Rectangles and Rats (by Springheel Jack)

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After the incredible trend day rally yesterday, ES has been almost
entirely flat overnight. After a trend day we would normally expect one
to three days of retracement afterwards before the next move up, and I
think that today at least is likely to be flat to down, though that is a
cautious prediction after yesterday's wild move up.

On ES, the extremely ugly IHS that I posted yesterday morning finished
the left shoulder, broke up, and is halfway to target in the 1080 ES
area. I'm expecting a retest of the neckline today and I would add that
the IHS target is supported by a nice looking rising wedge that broke
up, as they do 31% of the time, and targets the same area. I am
expecting to see 1075 ES hit within three or four trading days at most:

100708_ES_60min_Patterns

Within the GBPUSD rising channel a (69%) bullish rectangle has formed in
the last three days with a target of 1.5375. I am expecting this
rectangle to start to play out in another day or two, though if it makes
target it would take GBPUSD through an important declining resistance
level and might well signal a major bullish breakout. That wouldn't
surprise me as the UK government seems to be moving back towards sound
money policies and the currency is starting to look much more attractive
to anyone concerned about the current general government debt bubble:

100708_GBPUSD_60min_Rectangle_and_Rising_Channel

EURUSD has spent the last three days crawling up the upper trendline of
the current rising wedge. A break above the trendline would be very
bullish, but it looks very overdue for some retracement today. I am
encouraged at least that the big move up in ES yesterday did not carry
EURUSD correspondingly higher with it. I'm unconcerned about a break of
declining resistance on GBPUSD, but a matching break through to 1.28 on
EURUSD would be a disaster for bears this summer IMO:

100708_EURUSD_60min_Rising_Wedge

The mirror image of the main broadening descending wedge on EURUSD this
year has been the broadening ascending wedge on USD. I'm seeing support
at 83.5, unlike many, and I've explained my reasons on this daily chart
below. I'm watching this carefully as a key indicator of a major bullish
breakout as IMO, a break with conviction below 83.5 would signal that
the USD rally is over, and demolish my primary bear scenario for the
summer:

100708_DX_Daily_BA_Wedge

Another key indicator that I am watching is 30 year treasuries. We are
well above key rising trendline support at 125 and a very encouraging
bullish rectangle was formed in recent days with a target in the 129.35
area. Again, if we get a major bull breakout this summer then treasuries
should break support, though this may well be a lagging indicator:

100708_T30Yr_60min_Rectangle

I think the primary bear scenario for the summer will play out, and I
think that bears will get an ideal short entry next week somewhere
between 1080 and 1090 ES with a target in the 870 area. This could break
the other way though, and if it does then I will abandon the bear side
with great speed.

We should learn a lesson from the rat here. A captain goes down with his
ship, while rats are packing bags and hitting the exit. This is one
reason why there are a lot more rats than captains, as rats are very
focused on living to fight another day.

While the US government particularly has the power to borrow huge sums
and print trillions of dollars to support a counterfeit recovery, the
bulls are armed with an extremely potent weapon. I'm doubtful about
seeing new equity lows while that remains the case and bears need to be
on their guard for any signs that the bulls are breaking up through key
resistance levels.

I'm out much of tomorrow & may not be able to post. If I don't check
in beforehand, everyone have a great weekend.

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