Another Bullish Monday? (by Springheel Jack)

By -

Pug was asking on Friday why I
had switched back to being strongly bearish from having switched to
bullish a few weeks ago, and the reason for both changes was EURUSD. A
few weeks ago EURUSD broke up from a broadening descending wedge and a
rise to a target in the 1.46 to 1.50 looked likely. That was bullish for
equities. On Friday EURUSD, having formed a new broadening ascending
wedge, broke down from it, and is indicating towards a retest of the
June lows. That is most definitely bearish for equities.

It isn't just me who thinks that about EURUSD, the positive correlation
with equities is well established, though complex and obviously a proxy
for the complex equities inverse correlation with USD. On the EURUSD
direction, Arthur Hill wrote in his Friday night post that a retest of
the EURUSD lows (at least) now looks likely, and technically that's
obviously right.

Longer term I'm considering the possibility that the EURUSD broadening
descending wedge that broke up was just the lower section of a much
larger broadening descending wedge where we have just touched the top
trendline at the recent high. If so the next EURUSD target is the strong
declining support trendline currently below 1.10, and if so then we
could see a very major fall in both EURUSD and equities. I'm short
EURUSD from 1.2835 and I'll be holding on to that for a while in the
expectation that I could well extract a 2000+ pip fall from this short.
If EURUSD recovers to 1.28 I will be adding to that position.

I always liked the bear scenario here, we have multiple patterns
pointing towards 870, and it has the force of economic logic behind it
as well, given that the economy is quite obviously still in a mess, and
that we have finished one major bout of stimulus and quantitative easing
(shortly before the SPX peaked this year) and have not yet started

The short term bull case looks DOA to me here and now, and if it is to
rise from the dead, we'll have to see a break of the SPX declining
channel, currently at 1115, and a return to the June highs to complete
the right shoulder on the possible IHS indicating towards the 1250 area.
I don't suggest that anyone hold their breath waiting for that to
happen but you never know. We are only ever dealing in probabilities of
course .

I've marked the technically flawless SPX declining channel on the daily
chart below, and marked in the potential IHS that could be forming. If
the declining channel is to break though, I'd be very surprised to see
that happen soon as I have a number of indicators suggesting that no
major swing low has yet been made. Two of those indicators are the RSI
and MACD on this daily chart, which form patterns sometimes with clear
support and resistance levels. You can see that we are still well short
of the obvious support levels. Even on a bull scenario, the right
shoulder of the IHS bottomed twice in the 1040 SPX area, so the obvious
target for the bottom of the right shoulder would be in the same area:

100823 SPX Daily Declining Channel

Short term though, we could well see some retracement. The nice little
declining channel within which ES closed the week has broken, and an IHS
formed with the neckline at 1074.5 and a target at 1087.5. As I've been
writing the neckline has broken and we have risen as high as 1076 ES.
I'm expecting at least one, and possibly several retests of the strong
resistance level at 1084.5 ES. I'm doubtful about getting as high as
1090 ES but that can't be ruled out. I'll be regarding any moves higher
primarily as an opportunity to add to longer term short positions,
though I am scalping as well and went long at 1071 ES this morning after
looking at the overnight action.


On EURUSD we could see a retest of the broken wedge
trendline just over 1.28, but it is looking very weak this morning, and
hasn't followed ES up overnight:


GBPUSD is looking slightly livelier than EURUSD today, and again, we
could see a retest of the broken wedge trendline just over 1.57:


Oil has found support at an obvious rising support level, and I'm
expecting a bounce here. That bounce could go as high as a retest of the
broken channel trendline slightly above 76, but the obvious longer term
target remains the May low just above 67:


I posted a chart on natural gas a few days ago suggesting that the
obvious decline target was the strong support level at 3.8. Since then
it has made some progress and has broken a minor declining support
trendline, and I'm fairly confident we'll see 3.8. Technically the
triangle target could be a retest of the 2009 low at 2.4 though, and
while it looks worth a spec long at 3.8, if that strong support level
breaks with any confidence, then gas could fall a long long way.
Regardless of direction UNG looks a poor way to play gas as it has
failed to track the gas price well over the last year: