Breaks out of holding pattern. Is 1.7000 on the cards?

A few weeks back I suggested in a rather long-winded post that GBPUSD was possibly on the verge of a move to 1.7000, or at least the high 1.6000s. Its been a frustrating trade in that time, as cable lived up to its name of 'the widowmaker', a term we affectionately gave it on an FX desk I used to work on. For those of you with the inclinations, that post can be seen here. 

Today's price action has however suggested that the bull move first alluded to in that post may be back on. The price action today, in the wake of very strong UK data, has seen the breakout of a classic 'Bullish Falling Wedge' pattern, one of my favourite trading patterns, this suggests further gains may lie ahead int he coming weeks if not days. 

Some resistance may occur at the old high from December at 1.6603, but a move clear of that would strongly favour continued gains, possibly to around 1.7000, with any move back below today's 1.6450 low, suggesting a pattern failure.  - Longer-term, I'm not to sure, I'd like to see how it performs around the 1.7000 area if it gets there, though currently I favour the idea of a failure around there and eventually lower levels.

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EURUSD - CLASH of Wedges + Some futher observations on EURAUD, SP500, US 10 YEAR, USDJPY..

EURUSD FX
A couple of years ago I wrote about what I termed 'The clash of the wedges' on the SP500, the post can be seen here. We seem to have another smaller scale version of a clash of the wedges on the EURUSD. - Just for the record 'Wedges' are subjective patterns which usually indicate a temporary interruptions of the previous price trend, they can appear at terminations of trend, and can also appear to be occurring at the onset of new trends before the wedge actually morphs into a new trend. Technical analysts see a 'breakout' of a wedge pattern as either bullish (on a breakout above the upper line) or bearish (on a breakout below the lower line).

I have noticed a number of occasions in the past when the breakout of a wedge takes the form of a new wedge, thus evoking a 'clash of the wedges'. One would normally expect the outcome to favour the major wedge, though this is not always the case as can be seen on the lower of the two examples below. I have produced a chart showing the current EURUSD wedges and some further charts below highlighting a couple of previous examples each with a different outcome. - In the first example the major wedge dominated, though not before the minor wedge had put in a strong showing, and in the second case the minor wedge overcame the major wedge and emerged dominant. - At this stage, I would favour slightly the major wedge, to emerge strongest but it is certainty not a given, and in the meantime, there is every chance the minor wedge pushes the EURUSD back towards the recent highs around 1.34/1.35. - As I said I would slightly favour a re-emergence of the downtrend from there, however a solid break through the 1.35 highs is likely to favour further EURUSD strength possible towards 1.4000.

SOME FURTHER OBSERVATIONS AND UPDATES.

EURAUD FX - DIAMOND PATTERN UPDATE:  This may have made a breakout of thIs basing pattern today, though given my own antipathy to these formations (See post here) I would still heed caution on this.

US 10 YEAR NOTE FUTURES: Similar emergent price behaviour over the past years to EURUSD in 2009.(See below). If this continues to unfold in a similar fashion, we may soon some period of consolidation, before further significant losses emerge int he months ahead.

 

SP500: Finally, my recent comparisons of SP500 rallies of late, which hinted at possible top in early-March proved to be somewhat wide of the mark.- Which goes to show how one should always treat comparisons with previous behaviour somewhat cautiously. - Which ironically leads me onto some comparisons with previous behaviour on the SP500. - A couple of weeks ago the SP500 produced a weekly 'Hanging-Man' candle, the chart below shows a number of these patterns emerging after some sustained weekly rallies. In the highlighted cases the hanging man was followed by further strong gains usually for another couple of weeks, followed then by some fairly wide-ranging consolidations back in all cases to the top of the 'Hanging-Man' candle where support kicked in. - In this case, were this to occur again, then the top of the 'Hanging-Man' candles would offer good support around about 1370. - Note, these previous consolidations were merely resting places for the rallies to re-charge themselves for further gains later on. 

 

USDJPY FX:  Last but not least the USDJPY, I highlighted in a post a couple of weeks the significance of a close over the 95 Week SMA (See post here). Since then it has continued to solidify these gains. I have updated the USDJPY chart below to show activity since that breakout. - If previous break performance is to be echoed, then I believe in the next couple of week, we may see a re-test of the moving average. This could bring USDJPY back down to 81.00-81.30, where support/new buyers would be expected to hold it before further significant gains emerge over the course of this year, quite possibly carrying this much higher into the 90s at least. _any significant moves below 81.00 on a sustained basis may cause me to question the assertion of further USDJPY strength.

Finally bringing all this together: The outlook for T-Notes appears to suggest further losses in months ahead, the SP500 further gains, and the USDJPY further gains, however all appear to be close to a period of consolidation of recent moves, thus I would be on the watch out for some corrective/consolidation activity on all these markets over the next few weeks.

EURUSD and EURAUD appears to be un-synched a little from these risk asset classes of late and following their own direction. EURUSD may see some further gains towards 1.34/35, however I think this zone may be pivotal, with my current preference for the EURUSD waekness to re-assert itself. EURAUD may be making a significant base, but I remain cautious as to whether to trust this right now. 

The 'Trader,Trading & Risk Psychology' Blog is part of 'BGT Edge' a trader and investor coaching, development and education company. - To know more about how we can help improve your Trading or Investing Performance from a psychological or behavioural perspective, and how it could help drive you towards greater 'trading success' please email me on sgoldstein@bgtedge.com or check out my website www.bgtedge.com.

AUSUSD - LOOKS LIKE NEW HIGHS STILL TO COME.

Yesterday I asked if the High in the AUD is in, or still ahead... Then I presented two possible scenarios. - Since then the move over the past 24 hours has gone a long way to help provide clarity. - It appears as though the 'Falling Wedge' pattern has clearly won out (barring a false breakout), which suggests to me that we are likely to make a new run to the highs over the coming weeks, and that my hunch we were moving lower was wrong. - In the bigger picture the 3 Peaks pattern I have alluded to is on the back burner, at least with regard to the bearish element of it, and now I feel we have a decent possibility of higher levels, in what I think will be the final hurrah for the bull move (though of course I do invoke the official technical analysis get out clause; the false break).

The chart below shows the Falling Wedge pattern on the 4 Hour chart. Key resistrance in the short-term is 107.20.
The implication of this will have repercussions for the Risk-on/Risk-off debate. - The AUDUSD has been the heartbeat of this over the past few years, so should we see a decent bull run in the AUDUSD, it is likely to be accompanied by bullish action in most risky assets.

EURUSD - A long-term very possible bullish resolution.

This morning I would like to take a look at the Long-Term EURUSD chart. I can not help remain surprised by the recent relative out-performance of the Euro versus the USD. When one considers the amount and weight of negative Euro sentiment in recent months, the current level versus the USD is surprisingly strong [Currently 1.3570]. Overall it is sitting pretty much in the middle of its range for the last three years, and close to levels from mid-2007 when the pre-crash asset price bubble was hurtling towards it final spell of strength.

Looking at the long-term monthly chart, I can not help thinking that price action since the top in 2008 has unfolded in what may appear to be a pattern which typically has a strong bullish resolution. The pattern I am potentially seeing is a very large Falling Wedge pattern (Though it could also be described as a downward sloping Bull Flag.) . Last year I wrote a piece about 'Falling Wedge' patterns, which can be seen here. In that article I was referring to the mid-year wedge on the SP500 as a potential Type 2 Falling Wedge pattern, which typically has a strong bullish resolution, since then as we know the SP500 has soared. If I have correctly identified this as a potential falling wedge pattern, then I too favour it to be a Type 2 pattern. - Of course I always add that at any one time prices always have at least 2 possible paths, and it may equally be that we are unfolding in a large ranging downward channel. However, for now I will lean towards the formation of the possible Falling Wedge pattern. - In saying that, thus far it has not broken any resistance levels, which reside around 1.4000-1.4200, and a clean break over those levels will be needed to tip the odds more strongly in favour of an ultimate long-term Bullish resolution. - The chart below shows the Long-term Monthly Euro chart.

For very short-term traders, a chart on this time frame is clearly of little real use, however for slightly longer term traders, then this might be noteworthy in forming a backdrop relating to the bigger picture.

Poor correction attempt on SP500 should help the bullish cause. + EURUSD update.

I had what historically was a very bearish 2 day-candle pattern on the SP500 over Monday and Tuesday which I highlighted in yesterday's post.. However this failed to follow through and was totally annulled with yesterday's rally. This suggests to me that the market is not ready yet for a correction, and that the bulls and buy-dip traders continue to hold the upper hand over the bears and sell-rally traders; thus favouring further upside for now.

EURUSD FX

EURUSD has rebounded nicely over the past 24 hours, and I see at least a re-attempt at last weeks high at 1.4140. I am looking at two short-term patterns driving this right now. The first chart below shows a Failed Head + Shoulder pattern, it was probably always doubtful that this was a valid Head + Shoulder pattern given the weakness of the Right Shoulder relative to the Left Shoulder. Failed H+S patterns often return to the top of the head as a minimum. The second chart shows a Falling Wedge pattern, I have previously discussed Falling Wedges and have identified four different types of Falling Wedge patterns (See illustration below). The current Falling Wedge confirms ideally to a Type 1 'Falling Wedge', suggesting strong short-term bullish potential. -  Of course bigger picture considerations take precedent over the shorter-term patterns, and the high of last weeks two bearish candles at1.4122 and 1.4158 will act as strong overhead resistance. However, a clear break over this resistance should favour a move in accordance with my my views expressed last week in this post here. --- One final point, the G20 finance ministers and central bank governors meet this weekend, I would be surprised to see last weeks highs taken out ahead of this event, and the potential for further volatility remain highs particularly as this could see some feisty headlines. 

 

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.

Rates Update + SP500 may be getting ready for break higher.

Global Rates

The past couple of weeks have seen some very sharp corrective activity on Rates markets. This corrective phase has occurred in the face of very sharp drops in Government Bond yields over the past few weeks and indeed months. There have been a number of events which have helped contribute to the large drop in yields over the summer, chief amongst these have been 'Flight to Safety' fears regarding the Euro Periphery (PIIGS), Double Dip fears as US economic data disappointed over recent months, poor economic data in other G7 countries, and the increasing belief that Central Banks were going to increase Quantitative Easing in response to fears of further economic pain.  - Is this the beginning of a real turn in the rate environment or a mere correction? - Personally I think this is too early to come to any firm conclusion, however it is something I am going to try and focus on over the next few days and weeks as this is likely to be a barometer of the level of fear and/or confidence running through the global economic environment.

My initial feeling is that this is a correction in rates for now, which probably still has further room to run. - Regarding the issues above, the PIIGS issue has not gone away, Credit Default Swap (CDS) levels remain elevated, though price levels have eased a touch over the past few days. Double Dip fears have eased slightly in the face of marginally better data over the past couple of weeks, (but still remain elevated), stock markets have recovered there poise and QE2 has not yet materialised, though it remains a very strong possibility. - The charts below show US 2 year and 10 year yields, German, Japanese and Australian 10 year yields. --- I have highlighted the Japanese 10 year yield level of 1.20%, this has been a pivotal level for the past few years, the recent collapse in yields across the G7 really accelerated upon the confirmed breakdown through 1.20% in June, and the rebound of the past couple of weeks in JGB yields moved from 0.90% to 1.20% before easing back to current levels around 1.6%

SP500 Index

Last Thursday's 'Shooting Star' candle failed to turn the markets down, with futures levels currently suggesting cash trading around 1118/19, it would appear that this signal is a fail. Unless today's likely stronger opening turns round to produce a weak losing close, then the focus is likely to switch back towards the 1130/32 key resistance area from June and early August.

The chart below shows the patterns which I think are likely to have the greatest influence on the market going forward. I believe the market may be preparing for a breakout higher, I have listed below my reasons for this below. However, as long as the 1130/32 continues to offer strong resistance, and until we see a clear and sustained break over this level, the risk of further consolidation or a move lower remains a possibility.   

Clues as to why a breakout higher may be due soon :

1) The large 'Falling-Wedge' pattern (highlighted above): I covered this many times over the past couple of months, including this posting from the 2nd August (Click here). I am re-posting some work I have done on 'Falling Wedge' patterns below.

 

I have long favoured that we have a Type 2 pattern (as per the above), though I have had doubts, which have led me to question that we may actually have a Type 3.  However the re-test of the breakout, which has held well, does lead me to once again think that this is a Type 2 pattern, which has bullish connotations whereas a Type 3 has a very bearish connotation. - Note: Type 2 patterns usually morph from failed Head + Shoulder pattern, which in its own right is a Bullish pattern.

2) The Higher Low (highlighted in above chart) is another supportive factor.

3) The internal 'Inverted Head + Shoulders' pattern. - I am loathe to actually call this a true 'Inverted Head & Shoulder pattern' as these would normally occur at the end of a sustained trend, however when combined with other signals, these can act as continuation patterns.

4) My own Long-Term trend following system remains in Bullish posture, it failed to produce a sell signal on the May/June sell-off. I posted a blog on this a couple of months ago (can be seen here). This system is not a forward looking system, hence I do not consider it as a trading signal, however it should not be ignored either.

5) 1970's redux. I posted about this in July, the price action since then has actually re-enforced this even further.  Below is an updated chart of the near-term comparisons, note history does not repeat itself, but it does rhyme.  (Click on the Highlighted link at start of this paragraph to see full item for bigger picture).

6) AUDJPY -- This has been one of my main risk barometers over recent months. I have previously highlighted the Symmetrical Triangle on this FX cross. The price appears to be breaking out of the top of the pattern (see chart below), if this is maintained, this would be bullish for the AUDJPY, who's moves have been well correlated with moves with the SP500 over the past couple of years.

Of course, all this will be 'by the by' if the SP500 fails to clear 1130/32, or makes a short-false break. In the meantime, I would not be surprised if selling pressure was to emerge ahead to this key area. 

SP500 Update.

On Friday, I produced a post regarding the major bearish 'Broadening Patterns' hanging over equity markets, this included a large selection of charts showing various global markets (That can be seen here). The day before I had a posting which suggested a possible short-term bottom (See here). --- This echos a similar ocurrance from the beginning of July when I did something very similar, on the 7th July I posted a set of charts showing various markets from all over the world displaying topping patterns, yet the day before I had posted an article suggesting a correction due (can be seen here). The 6th and 7th of July turned out to be the final part of the bottoming process that led to a 100+ point rally over the next few weeks. -- Basically I spotted a potential short-term reversal pattern, then when it immediately failed to follow through I had my doubts and went all bearish, only to have been correct in the first place. The market can play wonderful tricks on the mind sometimes.  - Well it is possible that the same process is taking place. 

Looking further at the July low and the past few days, the set-ups bear very strong similarities. The set-ups are as follows:

• Day 1 is a Hammer (or Hammer Type Candle).
• Day 2 is a large Bearish Candle (The high of Day 2 is higher than Day 1) .
• Day 3 Produces a Double Bottom with Day 1 (Slight new low in July), then a Bullish Engulfing Candle with higher highs than both Day 1 and Day 2.

Thus we have 2 potential Bullish Reversal Candle patterns, firstly a hammer candle, then a Bullish engulfing candle.  Furthermore these have created a potential 'Tweezers Bottom'.

This can be seen on the following chart :

Elsewhere there are various other signs hinting that we may have a bottom for this current move. The following chart highlights significant Bullish Divergence in both RSI and MACD. Also as I previously pointed out, support held at a line connecting the April high and the interim July high, which is the upper line of the large Q2 'Declining Wedge' pattern. This low was also significantly the fibbonacci 76.4% correction of the July - August rally.  - In addition both the RSI and MACD momentum indicators have produced strong declining trendlines over the past six weeks, the RSI trendline has broken, the MACD line is close to breaking. If price action breaks its declining trendline in co-ordination with breaks of the declining momentum trendlines, this could produce a strong counter-rally. - I have seen this sort of price and momentum behaviour in the past, the lower chart shows a previous example of this which occurred on the Continuation Bund future last year.

Finally I refer back to my early August post regarding Falling Wedges (this can be seen here). I mentioned that this could be a large continuation type wedge, though it was unclear whether it could alternatively be a reversal type wedge pattern. Nothing has happened yet to solve this particular puzzle, however in the past I have seen the continuation type wedges come all the way back to test the upper wedge line, which is exactly what has happened. Though this resolves nothing, it is something which I will keep an eye on, since if this does turn out to be the continuation type wedge, it would mean that the SP500 is at least likely to revisit April's high.

Overall my prior post regarding the 'Broadening pattern' still remains valid, however it is a very large pattern formed over the past year, and as I previously mentioned it could and will possibly continue to act as a Dark Cloud hanging over the market in the much bigger picture. Short-term though this market could post a surprisingly strong rally, I also however think that last week's low is now a major pivot, should the market fail to rebound strongly from here, and makes a sustained break below last week's low, then the market could drop very sharply. - In the absence of this, a strong rally could ensue, back towards the high of early August, and should this break, then the odds will shift in my opinion to a re-test of April's high.

SP500 --- BUND --- USDJPY

There is a lot to comment on after yesterday's moves : - Starting with the SP500; the solid break out through the bottom of the Rising Wedge has set up some interesting scenarios, though in my opinion nothing is resolved yet. The price action in the past couple of days and even weeks, has not yet broken the 'Lower highs and lows' trend from late April nor the 'Higher lows and highs' from early July.  - It is worthwhile noting that this pattern is not consistent with other US equity markets; the New York composite broke both the prior high and the prior low, the Dow broke the prior high and remains above the prior low, whilst the opposite is the case for the Russell 2000, and in addition the SP500 futures have broken this low with the overnight move. - So it may even be a moot point. -  I am re-posting the 'Clash of the Wedges' chart, which I have been flogging this past couple of weeks. Yesterday's breakdown was clearly a bearish development, though my hunch is that it is corrective in nature, thus I want to see how follow-up price action over a few days transpires before I have a stronger opinion on this. - Looking for clues elsewhere does not really help me at this stage.  I believe 10 year yields in the US, which I covered yesterday, are due for further lows in coming weeks and months. This should be a poor reflection of the US economy and hence should not be bullish for equities, yet it is possible that equities could take heart from a low rate environment, particularly if the Fed are seen to be helping their cause. The strength of the JPY, which I touch on below, is a sign that people are continuing to flee risk, and should argue for equity weakness, though it may also reflect Japan's own particular problems and may be less of an indicator than in the recent past.

Moving onto the Bund. - Last week I made reference to the Symmetrical Triangle, the original posting can be seen here. Since then the Bund has broken sharply higher in almost a straight line. I think further gains remains on the cards towards the triangle target at 132.20 (Current level 131.10), and probably higher. The Bund hit a first target @ 131.20 yesterday, this was measured off a Broadening Triangle Pattern which was internal within the bigger triangle. - I would however caution, that some corrective activity is probable before making the targets in the 132s. The area around the 131.20 target may act as temporary resistance for the Bund.  Whilst I do not see any immediate sign of divergences on the shorter-term charts on the Bund, if the Bund starts struggling in the vicinity of the 131.20 area over coming days, then there may be a risk of a correction before eventually shooting for at least 132.20.  If that correction did occur it would probably be short but sharp, possibly taking the bund briefly back to the high 129s. -- The chart of the Bund is posted below:

Looking at the USDJPY:  Firstly, let me say that I don't like trying to predict the USDJPY. Over many years this currency pair has made a good job of making me look and feel extremely stupid. Nonetheless I feel there are some matters to watch on the USDJPY right now. The USDJPY remains within a strong downtrend, and the downtrend is at present the dominant force. Yesterday the USDJPY fx pair made its lowest level intraday and daily closing since 1995. - This is significant as the JPY has been a source of safety from risk in recent years, and continued JPY strength could be a strong sign of further flight from risk. - One observation yesterday however was that the price action produced a small 'Hammer Candle', these are potential reversal candles. In addition daily momentum in recent weeks has been diverging higher from the lower price trend. There is also a clear 'Falling Wedge' pattern since Mid-May, which could be a sign that this may be readying for a reversal. I merely point these out as something to keep an eye on, whilst bearing in mind that the major trend is lower. The daily chart is posted below:

The Rising Wedge and the SP500.

On Friday I implied that the US equity Bulls needed to hold the current 'Rising Wedge' pattern from breaking down in order to avoid a very ugly set-up for US equities. As it happened the bulls did pretty damn well given the negative data and strong sell-off which appeared to be taking hold in the wake of that data. However, I have decided to have a look again at the 'Rising Wedge' pattern, to see whether my initial prognosis that a break down would see the market turn ugly, was a valid call.

If you would prefer not to read all the waffle which follows. A quick summary is that this 'Rising Wedge' is just as likely (possibly even more so) to break to the upside, either directly or perhaps after a false break lower, as to the downside. Which slightly contradicts my assertion on Friday.  - Further, which ever side breaks, this is probably going to be the direction to go with (though watch for the false break).  - I have gone into more detail below, and added my conclusion to some prior analysis of the SP500.

Added after original posting. - There is quite clear divergence on the momentum studies intraday, this may continue to work against a short-term upward move, however continued sideways consolidation, or a correction (which may be a false break), could work this off nicely.
_________________________________________________________________________________ 


A look back over the daily SP500 since 1965 shows 19 prior 'Rising Wedge' patterns, most of these have been in the period since 1990. I have classified those 'Rising Wedge' patterns into three broad types.

On the face of it, the current 'Rising Wedge' pattern would appear to be the of the first type above, 'A corrective 'Rising Wedge' within a downtrend'; there have been seven 'Rising Wedge' patterns of this type, six of which broke lower, and one which broke up higher. - However, it is arguable whether we are in a downtrend,  in all the seven prior examples of this type of rising wedge, the prior uptrend had ceased at least six months previous, and in most cases a downtrend was well established. Currently we are just 3 months from the end of the previous uptrend, and it is no way clear we are in a down-trend. - Furthermore, if this is the case, the pattern over recent months looks very similar to the set-up around the one example where this type of 'Rising Wedge' broke up, which occurred in March 2009. [This can be seen in the chart below].  And, just to add a further level of confusion, that 'Rising Wedge' initially made a false break lower.

   (Click on chart to enlarge.)

However, I digress slightly, if this is not the first type of 'Rising Wedge' pattern, then it would appear to be the second type, ' A Rising Wedge following either a correction lower within an uptrend, or a consolidation phase. This adds to the confusion, since breakouts from this type of wedge do not appear to display a typical behaviour. Of the nine examples I have found of this type, four broke higher (one of them after a false break lower), three broke lower, and two had erratic break outs leading to further consolidation.

The conclusion from all this is that perhaps the 'Bearish' potential of this current 'Rising-Wedge' is not as clear as I first thought. Sure a clear breakout should favour a continued move in which ever direction it occurs (though false breaks do occur), however it would appear that a until breakout occurs, this 'Rising Wedge' may have as much Bullish potential as Bearish Potential.


I can apply the above to previous analysis of the SP500, in particular analysis of the larger recent 'Falling Wedge' pattern, which I carried out last week, which can be seen by clicking here.  - At the time I concluded that the set-up fitted a type of 'Falling Wedge' pattern which favoured further upside, although I did caution that it was not totally clear, and that it could also be labeled alternatively as a type of set-up which had a potentially more bearish outcome.  -  To add further, my own long-term directional bias system, which I referenced here, has failed to generate a bearish signal on the recent down-move and retains a Bullish Bias for now, though this is a lagging not a forward looking indicator. Finally, and to the contrary, in my head I still have a bearish fundamental bias. Though I prefer not to let my fundamental thoughts override my analysis, I always pay some attention to this. -  In summary, I believe the odds favour an upside resolution, but the picture is confusing and lacks clarity right now, and it would not take much to shift to a bearish stance.

SP500 and wedge pattern + USD Index

The - 'Falling Wedge' pattern during an uptrend-  has been one of the most reliable trading patterns over the years. A couple of years ago (during one of my more anoraky moments) I decided to look back and see if I could characterise these patterns to see if they possessed certain attributes which could help assess the likelihood of future price action. At the time I was more involved in Fixed Income, and that was the market I used to assess these wedge patterns. My research led to two conclusions: Firstly, that there are basically four different types of falling wedges patterns prevalent within an uptrend. and secondly, that I really should get out more.

With the recent price action on the SP500, I have decided to apply these patterns to a ' look-back' over the past 20 years of SP500 price action. The criteria for the wedge patterns can be seen on the following insert.
(Click on insert to Enlarge)

The following chart is the SP500 weekly Log-Scale 1990 - 2010. I have applied my look-back and labeled each pattern, as per the above categories.  As can be seen on the chart below, most the wedge patterns conformed well to the expected behaviour as per the above insert.  In light of the above, I have labeled the recent Falling Wedge which had developed over H1 2010 as a 'Type 2' wedge pattern. These typically start out looking like Head + Shoulder pattern, then morph into a falling wedge pattern. Once these patterns break over the right shoulder of the 'Failed' Head + Shoulder pattern, they typically move sharply higher. - I say typically, because there are exceptions, however on this chart, two prior 'Type 2' Wedge patterns can be seen to have acted in this fashion. The top of the Right Shoulder of the 'Failed' Head + Shoulder pattern occurs at 1131.  - One final note for those with a more Bearish Bias, and fundamentally I do still possess a Bearish Bias. Type 2 wedges tend to occur late in the trend, this can be seen in both previous Type 2 wedges on this chart.

(Click on chart to enlarge).

(This following paragraph is an addition to the original post.)
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.  - This possibility has to be given consideration. - In particular the arguments for an alternative labeling are, Type 3s tend to be larger,(This has been a large wedge), Type 3s tend to be more complex, and most significantly Type 3s tend to breakout to the upside before failing. Currently I consider this a Type 2, but the possibility of this being a Type 3 (which would potentially be much more bearish,) remains a possibility.-- One final point, the suggested price behaviour in the wake of a patterns is a tendency not a rule. This is important to remember, since even the best set-up is no guarantee that the market will move in the suggested direction.


In relation to the recent large 'Falling Wedge', the chart below shows this large Falling Wedge currently in conflict with a smaller 'potentially bearish' 'Rising Wedge' pattern. Though if the S+P can break through the top of this smaller rising wedge pattern, it could morph into a more regular uptrend channel. - On the chart I have highlighted a Blue horizontal line at the significant 1131 area, which I mentioned above as being the top of the right shoulder of the 'Failed' Head + Shoulder pattern.  However, this level is also significant since it marks the level where either a series of lower highs (Bearish) from late April and higher lows (Bullish) from early July meet. Only one of these series can continue and a break above or failure at 1131 line will decide which series dominates. 

One final note. The USD index dropped sharply through a series of levels which I had identified on my Friday's posting as offering the potential to reverse sharp losses in this index. Often how a market performs at certain levels can give a strong clue as to where the underlying power lays. This failure to even pause for breath does not bode well for the USD. I will watch how this develops, but my feeling now is that we will see  further USD selling short-term, with eventual corrections now likely to be dips to be bought.