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.

Advance -Decline line and Price slight divergence,

The following two charts shows the NYSE and the SP500 against their respective Advance-Decline lines for 2010. The past few days have seen a slight divergence between the direction of price and the respective  Advance-Decline lines.  This may be flashing a caution sign with regard to stocks.- I have highlighted previous occasions this year where directional divergence has occurred. - Often in previous years this directional divergence has led to corrective activity. 

(Click on charts to enlarge)

SP Index - Trying to define the trend. + Betty Grable (GBP/USD)

First my gratitude to Michael for pointing out that the NYSE Advance-Decline line I used in my analysis from a couple of days ago was for all NYSE securities, this includes heavily interest rate sensitive securities such as ETFs and the like. Traders Narrative has previously written a piece last year which refers to this difference.

If I look at the the NYSE Advance-Decline line for Operating Companies instead the price action of the past 2 weeks looks less bullish than my earlier analysis suggested, however it still in my eyes looks like price action in the past 2-3 months look corrective rather than a trend change. The charts below show the comparison of the NYSE All securities cumulative Advance-Decline line  Advance-Decline line (Top Chart) versus the NYSE (Operating Companies) Advance-Decline line (Middle chart). I have also added a chart of the NYSE index at the bottom.  -

Looking at some of the many many blogs commenting on Equity direction one finds much debate and confusion on where we are now and where we are heading. This is understandable, price action has been confusing, I myself have veered between a bullish outlook and bearish outlook recently, though with an overall bearish bias. Right now I am neutral, there are just too many mixed signals. FWIW worth I believe above 1130 could see this take off back toward April highs and maybe higher (before eventually revisiting 2009's lows at a minimum), on the other hand a move back below 1040, and definitely 1010 then the downside is favoured. 

Finally Betty Grable has flown these past few days (Unless you've worked in the London FX markets you probably have n't a clue what I'm talking about: - Betty Grable = GBP/USD FX Rate). Since posting a low near 1.4950 on Monday the GBPUSD has soared to 1.5350. (See top chart below).  Looking at the lower longer-term chart, it can be see that GBPUSD has broken up the downtrend line which connects 2008s pre-Lehmans crash high, and a series of highs from late 2009. Additionally recently it broke up above the 100 day SMA and held a re-test, this is encouraging for the much bigger picture for GBPUSD.

 

Goodbye Bear - Hello Bull ??? !!! ???

My stop on my Bearish view of equities in recent weeks has been 1075 on the S+P500, this does not mean it is dead, however it on at best life support. In the meantime I have started to explore the bullish side of the case. - Last week I alluded to the bounce and the possibility of a larger bullish move (Click here to see) , at the time I saw this as stating the bullish case, but still favoured the downside. I realise we may be in a headfake, after all Mr Market likes to make it as hard a possible to make money out of him, and a headfake would certainly fit with that.

Further to the above, something worried me when I looked at my analysis showing various Equity markets last week. in the post titled 'Equity Topping Patterns - Everywhere' (quite ironic really). I had tried to justify what I thought were Head & Shoulder confirming patterns in various Global Equity Markets. However I now think I was guilty of trying to make non-confirming patterns fit as confirming patterns. As I look at the various overseas markets again, I believe that most of them may have actually been taking the form of a falling Wedge pattern, these are actually Bullish continuation patterns. Furthermore on the next day, when I looked at the possible bullish case for US stocks, which I refered to above, I stated this may also be forming a bullish wedge. (FWIW I also hate downward sloping necklines anyway on Head & Shoulder patterns such as the NYSE and SP500 have).

In light of this I have decided to look at the Advance-Decline line on the NYSE. I have posted 2 charts below. The top chart is the NYSE cummulative Advance-Decline line, the second chart is the NYSE Composite Index for the matching period. (CLICK ON CHARTS TO SEE ENLARGED)

The ultimate level of the Advance-Decline line is not an issue for me, though such a huge divergence between new all-time highs on one index and not the other is slightly baffling. - No the issue for me is what happens at corrections in the Advance-Decline line. If one looks at the above an upward sloping correction, it is usually consistent with a bear market, and a downward sloping correction is usually consistent with bull markets. Obviously at the turn of a trend this is going to be crucial since there will be conflicting signals. The recent move lower in the NYSE advance-decline line appears to me now to be a correction. In fact one can go further in saying that it appears similar but the opposite to the correction at the bottom of the downtrend in late 08/early 09. - This would be interesting, since if it did unfold as such, it would imply ; a) a test of the recent highs from April and quite possibly a break though there b) That this past couple of months, may actually be part of a larger topping process which has a few more months left to go...

Just to re-iterate. I am now neutral. My bearish analysis of recent weeks has served me well, however it may soon be past its 'sell-by' date. I am looking at a potential bullish scenario. I will elaborate on this in further posts. - If my analysis does prove to be correct, then this may have major implications for the 'Risk-on' v 'Risk-off' trade across varying markets.

Equities Topping Patterns - Everywhere

My post yesterday highlighted the risk of a short-term bounce, everything was setting up for a 'key-day reversal'. Well the bounce as it happened was very very short-term, the indices made it to the neckline of the Head & Shoulders pattern which broke last week before falling away. Though the S+P futures, did manage to complete a weak 'key-day reversal', this was not confirmed on the S+P500 index itself. Looking ahead some of the conditions still exist for this bounce to re-occur, however I think the odds have become remote for now. Looking at the bigger picture, though recent days' price action has show indecision, refering back to some of my earlier posts, I feel we may head lower soon, and possibly much lower.

Beyond that, I have decided to see how the bigger picture looks across a wide variety of markets. One of the maim tenet's of Charles Dow's original 'Dow Theory' was that of confirmation. Dow believed that a directional move or trend in the Dow Industrials Index could not occur unless the Railway's average (The Dow Transports Index) was moving in the same direction. If they diverged, then this called in to question the sustainability of the trending move. - The world has moved on since then, there are far more markets, covering specific sectors, or different size of market capitalisation. To that end I have looked as charts across a broad spectrum of indices, these can be seen below. All charts have a similar topping formation and each one has recently broken to the downside. To me this is strong confirming evidence, which adds weight to the major topping pattern, the Head & Shoulders, which should portend significant lower levels in the weeks and months ahead.
Beyond the US markets, it is also worth looking at global markets. The following charts show a selection of major G7 markets. What is clear here is once again we have similar topping patterns, though the German DAX offered a variant of the Head & Shoulders and has not yet made a new low for the recent phase (nor have a number of other markets within the EURO bloc).

The next set of charts move beyond the US and G7 countries and look at a variety of markets symbolic of Asia, South America and Commodity countries. Once again the major topping pattern is evident in all three charts. The Hong Kong markets has produced another variant of the Head & Shoulders pattern, this is probably because of the strong Chinese influence, - Chinese stocks indices seem to march to a very different beat. - As was the case with the German market, these have yet to make new lows for the recent move, however they all appear to have a strong downward bias.

SP500 + EURUSD

Yesterday's strong sell-off took US equities down to the support lines for late May early June. Of the major US indices only the S&P500 managed to make a slight new low for the year, most other indices just managed to hold their lows (for now), including the Dow Industrials & Transports, the NYSE composite, Russell 2000, and the Nasdaq. In Europe the FTSE 100 managed to hold the lows by a whisker, whereas most other Euro markets are well above their lows from the height of the Euro Sovereign Debt crisis. With regard to US equities, we are right on the pivotal point, for the third time in the past 5 weeks. A good friend of mine use to say rather crudely about key pivotal market levels, that price action has to 'Lubricate to Penetrate'. I believe that describes what has been occurring these past few weeks, with next week or so likely to determine whether penetration does actually occur. One slight note of caution however for the bears (of which I am one at the moment); quarter end is upon us, the key payroll data is due,as are ISMs etc, plus the extended 4th July weekend break. Add the fact that this comes on top of an already hefty 8% decline in the past 7 days, and it would not surprise me if the market take a breather allowing for some consolidation, if not from here, then perhaps from slightly lower levels.

With regard to the EURUSD I have talked to a few people who are frustrated with the failure of EURUSD to decline alongside US share indices this past week. This leads me to question whether the correlation between the two is breaking down. Below is a set of charts showing the SP500 over the past 5 years together with the EURUSD , and below them a chart of the 60 day correlation during that time. My reading of this (and I am no stato, so it is really a rather amateur reading), is that the correlation is generally rather poor, veering between periods of high correlation and low correlation but with no real consistency.Further to this I have looked at the 60 Week correlation going back to 1990. And this shows an even less consistent relationship, and if anything the periods of high correlation have tended to occur at times of Equity and EURUSD strength.
So with no real evidence of a link between US equity index performance and the EURUSD historically, why the obsession with looking for weaker EURUSD when US equities moving lower? I have a view as to why this might be, it may be right or it may be utter nonsense, but here goes anyway: The 2008 sell-off in Equities and EURUSD was a complete flight from all risk, and since both Long Equities and Long EURUSD were long-held risk trades at the time, their correlated move was not surprising. The recent move lower in stocks at the end of April, was in part triggered by fears of a full-blown Euro Sovereign Debt crisis, this itself was causing a flight from the EURUSD.

However over the past couple of weeks, I believe it is has been different. The weakness in equity markets is probably due to fears of poor US economic prospects (Double dip recession), not as a result of a Bank/HF deleveraging and consequential risk flight, nor as a result of a heightening of the Euro Sovereign Debt crisis. Therefore since the reason for this move would be a re-evaluation of US economic prospects, that should not be supportive for the USD going forward. On the other hand EURO economic prospects have already been massively downgraded as a result of the Euro Sovereign Debt crisis. -- Also, since an equity sell-off is leading to flight from risk (though not on the scale of 2008) it could be argued that this may actually be supportive for the EURUSD, since in 2007/8 risk was long EURUSD, whereas now I would guess risk is short EURUSD.

Shorter-term a break (and hold) through the 40 day moving average @ 1.2323 will be supportive for the EURUSD, and a break and hold over 1.2400 would confirm an inverse Head & Shoulders pattern, which could potentially see a move towards 1.3000. - On the other hand a successful break of the mid 1.2100 area, could spark a re-test of the lows of early June. --- Saying all that, the EURUSD has limited upside in the bigger picture due to its on-going concerns which are likely to continue to weigh on it, and I believe will eventually lead to sub-par levels over the next year or two.

US Equities Fractal.

I am going to revisit something I posted earlier this week. The link is here, the item I refer to is the additional point regarding the S+P500 at the very foot of the article, regarding a repeating pattern I had in the S+P which intimated we may about to head lower. Though I was myself somewhat reticent about whether this had any validity, the S+P has fallen some 40+points since then without any correction.

In terms of Technical Analysis, the chart referred to is a 'Fractal Pattern'. A fractal is a rough or fragmented geometric shape that can be split into parts, each of which is (at least approximately) a reduced-size copy of the whole. I recall looking at a similar analysis in relation to the Bank Index a few years back, prior to the spectacular crash in that index during the 2007/2008 bear market. My original analysis at that time was looking at the Bank Index and a rare '3 Peaks and A Domed House Pattern'. I noticed that this pattern, or some variation of it which overall was similar in formation, existed as one zoomed in closer and closer from the Multi-year chart right down to the intra-day chart. I have tried to emphasise this in the charts below (It will help to click on the charts to see them larger) .

 Below I have redrawn the S&P Index, however I have used the NYSE composite for the larger period, and the S&P Sep future for the shorter periods, since I think this captures the essence of what I am looking at better.
The implication of this Fractal analysis is that we appear to have a Head & Shoulder pattern embedded in the right shoulder of the next higher scale Head & Shoulder pattern, and so forth from intra-day up to multi-year. A highly respected ex-colleague of mine told me once that embedded patterns within other embedded patterns can be very dynamic.

This fractal analysis may work, it may not work, or it could be a misanalysis, however the implications if it does work are stark. --- My reading of this at the moment is as follows; the current move in the S&P should continue on to around 1040ish, possibly with a small bump or two along the way but not too much. After a pause and consolidation around/above 1040ish, then a further drop should begin, which could see a move towards around the 800 level ( I consider the 666 low an overshoot). After further consolidation around 800 there would then possibly be one further move to around 450-500. -- I will add that this is of course highly speculative, it is reliant on whether this analysis is valid, it is reliant on me correctly reading this analysis and reaching the right conclusions (for example this current move could be a Left shoulder forming, etc) , and of course it is reliant on whether it continues to perform in the manner consistent with prior performance.

On that note, I will finish this posting for now... Finally good luck to our boys for Sunday in the World Cup v Germany............

-- COME ON ENGLAND--.