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. 

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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.
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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.

Clash of the SP500 Wedges, updated.

Earlier this week I posted a chart I called 'Clash of the Wedges'.  It actually had two elements to it, the clash of the two Wedges, and the clash of the 'Lower Highs' and 'Higher Lows' trends. The Battle line on the SP500 was the June high at 1131.0 . I have re-posted the original chart below.
(Click on chart to enlarge)

As I write the battle is still going on, the high of the week has been just shy of 1128, and despite a poor set of payroll data today, the SP500 has barely moved lower, (it is currently 1120). - Net net, the data should have helped the bears, however the market is thus far holding in well, which should be encouraging for the bulls.

I want to post one more chart, which shows why for the Bulls this is a battle they dare not lose. The 2 prior rising wedge patterns, both occured in 2008, a breakdown from both patterns turned out to be very bearish indeed. 
(Click on chart to enlarge)

EURUSD - Interesting Comparison.

The charts below show the EURUSD daily in Q4 last year (Top chart). - The lower chart shows the Current EURUSD 8 Hourly chart. The failed Triangle breakout in December 09, and today's strong break up out of the triangle, look strikingly similar.  - Am I guilty of pattern hunting? who knows? indeed it may be too early to say we are in for a similar outcome, however this breakout has occurred right within the 1.3100/1.3150 window I suggested as a target zone for the EURUSD a few weeks back, the chart used back then can be seen here. - Significantly it is just shy of the 38.2% retracement of the entire move lower since the December top. Whether this is a major top or an interim top, this level should provide tough resistance. - Note: The Nov-Dec 09 top was also strong resistance in the form of 78.2% Fib resistance of its entire prior 12-month rally.

A quick note on the SP500. This afternoon's price action has seen a strong rejection of the 200 day moving average at 1114, and the significant 50% retracement at 1115. The correction higher over the past few weeks, appears to have unfolded as a Wedge shape pattern, this is potentially a bearish development. On the other hand the large correction lower since late April also unfolded as a potential Bullish wedge pattern. - This pits these two opposing forces against each other over the next few days. - I believe the battle ground may occur around 1065-1080, with the outcome possibly being decisive for near-term direction.

Further to this, the next chart shows the above opposing wedge patterns in the bigger picture. I have also highlighted a similar set-up, which occurred in 2007. It may be that this 2007 price behaviour is repeating itself. I will keep an eye on this to see how this evolves, as this may have 2 major connotations for the much bigger picture. - Firstly that if the Bull/Bear battleground I have highlighted at 1065/80 can hold, there may be  another approximate 100 point advance. However, if that occurs, then it is possible that this may then set up the S&P for a much bigger fall later following the termination of that rally. Furthermore, that fall could be the precursor to something far more serious as we enter the fall (no pun intended - seriously).
(CLICK ON CHART TO ENLARGE)

GOLD at a key juncture possibly.

Of all the Markets which have confused me during my time as a trader, the one which has baffled me the most and has probably floored me more than any other is Gold................ I don't profess to be an expert on Gold, infact a quick look back at the few Gold trades I have done over the years will confirm just that.... However, I do look at Gold and start to wonder exactly how high it can go, given its quite amazing gains over the past decade, particularly in light of the performance of most other asset markets during this time and considering the deflationary winds blowing across the major western economies. I am not however going to try and debate reasons for and against buying or selling Gold, this is covered in depth in a million or so blogs and news services elsewhere, however I am going to post a few charts, which I hope may shed some light on where I think Gold may be heading...

Firstly I will show 2 sets of fractal patterns, one with Bearish possibilities and the other with a potential Bullish outcome:-

The first set of chart show a series of Rising Wedges embedded within each-other, rising wedges are potentially bearish patterns.

The second set of charts show the Gold over the same period, however this time I have identified each pattern as a series of Bullish 'Cup & Handle' patterns.


The third set of charts shows the performance of Crude Oil 2007 and 2008, together with a similar set-up on the weekly Gold chart. I will admit, that if one looks closely at the two charts, there are many differences, however I am trying to capture the essence of the moves, which on both charts show two converging arcs of support and resistance.
My head says the arc converging from the left should win, and turn Gold sharply lower, however there is no reason why this could not break in favour of the sharply rising arc, particularly as this arc has a longer duration. If this were to break to the upside, it could quite possibly project Gold sharply higher. Either way, I think soon we will see a sharp move.

I will confess, at this stage I have no idea which side will win, however I think it worth watching a break of either 1200 and 1300 for the next significant move....