Low Volume Trickle Down

As I said on Friday and yesterday morning, I'm not expecting a huge retracement this week, and with the very low post-holiday volume I'm aware that my gentle little retracement could be derailed by any serious news. Equally I am expecting that after this retracement there will be a move back to retest the June and August highs near 1130 SPX, so playing this move is very much a higher risk counter-trend play.

That said I'm reasonably confident that we will close flat or down today and tomorrow, and there is a reasonable prospect in my view of reaching my ES target zone in the 1074.5 - 1077 area by the close tomorrow. I think that any gap up today is likely to be filled. Having traded as low as 1086.25 overnight, yesterday's support level in the 1094.5 area may well be resistance today and if so, restrict any early upside to the 1096-8 ES area.

Over the last day ES appears to have formed a declining channel, though the lower trendline is much better defined than the upper trendline. If the upper trendline breaks then I don't have any solid feel for where this bounce may peak today, and if so I would be very carefully choosing my short entry today only when I can see some sign of weakness:

One reason I'm feeling cautious today is because of the action on EURUSD yesterday and overnight. I said yesterday that I was expecting a hit of a strong rising support trendline in the 1.2685 area and that was my target to be hit by the close on Thursday. Instead EURUSD moved down very fast and hit that support level overnight, and that leaves open a very real possibility that it will now bounce back up towards 1.29 and carry equities up with it.

The other possibility of course though is that we are just seeing a much more powerful move down on EURUSD than I was expecting. That support trendline is the lower trendline of a broadening ascending wedge and if that support trendline is broken today then the wedge target is a test of the August lows just under 1.26:

On a larger scale EURUSD may well be forming a broadening descending wedge from the August high. If we see a break of the August low then the obvious next target is under 1.23. With rapidly declining confidence in the ability of Greece and the other PIIGS to put their fiscal houses in order that is very possible, and a lot of analysts are still expecting that EURUSD will put in new lows in 2010 because of the very grim outlook for the PIIGS over the next few years:

GBPUSD almost hit my retracement target at 1.5275 yesterday and has established a strong support trendline. Unless we see a break up through 1.55 today then I am expecting to see a hit of 1.5275 later today or tomorrow. I'm watching carefully for a break up on GBPUSD as recent action is looking increasingly like a bottoming process, and 1.5275 might be a good entry for a spec long if we do see another short term swing down:

Of the three USD currency pairs that I posted targets for yesterday, AUDUSD is the only one still in a definite uptrend and it was the strongest of the three yesterday as well. None of my wedge targets were hit, and a short term strong support trendline has been established. Overnight AUDUSD has recovered yesterday's losses and is now testing last week's highs. This looks a dangerous short to me here and we could well see a break up. I've marked the short term support and resistance trendlines in purple:

Overall I'm leaning short today across the board but without a lot of conviction. The overnight action has been ambiguous and in this low volume post-holiday week it is probably best to be cautious.