A Promising Start

Support finally broke on Friday and there were impressive falls on SPX and Nasdaq while oil spiked up on riots suggesting that the Egyptian dictator Mubarak may be replaced soon.Why's that important for oil? Because Egypt's Suez Canal is a potential choke point for shipping world oil supplies and because the toppling of Mubarak might lead to an aggressive islamist government in this key western ally in the Middle East.

We'll see how that goes but rioting in Egypt looks set to run for a second week this week and Middle Eastern stockmarkets, which are open on Sundays, were down a further 3% to 5% yesterday. Things look promising for more downside on equities in the west too as ES failed to hold the support levels at 1276 and 1273 on Friday and traded as low as 1262.5 overnight. The next target support level that I have on ES is the potential H&S neckline at 1258 and I'm expecting that we'll see that hit this week, though we might well see a bounce first. That matches exactly with the lower trendline of the rising wedge on the SPX daily chart:

NQ failed to hold the key 2267 level on Friday, and is now rising in a short-term channel that looks like a bear flag. If it breaks downward the obvious target is the lower trendline of the broadening top in the 2220-5 area:

Encouragingly for equity shorts, the technical picure on EURUSD now also looks increasingly bearish with a significant break downwards on Friday. For two weeks now EURUSD has been breaking through a succession of three progressiverly shallower trendlines and is now bouncing from a potential H&S neckline. If that plays out the pattern target is at 1.338:

Copper was looking divergently bullish on Friday morning, made my 439 target, reversed to channel support at 433.6, and is now moving up towards declining support in the 444.5 area. I'm expecting that target to be made, and (slightly less confidently) am expecting a reversal there towards the larger channel support in the 425 area. A break above 444.5 would look very bullish and the next short term top will be signalled by the break of the short term channel:

Silver is continuing to look extremely bearish, and reversed at the top of the current declining channel yesterday. I'm expecting a move down within that channel to the key support level and potential H&S neckline at 25. It is possible that silver's H&S has already formed higher with a target at 22, and if 25 fails to hold, that is where I would expect silver to go. A break up through the declining channel would look very bullish and would put the immediate short scenario into serious question:

Oil is the star of the current geopolitical show at the moment of course, and has broken up convincingly from the declining channel that had seemed likely to take it to the potential H&S neckline at 82. Added to that potential H&S pattern we now have a potential (continuation) IHS forming with the neckline at 93.5 and the target in the 102 area. If the crisis in Egypt deepens this week, that will be one to watch:

We may be watching a very significant reversal forming here, and if the SPX rising wedge breaks downwards then I'll be looking for a retracement into the 1200 SPX area, which I'd expect to hold unless Atilla at Xtrends is right about equities having already made a very major top.

Copper Breaks Up

There's a bullish feel to everything this morning. Copper has broken the recent declining resistance trendline and may be forming a large IHS indicating to the 450 area. If it breaks through the neckline I have an immediate target just over 439 and a secondary target at declining resistance in the 444 area:

The big question today on equities of course is the GDP number and the reaction to it, and that's obviously hard to assess. Overnight action looks cautiously bullish on NQ however. The rectangle target at 2333 was made yesterday and NQ pulled back to support in the 2318 area overnight. That support held and if we see a strong move up on NQ from here, the remaining pattern target is on the (now huge) broadening top in the 2390-2400 area. NQ could make that target:

On ES there remains the possibility of a dip back to test support at 1286, and a break of that support would be bearish with the next immediate support at 1276. To reach it though would require a major technical breakdown, and I'll show why that is on the chart after this. ES is bumping around just under yesterday's resistance level but there's scope for a move today to the 1300 level and perhaps 1303 if we see a touch of the larger channel's upper trendline:

I was complaining in December that the rise on SPX from late November was shapeless and hard to pin down for targets. That's no longer the case, though the perfect rising channel that has formed on the SPX 30min chart will not be a welcome sight for bearish eyes. On the plus side we're not far above support and a break down through it would be very bearish. On the minus side the upside target looks to be in the (cough) 1350 area, though there are two decent resistance trendlines marked that should provide some resistance in the 1302 and 1310 area if hit today. The main rising wedge on the daily SPX chart has the upper trendline in the 1310 to 1315 area today:

The most interesting chart this morning is definitely GBPUSD, where a textbook bear setup may be about to fail dramatically. The chart is simply beautiful and my commiserations to any GBPUSD shorts if this setup fails, though the odds are still that it will play out as you would expect:

Hard to say what the GDP figures will bring, but I'd be wary of shorting the picture I'm seeing this morning. There are still some signs of a top forming here, but the old adage that you should never short unless you see significant weakness comes to mind strongly here. Good advice though I'd add to it that a major trendline hit can also be a very good short entry. Unless we rise a lot, we're not going to see one of those today.

Is the Euro topping?

Just a short post today as I've had a late start and I have a lot on, so I'll just have a close look at EURUSD, ES and NQ. First EURUSD, which has been frustrating in recent weeks because despite showing some signs of topping, it persists in making new highs. EURUSD is of particular importance because while it continues to rise, it's going to be tough to see much retracement on equities, and the best chance to see that retracement will be when it turns.

So where are we on EURUSD? Well as I said it continues to make new highs, and has made new highs overnight, but it has been breaking down into a succession of shallower rising support trendlines. This is something that ES did in the run-up to the April 2010 high last year and is a signal that an important interim high may well be approaching. I've done a broad view 60min chart on EURUSD to show also that it has also entered an important resistance zone, which would be a likely place to see that reversal:

On ES there's now an interesting setup that has me leaning somewhat towards weakness today. There's a five day rising channel, and a rising support trendline / wedge within that channel that has broken support. It may also be forming a reversal H&S. If we fall today the target and support will be in the 1282 - 1284, which would be a good long entry for another move up. If that lower channel trendline breaks that would look very bearish:

NQ looks unequivocally bullish this morning, and is outperforming ES considerably, so the possibility exists that NQ could make the upside targets there without ES breaking up from the rising channel. The upside targets are 2333 for the rectangle and 2339 for the falling wedge, and that would be close to a double-top or new high for NQ which might then be made within the current short-term broadening ascending wedge. A break below the support trendline would be bearish and that support trendline is currently at 2317. If we do see weakness today before NQ makes the upside targets then there's a possibility that we might get another long entry near the rectangle top at 2300, as we did yesterday:

I'm seeing the current action on equities as part of a topping process, but there's still room to rise within that process, and my short-term bias is still bullish with a keen eye on the exit until we see some further signs of weakness. Seeing a top too early can be very expensive and we should remember that the second mouse gets the cheese. :-)

Gold and Silver Targets

NQ closed just over the rectangle yesterday and has kept on moving up overnight. I'm expecting more upside and I have pattern targets of 2333 (rectangle) and (2339) falling wedge on NQ. If NQ was to reach the upper trendline of the broadening top that would require a move to 2400 which looks a very long shot from here and seems unlikely because ES would have to break the main rising wedge on the daily chart:

ES is now close to a new high, and is therefore considerably outperforming NQ of course, as well as many other lead indicator markets such as EEM. ES looks likely to make a new high today and I'm looking for a move to the 1310-1315 SPX level for SPX to touch the top of the rising wedge on the daily chart if SPX makes a new high today

EURUSD followed the support break yesterday with a new high. It has been a widow-maker for shorts recently. Oil also broke support on the five month rising channel, but is now bouncing. In the short term there's a steep falling wedge on oil that has broken up since I did the chart below. Short-term, that's therefore looking bullish, and should bounce a bit here. It's worth noting that the rising wedge target is for a return to the recent high, but there's strong resistance in the 88.3-88.5 area, and I'd expect this bounce to fail there:

I've been looking at gold and silver this morning, and a bounce here for both seems likely. Both have reached significant support levels and have touched support trendlines yesterday. On silver I have a very nice declining channel and two possible H&S patterns forming. We reached the neckline for the first of those possible H&S patterns yesterday:

On gold I have a falling wedge since the most recent high and it looks likely to bounce from the lower trendline which was hit yesterday. It didn't quite make it to my neckline target of 1315 and might yet do that before bouncing. I've sketched in a potential path if the H&S continues to form and then plays out.:

I'm definitely leaning long today. A gap fill looks possible, but after that I'm expecting equities to go up. If ES breaks below 1284 or NQ breaks below 2290 then the short-term bull scenario would look much weaker.

Anyone for Calamari?

Lots of charts today as it has been very interesting overnight. First though I saw a lovely chart yesterday which I thought I'd share with everyone and it is the daily chart for everyone's favorite vampire squid Goldman Sachs.

It's a beauty, a failure at long term resistance, a broken rising wedge and negative divergence on RSI and MACD. Furthermore there's a broadening descending wedge in red dotted red line that suggests that the next serious downswing may see GS break 100. Strong resistance is slightly below $175 so the risk/reward on the trade looks pretty good, and they may in any case rise with the market over the rest of the week to a better entry level:

Everyone knew what was going to happen next at the close yesterday at the high, after the breaks of declining resistance on ES and NQ, but the very bullish short term scenario didn't deliver overnight and looks unlikely to deliver today. The rot set in first with copper, which broke the strong recent (wedge) support trendline and then gave up most of the gains in recent days overnight. A break of 422 should take copper to 415 if we see that:

I stayed up late waiting for the NQ rectangle to break up so I could enter long with a target at 2331, but it didn't break up, and after pulling back significantly overnight the next obvious target is the rectangle bottom at 2267. Rectangles are (69%) bullish patterns so that support should hold:

On ES rising support from the low was broken overnight and the next obvious target is the second retest of yesterday's broken declining trendline. If that breaks then there is strong support in the 1273.5-5 area, and below that there is the lower trendline of the main daily rising wedge at 1264:

Oil fell overnight to hit my target at the lower trendline of the five month rising channel. It's showing some signs that it may break through it, in which case I'd expect a move below 85:

What was really interesting overnight though was that EURUSD broke the support trendline from 1.30. This opens the way for a serious retracement which could give the short side a strong edge today. EURUSD has been the despair of the shorts in recent days though and could trade around the broken trendline for a while:

GBPUSD also broke rising support overnight and crashed over 200 pips on the news that the latest GDP figures show that the UK economy contracted 0.5% in the last quarter. I've no idea why this should cause such a fuss as this seems a natural transition from the jobless recovery in the developed world, to the jobless and growthless recovery in the developed world. The UK has moved earlier than most in trying to restrain wild government spending to s(t)imulate growth, and others will follow in due course IMO, but in the meantime GBPUSD is building a bear flag and I'm expecting more weakness:

This might yet turn around, but the immediate picture looks bearish, and I'm expecting to see weakness today. If that develops momentum there is a significant risk of a trend down day. 

Undecided

There are some days when the market direction stands out strongly, and others when it really doesn't. So far this is one of the latter kind, with equities dithering between support and resistance without any conviction so far. On ES declining resistance is at 1285-6, and a break up through there would look very bullish, and there are support levels just below at 1278, 1274 and the 20 day SMA at 1272. A break of 1272 would look very bearish and would suggest a hit of the daily rising wedge support at 1262 ES:

NQ looks equally uninspiring, seemingly pinned halfway between declining resistance at 2285 and broadening top support at 1255:

There's a mixed picture elsewhere. EURUSD is still looking stronger than I expected, but recent action has formed a promising rising wedge:

Oil looks bullish with a hit of strong support but will turn bearish on an hourly close below 88.3:

Silver looks bearish with a test of broken support overnight and failure there:

The real question today is whether we have topped or are topping? That could still go either way. A break of declining resistance on ES and NQ would open the way to a new high or double-top, and a break below support on NQ would be a very strong signal that we have already topped.

Major Commodities Top?

I've been mentioning for a while that we're in an area where we could see a very major commodities top, and I'm aware that my view is at best a minority view, but I'd like to put the case anyway, and to stress that I'm seeing this from the perspective of an chartist who mainly calls reversals on the basis of trendlines, and to show how impressive some of the trendlines are that commodities have recently reached and, so far, reversed at. I can only show a few of the commodities here so I've chosen copper, silver, oil as three of the most influential individual commodities and CRB to represent the commodities complex as a whole. First the CRB, where the index has reached the lower trendline of the rising wedge that broke down in February 2010. It has also hit the upper trendline of the more recent rising wedge and is showing strong negative divergence on the daily RSI. At this level I would expect to see at least a retracement to the lower trendline of the rising wedge, and if that should break, considerably more. It's also worth noting that in 2010, CRB peaked almost four months ahead of equities:

The next three charts are much longer term charts. The first is the copper chart, where a major long term rising trendline has been reached. The trendline could be hit again short term, but unless we are to see a massive resistance break then that trendline represents the likely high for this move up, and I'd expect to see a move at least to the lower trendline of the shorter term rising channel soon:

The resistance level reached on silver is even more impressive, and the shorter term charts are indicating a retracement back to the 25 level here, and if that level turns out to be an H&S neckline, which it might, then perhaps much further after a bounce there:

The trendline hit is less definitive on oil, but it has hit two significant looking trendlines in recent days, and we may well see a reversal on oil too. It might break up through back into bubble territory of course, but the low stocks and tight production capacity over demand that fed the 2007/8 spike simply isn't there any more, and on that basis, this is a natural reversal level for a substantial retracement:

Commodities are also a currency story as well of course, and on the commodity currencies we saw a major trendline support break on AUDUSD this week. At that break it has formed a very characteristic reversal H&S with negative divergence on RSI, and I'm looking for a retracement to test the important support level at 94 if this continues to play out. It would make sense if that took place within a sharp correction on commodities generally, as the prospects for USD aren't looking promising generally at the moment, in which case any such decline would be likely to be commodity related:

Quantitative easing has fed this boom in commodities, and commodities peaked months before the end of QE1 in late March 2010. QE2 isn't finishing until June 2010, but it may well be that commodities are peaking further before this time. On the longer term charts the real question is whether there will be a QE3, and that is open to doubt. The Republicans won't be keen, and there would most likely in any case be a gap of several months between the end of QE2 and the announcement of QE3 during which, if 2010 is any guide, we would expect to see equities and commodities tank while bonds soar. If commodities have peaked now, that means that we could well see a ten or twelve month period now where commodities retrace some of their gains in the last two years. In the event that there is no QE3, it might last considerably longer.

The First Bounce

NQ was a lot weaker than ES yesterday, and so rather than NQ hitting the lower trendline of the megaphone at 2266 at the same time ES hit wedge support at 1257, it hit while ES was only at the daily 20 SMA at 1267. They both bounced there and now we will start to see the shape that this correction will take by seeing how far the bounce goes. It's still possible that we could see new highs before the correction really gets going, but there's now been so much technical damage elsewhere that I think that's unlikely. On both NQ and ES we now have fully established declining support trendlines. On NQ that trendline is shallower and I'm expecting it to break on the next big move down as the megaphone, or broadening top to give the proper name, breaks downwards. As for bounce targets that's hard to say, but I have a declining resistance trendline in the 2300 area that I'll be watching carefully:

On ES a declining support trendline has been established that will be a buy level on the next big move down. The big rising wedge support trendline was not hit at 1256 yesterday and is unfinished business. Declining resistance for today is in the 1287-8 area. If declining support there is broken then a new high or double-top is still on the table:

Elsewhere on the equity indices the RUT made a nice support break yesterday and has formed another broadening top. Interestingly the target (on IWM) for the broadening top would be the strong support level at 74:

Worldwide there's less damage so far. I always watch EEM as an indicator and there's a very promising looking double top with negative divergence on the weekly chart there. The shorter term support trendline needs to break but when it does it will look like a very attractive short:

EURUSD disregarded my beautiful chart yesterday and went on to make a new high overnight. GBPUSD made a significant support break though and AUDUSD broke a major support trendline, so I'll console myself with the thought that at least EURUSD made that marginal new high with significant negative divergence on the 60min RSI. It should reverse soon I think, but we may see it go higher again while the current equities bounce is ongoing. I've given some thought to the last chart I'll post today, as there are a lot of interesting charts to choose from, but I think I'll have to go with the silver chart, where the H&S neckline and ten week rising channel both broke down yesterday. The target is in the 25 area at a significant support level, and I'm hoping to see a decent bear pattern for the decline so the bottom can be easily identified if it isn't there. I'm a long term silver bull so the low will be a major buying opportunity IMO. It is worth noting however that the 25 level is also a potential neckline for a much larger H&S, and that there is therefore the possibility after a bounce there, of a much larger decline later in the year:

I started off writing this post with the thought that I would combine it with an argument that we have just seen a very major top on commodities, but there were just too many charts to do that. I've therefore written a second post on that subject that I'll publish tonight as a weekend read.

Failing To Bounce

ES fell to my first candidate H&S neckline yesterday and bounced there. That bounce hasn't been sustained so far, and I'm doubtful now about seeing much of a bounce today, though the positive divergence on the 60min RSI and CCI still looks promising. The small bounce that we have seen has has formed a stumpy right shoulder onto the potential H&S and on a conviction break of yesterday's low I'd been inclined to take it seriously if only because the next obvious targets are in the mid-1250s in any case:

There are two reasons why the mid-1250s are the next obvious downside target. The first is that the lower trendline of the big rising wedge on the ES daily chart is in the 1254 to 1256 area. The second is of course that there is a second candidate neckline for a possible big H&S located there at 1257. If that were to continue forming it would indicate to 1228 with the RS forming on a bounce from the 1257 area to about 1275. I've not marked that on this chart but it's worth bearing in mind:

There is one other downside target worth mentioning, and that's in the 1270 SPX (1267 ES) area. That's the daily 20 SMA, which is usually touched regularly on retracements but hasn't been touched since the start of December:

Nasdaq has  also been failing to bounce overnight and if we see a further move down today the obvious target is the lower trendline of the megaphone in the 2260-5 area:

I've been reading a lot about the EURUSD break up through resistance this week and the general view seems to be that it will rise further in the near future. That could be right of course, but I'm leaning towards the view that EURUSD has made a short term top and will retrace to the 1.32 area. I have two main reasons for thinking that, and I could be wrong, but they are as follows. Firstly EURUSD has broken down yesterday from a rising wedge which appears to be a wave 5 ending diagonal. I've marked a wave count on the chart and the rising wedge target is 1.325. Secondly I have a nice looking, though still unproven, rising channel with the lower trendline in the 1.32 area. EURUSD has recovered most of yesterday's losses overnight and we'll have to see whether it can make a new high from here. I hope not, as a retracement on equities will be much easier going with a falling Euro:

I'd expected to be leaning long today but after looking at the charts this morning I'm still leaning short. There's a good chance we'll break 1260 ES today in my view. If so we should bounce at one of the targets not far below it.

Interim Top?

I've been waiting for weeks for the upper trendline of the ES rising wedge to be hit, and it was finally hit near the close yesterday:

I'm expecting to make the next interim top here or very close to here now, though there's still some wiggle room. As you can see, the rising wedge target on the SPX chart has not quite been hit yet, though it's very close:

My first target for the correction is the 1255 - 1260 area, for the lower trendline of the ES rising wedge. If broken, then my next target is in the 1200 area, depending on when it is reached. That target is based on the assumption that the rising wedge will turn into a rising channel. That's always the first thing I look for if a rising wedge is broken and it happens a lot, though for some reason I've not found any references to this in Bulkowski or other pattern analyses. It really does happen a lot though, I was looking at the KO chart yesterday and there was a very nice example there:

There's every reason to think that at least some retracement is due on the Nasdaq chart as well. I've been watching a megaphone build on there, and I considered posting the chart yesterday but it didn't quite make the cut, not least because the 2340 target looked overambitious. It made it though, and the next downside target is in the 2270-5 area:

It could go the other way of course. There are still big IHS patterns on copper and EURUSD that look worrying but I'm not expecting either to play out. My analyst friend that called the EURUSD low at 1.29 and I both felt that the first wave up was unlikely to get much beyond 1.35 and we touched that level overnight. If EURUSD breaks 1.35 with confidence though, it might run much further and any equities correction would get tougher:

We might well knock around up here for another couple of days and perhaps have a stab at breaking 1300 on SPX, but this is a very likely area for a short term top, and that's what I'm expecting to see here.