S+P on verge of Breakout + German 10 Year Yield

In a post a few weeks back I alluded to the possiblity of a failed Head and Shoulder pattern in a similar set-up to a failed Head and Shoulder pattern in Mid 2009. (That posting can be seen here). At the time my view was leaning heavily bearish, since then however this Bullish 'Failed Head & Shoulder' pattern has become a much stronger possibility. In addtion this pattern has morphed into a Bullish Wedge Pattern, which though it has not yet broken out, is pushing very close to resistance (a move over (and ideally a close over) 1100, will break the cycle of Lower Highs since late April). The charts below show the mid 2009 set-up and the current set-up. - Note: Failed Head & Shoulder patterns are amongst the most reliable of patterns, with a break above the top of the Right Shoulder (1131) being the potential breakout point. - Also noteworthy is the momentum set-ups for RSI and MACD both similar on both charts. 

Turning to German 10 Year yields, these have been central to the recent crisis in European Sovereign Debt, and by implication closely linked to the sell-off since late April in US stocks. German 10 Year yields were a safe-haven throughout this crisis, as fears regarding the credit worthyness of the PIIGS increased, and investors sought sanctuary in Bunds (German 10 Year Yields) and anything but the Euro. I have over the past couple of weeks made reference to how there seems to be a basing in the German 10 Year yield occurring, and how this is shaping up to look very similar, albeit smaller, than the basing in early 2009. This is continuing, and looks like it may be be starting to breakout to the upside in yield terms (downside in Bund futures). The top chart below shows the German 10 Year Yield over the past few years, with the 2 periods I have referenced highlighted. Whilst fears persist regarding the on-going weakness of the US economy, the fears regarding the Euro Sov Debt Crisis definately appear to be waning, particularly with increasing signs that the German economy, 'the engine room of Europe', faring better. This can be seen in the lower set of charts, which show German IFO Business Climate (Which was released this morning at a very strong 106.2) and German GDP (up to Q2). -This may also continue to favour the EUR over the USD in comng months. (Note : Click on charts to enlarge).

Risk on ???

The 'Inverse Cup & Handle' possibility which I mentioned yesterday looks dead in the water, although at one stage last night it did look a good possibility but now its dead... --- Moving swiftly on, this morning it seems that we are moving away from risk-off -- at least for the next few hours/days.... The 'risk-off ' trade of the past several weeks has been characterised by several key features in various asset markets: - Strong declines in major global stock markets, interbank lending rates (Libor) rising, strong USD, JPY and Gold + weak EUR, German and US bonds making strong gains, spreads of Non-German European Bonds widening v German Bond Yields, to name but a few... - However, it appears this morning that a number of these features have turned/ or are turning / or are threatening to turn... Below is somewhat of a chart-fest highlighting these various markets.

Firstly - The USD Index - this has seen very strong gains in recent weeks, however it is running into a major resistance line. - In the bigger picture this is the Neckline of a huge multi-year Inverse Head & Shoulders pattern, in the shorter term however it is major resistance. - Additionally, there is significant divergence between gains in recent weeks and momentum as measured by the RSI and MacD indicator. Taken together this warns of potential reversal or consolidation.The EURJPY has been watched very closely as this has had a very strong correlation with the move lower on the S&P. At first glance this is showing less sign of reversing than some of the other markets, the downtrend is still strong, however RSI and MacD is diverging from this price action. - In addition Monday's low at 108.08 was an exact Fibonacci 76.4% correction of the entire entire rally from 2000-2008, and was also .06 ticks shy of 1.618x the move from Oct 2009 to the intermediate low in Feb 2010.

Pressure on Interbank lending seems to have eased over the past couple of weeks, the rise in Libor has been minimal or stopped altogether in the past few days, whilst Libor futures which had been moving in synch with equities until late May, has seen strong gains since then. This can be seen in the following chart.
Also note how spreads within Euroland v Germany have started to sharply contract. The following 2 charts show Spain and Italy 10 year yields v German 10 year yields.Finally equities. First is the IBEX. this has been particularly badly hit in recent weeks. However, there are signs signs that this may (and I re-iterate the word 'may') be turning. The recent low was within a whisker of the 2/3rd retracement of the March 2009 - Jan 2010 rally, momentum is bullishly diverging, and thus far the breakout of the descending triangle pattern is showing signs of a failure, which could see a reversal. Today and by the latest tomorrow, should shed some further light on whether or not this is a failed breakout. - If it is a failure, this should see the Ibex making some decent gains.

The next chart is the AUSUSD v the SP500 since late April. Yesterday I highlighted how the AUDUSD spot seems to have been leading the Sp500, if this is still the case and the AUDUSD manages to hold onto its strong gains of the past 24 hours, then this would favour a strong move higher in the S&P.


In conclusion. The above charts are posted as evidence that the risk-off episode we have been within over recent weeks may be due to correct. I am not going to commit myself to saying this will happen, only there is a lot of evidence piling up against it. I also do not say this as the end of the overall risk-off trade, only that we may see a few days or even a few weeks whereby the market is able to gain some stability. I will also point out some caveats; the moves of the past 24/48 hours could be minor corrective moves which have or will soon have run their course, in addition most markets or risk assets still remain close to recent extremes. Also I would have liked to see the USDJPY perhaps moving a little higher towards the high 91s. Either way I think the markets face a couple of interesting days.

Spain v Germany - Evening Star pattern on Hourly

Something to keep an eye on. The deterioration in Euro sovereign debt over the past week has been a stronger driver of the risk-off trade of the past few days, with the main focus being the spread between Germany and Spain. However the above hourly chart shows an evening star pattern formed during the past few hours. It is a signal suggesting the first sign a possible pause/correction in this uptrend, and should be watched for any follow through. Note, at this stage the trend remains higher, however a close through the rising trendline, and a lower close than yesterday could change this.

I would also like to note that some of the other usual 'Risk-off' signals, have been fairly relaxed during the most recent sell-off. USDJPY has remained fairly stable, Gold & Silver remain 'bid to old boots', and Libors appear very relaxed. I am questioning whether the 'Risk-off' trade may be due for another pause.