EURUSD Triangle update.

The breakdwon fromt he triangle, which I highlighted a couple of days ago has occurred. BUT I am not at this stage convinced that it will be maintained. Re-tests of breakouts of patterns are not unusual, however such sharp breaks, then quick rebounds in my experience are. I will not draw too many conclusions at this stage, but I am watching for a heightened risk that this is a false break. - False triangle breaks can be great trading opportunities: A move over the apex could be a sign that this is a false break. The approx apex of this Triangle is 1.4330, a clean and sustained break through there, which would also mean the closing of the Friday/Monday Gap 1.4274/1.4230 would strongly favour that we have a false break. False triangle breaks often see strong moves in the other direction, suggesting a reasonable chance of a sharp move towards the high 1.4000s, perhaps 1.4800.

It is also interesting to get a perspective on exactly how much damage the Greek debacle has done to the EUR v the USD. Below is a chart of the 10 year Greek Government Bond yield over the past 3 years versus the EURUSD.  Whilst the Greek debacle has no doubt affected the EUR , its actual values versus a range of major currencies (with the exception of the CHF) has not been significantly adversely affected over the course of this year.

Bund Symmetrical Triangle. + US Yields falling as Equities Rally..

The Bund Future appears to be breaking out of a Symmetrical Triangle, this would appear to suggest strong bullish potential in the coming days and weeks (German 10 year yields much lower), the chart below shows this Triangle pattern. The breakout level is 129.21 (Note: the bund is now trading at 129.35) and the measured target for this breakout is significantly higher at 132.20. In addition the breakout is supported by a break of the falling momentum trend-line on both the RSI and MACD.

With regard to the measured target above, I cannot rule out the possibility that this could go further than the suggested measured target. A look back at the weekly Bund chart over the past 20 years shows two similar price and momentum set-ups to the current set-up. The chart below shows the current set-up on the weekly, including the price set-up and the momentum set-up.  The two subsequent charts show the previous similar set-ups, one from 1995 and the other from 2002.

Bund 'Symmetrical Triangle' set-up - Weekly 2010

Bund 'Symmetrical Triangle' set-up. - Weekly 1995.

Bund 'Symmetrical Triangle' set-up. - Weekly 2002.

 

 

With regard to the recent drop in US Treasury yields and simultaneous rally in equities. There seems to be a few commentators questioning this, they suggestthat US stocks should be dropping as yields drop, the rationale being that the drop in yields is a reflection of a weak economy, particularly given the already very low yield levels. Fundamentally I can not argue with this, though for now I continue to hold a bullish bias on equities. This bullish bias is based off my take of the technical picture, however I will add that I am only short-term bullish, and this view could change easily with a change in the technical environment. - Further to this, the following chart shows that there is nothing unusual in the SP500 rallying as US 10 year yields drop sharply. The green drop down columns show periods where US 10 year yields dropped sharply as the SP500 rose, in the past six years. If I were to second guess why this is happening, my best bet would be that the low yields are looked on as favourable for stocks, a situation that may be accentuated if the Fed initiates a QE2 programme. However I guess that if low yields do not help stimulate the economy, then US equities will eventually move lower.

As an aside, with yields moving lower, the USDJPY weakening, the stronger EURUSD and Stocks rising, it appears the correlation of Risk-on and Risk-off assets seems to be breaking down.

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.