The Economy is Not the Market (by Springheel Jack)

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mmTesla said in response to a question at slopeofhope.com
yesterday that ‘the economy is not the market’. Very true. That doesn’t
mean that they’re not intertwined in the longer term, but in the short
term it does mean that the economy is of limited relevance to the
market. I take an almost purely technical view of the markets, and try
to put my personal (very bearish over the next five or six years) view
of the economy aside, as I don’t think it matters much in the short or
even medium term, and I’m very keen to avoid the easy trap of looking
for evidence to fit my view, rather than forming my view from objective
assessment of the evidence.

That does mean that my strongest views on market probabilities are over a
short timeframe, and I’ll switch my medium term projections without
hesitation or embarassment if circumstances change and major lines in
the sand are crossed. That’s as it should be in my view. Anyone looking
for bold projections that never change much regardless of the evidence
can always sign up at EWI, and the best of luck with that. Tim Knight’s
views are longer term I know, but there are very few chartists tracking a
wider range of individual stocks than Tim, so his view is much broader
than mine or indeed anyone who mainly specialises in the main indices.

In the short term I’m seeing intact declining channels on ES and EURUSD,
and I’m expecting to see a short term low today on ES with the highest
probability target area on ES in the 1033 – 1040 ES area. I’ll be going
long there, though with a degree of caution, as this looks like a
counter-trend play to me, and it is possible that ES could go lower. I’m
very aware that below my target area there is little support until we
retest the July low, but I’m expecting both of my ES channels to provide
protective support:

100825_ES_60min_Declining_Channels

On EURUSD I have a declining channel as well, though the upper trendline
was being tested hard overnight and on the 60min chart I am seeing
strong positive divergence on RSI and MACD. EURUSD has fallen back
somewhat since I did the chart, but I’ll be happier when it falls back
below 1.264, breaking very short term support:

100825_EURUSD_60min_Declining_Channel

Pug‘s primary count here is
still the bullish count until 1037 SPX is broken, which may or may not
happen on this short term swing down, and many would regard him as a
bull here while I am a bear. The more complex reality is in the
timeframe of course.

In truth Pug and I simply have different views over the depth of the
retracement of the March 2009 to April 2010 advance, in that he thinks
at the moment that it is more likely to have bottomed at a 38.2%
retracement, and I think at the moment that it looks more likely to make
a 61.8% retracement (878 SPX), which is also the maximum retracement
that Tim was putting forward as likely in a post last night. All three
of us and many others think that we are likely to see the market bounce
afterwards to a level considerably higher than we are seeing today, and
arguably that makes all of us bulls on that longer timeframe. :-)

In my view these labels are largely meaningless. Our only concern should be to stay on the right side of the market whichever side that might be. Anyone who thinks otherwise should probably avoid trading IMO.

Pug could yet be right. I switched my view back when EURUSD broke
support, as that for me is a very key indicator. EURUSD tends to form
wedges and they usually play out to target. The question here is which
of the two wedges that formed on EURUSD since last November will fail?
I’m leaning strongly towards the more recent bearish broadening
ascending wedge playing out, because of the supportive H&S that
formed at the recent top, and the increasing strength of the overall
bearish technical picture. Here are both of those wedges on the EURUSD
daily chart:

100825_EURUSD_Daily_Wedges_and_HS_Patterns

It could go the other way of course, my daily chart of SPX looks
extremely bearish, but I’m sure everyone can see the huge potential IHS
building on it with the neckline at the June and August highs. As far as
I’m aware I’m the first one who pointed it out as a possibility in July
and it is still a possibility. If we were to rise from here and break
the upper trendline of the main SPX declining channel in the 1110 area,
it would be a possibility to again consider very seriously

Something else to note on this chart is the patterns that have formed on
the daily RSI and MACD. I posted this chart the other day and you can
see that we are coming close to reaching the support trendlines on those
patterns. Those are likely to be hit today or tomorrow morning IMO, and
when they are hit the short term low should be in:

100825 SPX Daily Big Picture

One last chart to leave you with today. On the ES 15min chart we have a
fairly good quality descending triangle. These break down 64% of the
time and Bulkowski ranks them at 5 out of 23 as a pattern, though they
perform best on on upward breakout. Bulkowski’s page on it is here,
and I’d recommend his site to anyone using patterns a lot. I refer to
it often. The site is free and also has an excellent section on
candlesticks:

100825_ES_15min_Descending_Triangle

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