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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Likely to remain volatile into next week. + US 10 Year + Is Greece hotting up again?

The US equity markets continues to behave in a volatile nature, this is not surprising given the weight of news and data over the next week. A QE story seems to hit the wires about every 5 minutes, it appears that opinion remains strongly divided both within the Fed and outside. My call is that Bernanke, being the sly old fox, will pander to both sides, perhaps not doing as much as the most extreme expectations, but none the less providing a strong boost, but within that also allowing flexibility for the future so that of he needs to hit it heavy and hard he can, or if he needs to ease back he can. - I do not expect the issue to actually be resolved fully next week, thus this will likely remain an on-going theme for the next several months, adding to increasingly volatile markets. I do not think much, direction wise, will be resolved until next week at least, but clearly the news will have the ability to slice a chunk off of the market, or give it an extra boost, which is why we are seeing increasingly volatile short-term action.

Moving on to US 10 Year yields. This is obviously a central theme in the on-going QE debate, since these are likely to be one of the main tools used by the Fed in the QE operations. However, an awful lot has been priced in on these, and in the past few weeks some of the froth has started to disappear from the 10 year t-note futures markets: Yields have seen a decent pick-up, rallying almost 40bps from the low 2.30s to the low 2.70s yesterday. I had been expecting this to move lower towards 2.00%, however whilst I do not rule this out for a later trade, short-term it looks like a low is in, and the risk of a rally towards the low 3 handles is a real possibility in the next few months. The first chart below shows US yields over the past couple of years.

The chart above shows how the yield has been forming a 'Falling Wedge' pattern in recent months, whilst momentum as measured by the 10 day RSI has been diverging upwards. The past couple of days has seen a breakout from the wedge, the yield may comeback to re-test the top of the wedge, but the risk is that it holds and moves higher. - The 10 Year t-note continuation future chart is also supporting these assertions. The top chart below shows this on a weekly basis. A couple of observations which I have highlighted:

• Firstly the strong similarity between the recent price and momentum action and the price and momentum action at the interim top in early 2008, both highlighted within the mauve ellipses. Note the sharp correction led to an extended consolidation, after which the main rally re-asserted itself. 

• Secondly the similarity between the bigger picture price action and the next chart below which shows Gold weekly 2006 - 2010, in particular the price behaviour as highlighted by the large red ellipses on both charts. On both occasions the breakout of these large patterns led to strong dynamic rallies. In the case of the Gold the rally eventually led to the Gold price being well overbought in late 2009. This saw a sharp correction followed by consolidation, eventually however the rally in Gold, as we know re-asserted itself.

The market is likely to see some rebound I think before and possibly around next week's news, however the move to higher yields could be a theme in the next few weeks.  Will this affect stocks? I am not sure, historically these markets move inversely, however the relationship between these two has not been consistent in recent years. However, if stocks were to suffer a sharp drop, then it is likely that bonds rally and yields drop, thus if the above scenario above were to occur, it is likely it would happen against a steady or rallying stock market environment.

Finally with regard to Greece; there has been a lot of negative talk hitting the wires these past couple of days. One theme seems to be how, with economic conditions weaker than expected (not helped by the EURUSD recovery), tax revenue is coming up short of projections in parts of Europe, and as a result countries struggling with high deficits are now confronting the prospect that they will miss the budget deficit targets forced upon them this year. In the past couple of days things have started to stir in Greece whilst Ireland has had mounting issues in the past couple of weeks. The charts below show the 5 Year CDS for Greece and Ireland over the past 6 months, below that is a chart of the SP500 Index and the EURUSD. I have highlighted the two prior occasions when the 5 year CDS prices moved up sharply in the past 6 months, and how this saw sharp drops in the SP500 and the value of the EURUSD. In addition I have placed emphasis on the action of the past week. - If this whole Euro Sovereign Debt issue were to explode again, then the above analysis is likely to be wrong on the T-note, as US yields should drop as a safe-haven bet while equities would once again probably turn ugly. 

 

SP500 quiet,,,,+ 10 Year note comment.

The SP500 continues to churn within the consolidation zone of the last 2 weeks. A sustained break of either side of the approx 1130/1150 range is needed for this to start gaining some momentum in either direction. My bias is neutral at the moment, with the more bullish technical arguments offset by some concerns that highlight a potential bearish resolution. I covered these extensively in Friday's post, they can be seen by clicking here.

G7 10 Year yields are once again pushing the recent lows. JGB 10 year yields, which had rebounded sharply from 0.90% to 1.2% little over a month ago are once again threatening the 0.90% lows, currently they reside at 0.93%. German 10 Year Bund yields are at 2.24% having only recently rebounded to 2.50% from around 2.10%, and US 10 year yiel , which had rebounded in late August from 2.40% to 2.85% are back to below 2.50%. All three yields charts can be seen below. -

  

With regard to the US 10 year yields, I still favour these to push towards 2.20% and probably lower. There is a chance that the recent rebound may be a precursor to a deeper correction, with this move a re-test of the low and perhaps the early stages of a trend change, however I feel this is the less likely scenario. The next chart shows the US 10 Year Note continuation future weekly, the correction in yields shows up on this chart as a Bull Flag, with a strong Bullish breakout over the past couple of weeks. I have highlighted a strong similarity between the Bull move in 10 Year notes over the past few months and the late 2007 rally into early 2008. I have also added extra emphasis on the current Bull Flag and breakout and a similar pattern in Dec 2007,  whilst a repeat is not guaranteed the similarities are quite striking, and I believe this supports the idea of higher 10 year note prices/lower yields in coming weeks.  

SP500 , Bund, US T-Note, USDJPY, + AUDUSD updates.

SP500


The break up yesterday on the SP500 Index above recent resistance would appear to suggest further gains ahead. Last week I highlighted a number of Bullish Technical Factors supporting the SP500 (Can be seen by clicking here), the breakout of the Neckline of a continuation inverted Head + Shoulders pattern further bolsters this. - Key now will be to see how this performs in the wake of this breakout, I still suspect that we may see a pullback in the next week or so after a probable further push higher, possibly to the neckline of the breakout at 1132 on the SP500, or I suspect perhaps deeper to the gap underlying the the recent consolidation around 1110-1113. - If this occurs, then subsequent price action on this pullback will provide a strong clue as to future direction. Bigger picture I favour a return to the highs of April 2010, if however, the pullback makes a successful break below the 1110 gap, then I may have to reconsider.

USDJPY FX

After last Wednesday's intervention inspired rebound on the USDJPY from a low below 83.00 to almost 86.00 the USDJPY has been consolidating just below 86.00, I still feel a stronger rebound remains a possibility. The pattern on the weekly chart supports this, the past 3 weeks has formed a Bullish 'Morning Star Pattern'. This can be seen on the Weekly chart shown below: Note how the entire downtrend from late April began with the Bearish form of this pattern, a Bearish 'Evening Star Pattern'. Dec 2009 also produced one of these patterns. I also refer back to the analysis I produced last week whereby I noticed a similarity between USDJPY recently and the period in early 2004, this can be seen by clicking here .

Thus far the USDJPY has not yet re-tested the breakout around 84.70, I do not rule this out before this makes further headway, however it is possible that a re-test may not yet occur and the USDJPY forges ahead, this will grow more likely on a sustained break over 85.90/86.00. The daily chart below shows the key resistance around 85.89-93.

BUND FUTURE

The following chart shows the Bund Future (German 10 Year Yield inverted) daily candle chart. The past few weeks have seen a significant retracement of the major June/July rally. Currently I feel this move is an on-going correction, I feel that there may be some further room to run on this move. If this correction does run further, then I have highlighted some levels where I feel this may run to, I have a cluster of supports around 128.20 - 128.45, with a key level just over there at 128.70. I am however keeping an eye on a possible breakout of a Bullish 'Flag' pattern on the US 10 year note future ( I will highlight this on the next chart) should this happen it is probable that the Bund would get dragged higher too, if that proves to be the case then the downside may not have much further to run on the Bund future. 
























US 10 YEAR NOTE FUTURE

The following chart shows the 10 Year Note Future continuation daily candle chart up to last nights close. I have highlighted what I believe is a Bull Flag pattern, this is a continuation pattern, a successful break of this pattern should see a further resumption of the strong rally seen over recent months. Note, this morning the T-note has broken above the upper flag line, however I would prefer to see whether the move is valid in US trading hours. Also, at the risk of missing a big move, I would like to see if any break can hold for a couple of days.

AUDUSD FX


Finally the AUDUSD, this broke above its key resistance of the past year. If this can now hold this break through the week, ideally over 93/94, then this suggests significant gains ahead in coming months for the AUDUSD. - A failure in the wake of the break of resistance could however be a signal of a deeper retrace. though for now I consider this the lesser probability. Weekly momentum studies are supportive, though shorter-term studies suggest immediate further headway and some consolidation are perhaps likely.