Yesterday's early bounce failed at the key resistance level I mentioned
yesterday morning, which was the top trendline of the broadening bottom
on ES, and it fell most of the way towards the lower trendline over the
rest of the day. After a very weak close, it has fallen further
overnight to well below Monday's lows.
As it is still very clearly the dominant pattern here I'll be focusing
on the broadening bottom today. Here is where we are on ES at the time
of writing:
The first thing to note about this particular pattern is that it is a
monster. If it was to break up from here without touching the lower
trendline it would indicate to 35 points higher than the top trendline
of the pattern. As soon as we have a hit of the lower trendline of the
pattern though, currently at 1093, then the breakout target would
increase to 54. If we were to break up from (say) 1160, that would
indicate almost to new highs, and if we were to break down from (say)
1080 that would indicate to 1027. This is now a very big pattern.
The lower trendline of the pattern is currently at 1092, and won't be
lower than 1088 if we hit it today. If we get that far then we should
expect a bounce there, as even if this pattern is going to break
downwards, there is a reasonable expectation of a partial rise from the
trendline and then a return to break through it.
Even though this pattern is called a broadening bottom, these break
upwards only 53% of the time. A partial rise and return to the lower
trendline would indicate a 67% probability of a break downwards, but if
we do break downwards, there is only a 44% chance of meeting target.
This is not a high probability pattern on a downward break particularly.
As with all patterns and channels, if we hit the lower trendline, we
should watch carefully to see whether an IHS is forming. If we are to
see a good bounce, then there is a better than 50% chance, in my
experience, that we will see one form. If we are to make it back to the
top of the pattern, then it will most likely be a big IHS, and I can see
now that we have formed a possible left shoulder to such an IHS
overnight.
As ever these stats come from Bulkowski's excellent
website.
Now the inverse correlation between USD and equities is not what it was.
When USD bottomed in November the SPX was trading in a rectangle
between 1085 and 1115. Now that USD has rallied almost 18% we are still
near the upper end of that SPX range. That said, there has been a strong
correlation in the meantime in that while USD has been in a strong wave
up, equities have either traded sideways, or corrected down. While USD
has been trading sideways or down, equities have rallied strongly.
That matters, as USD has been in a very powerful wave up since
mid-April, accelerating powerfully in the last two weeks particularly.
At some point this wave up will finish, and if the correlation remains
the same, we will then see a powerful rise in equities.
The most important of the USD currency pairs is obviously EURUSD, and in
recent days that has met the rising wedge target just about 1.25, and
has since hit my broadening descending wedge target at 1.215 overnight.
Unless EURUSD is in freefall now, which is definitely possible, then we
should be close to an important reversal point:
GBPUSD has also been sold off powerfully and I have been having a very
careful look at this on the weekly chart. Again we have a broadening
descending wedge and my target if it should be hit this week is 1.408.
If it is hit next week it will be at 1.40, which is the key long term
support level for GBPUSD. At minimum we should see a powerful bounce
there and I will be a buyer of GBPUSD if and when that level is hit:
Of the commodity currency pairs, I posted on 21st April that
AUDUSD, which was at 93 at the time, had a very good chance of falling
ten cents or more to a target of 81.5 within a right angled and descending broadening formation. As I write AUD has been below 84
overnight, and there is a good chance now that it will make that target.
Naming no names, there were a couple of bloggers who suggested that my
AUDUSD target was ridiculous at the time I posted it. Hopefully they
didn't go long. 🙂
There is another target to consider as well though, and that is the 62.5
target from the rising wedge that defined the last major upswing. These
wedges are indifferent performers on equities, but are very good
performers on currencies. If AUDUSD breaks down from the broadening
formation, the target for the next decline would be 69.5 and while I'd
hesitate to go long at 81.5, this would look like a very appealing short
on a weekly close below 80.5. If that pattern target at 69.5 was
reached then the rising wedge target at 62.5 might well also be reached:
The real question for AUDUSD of course is what is likely to happen on
commodities. I've read quite a few posts in recent days about how oil is
now near the bottom of the trading range for the last year, but that
isn't what I see on the weekly chart at all:
It looks clear from the chart that oil has been in a gently rising
channel for the last year, and that the channel is now broken.
Unfortunately there are no downswing targets from a broken channel, but
this could well be the beginning of a very major reversal. If it is,
then we could see oil fall a long way from here and the same applies to
most of the other commodities with the possible exception of the
precious metals. That would put the commodity currencies under at lot of
pressure and we might then see that rising wedge on AUDUSD play out to
target.
As ever, time will tell.
