Dr Copper says more downside

ES went below the May low yesterday and if the copper chart is anything to judge by, there's more downside to come, as the copper futures just broke out of a small rising wedge on the 60min chart:

That fits with what I'm thinking here on ES, that we will break down through current support at 1033 ES with conviction and drop to test strong support in the 990 - 1000 ES area.

The RSI looks oversold on the ES 60min chart after hitting a significant low yesterday, but before we see a bottom on a move like this I'd expect to see the ES daily RSI in oversold territory. We're not there yet, though a drop of another twenty points or more would get us there:

 I'm travelling all day today. Everyone have fun!

ES - watching the Feb low neckline

I've been hoping somehow my primary bear scenario might play out with a rally to 1150 before SPX made the next move down towards 870, but it is becoming increasingly clear that it simply isn't going to happen. After reaching an obvious point for a low on Friday morning, the bounce on Friday afternoon was very weak and we just traded sideways yesterday. Overnight the range support level was broken very decisively and a test of the next main support level at 1048 ES in the near future looks likely.

If 1048 ES breaks again, and I think that now looks more than likely, then the way will be open for the February and May lows to be retested in the 1033 ES area, and it that level breaks then we will be starting what I believe will the main event of the bear action this summer, with a fall to the very important support level at 870.

I was expecting a bit more work to be done on the right shoulder of the huge head and shoulders pattern on SPX, but we came close enough I think, and the other two bear patterns on the SPX daily chart, the rising wedge and the right-angled and ascending broadening formations, are already sufficiently complete. The target of 870, as well as being a viable target for all three patterns, was also such a key support/resistance area in late 2008 and early 2009 that if we get close to it, it should exert a degree of magnetic pull for a test of that level:

Having said all of this we may well bounce initially today. EURUSD hit a significant support level overnight & the RSI on the hourly chart hit a major low:

GBPUSD continues rising in a strong channel, though it might retrace a bit today after hitting the top of the channel again yesterday:

I read an argument that the only major hard currencies in the world today were gold, silver, the Canadian and Singapore Dollars and the Swiss Franc, and I would agree with all of those and also agree that USD, EUR and JPY are all, on current policies, on the road to ruin. GBP was too, but the last spendthrift and incompetent socialist government is a receding memory and the new coalition government seems determined to steer the UK back onto a sustainable economic and fiscal course over the next few years.

If equities plunge hard over the summer then GBPUSD may well test long term support again in the 1.40 area. After that I'm thinking that GBPUSD might start looking attractive as a longer term hold, and UK gilts will start to look a considerably better bet than US treasuries.

ES & EURUSD Declining Channels Broken - Rally?

Both the declining channels on ES and EURUSD broke on Friday, and various others including oil, CADUSD, AUDUSD & GBPUSD broke up too. That was a significant show of strength, even if the rally on ES on Friday afternoon was nothing to write home about.

What I'd normally expect to see on ES and EURUSD at a point like this would be a rally, and that is what I'm expecting, and the question in my mind is how far that might go.

Here's the broken declining channel on the ES 60min chart:

Here's the other broken declining channel on the EURUSD 60min chart.

Looking at the main broadening descending wedge on the EURUSD daily chart, I was calling for a return to the top trendline in the 1.28 to 1.30 area when we last hit the lower trendline at 1.1875, and while that sounded like a pretty wild prediction then, if we were to take another two weeks to reach it the top trendline would be at just over 1.28, and from 1.2385 at the time of writing, that no longer looks that far away.

Here's the broadening descending wedge on the EURUSD daily chart:

Looking at the action on EURUSD since the last low, we have what looks like a wave up, then a retracement wave down. In combination they look like A & B waves, forming a bull flag, with the C wave just beginning to take us the rest of the wave to the top trendline of the wedge.

On ES at the same time, we have also had a ninety point wave up followed by an almost seventy point wave down, if those were equivalent A & B waves, and EURUSD is now starting the C wave up, then I'd expect to see that C wave up on ES as well.

So how far could that go?

On ES the last wave up was stopped exactly at the declining trendline from the top and that would be the main resistance level to consider from here on any rally. That would be found just over 1100 on ES, which is also the location of serious range resistance at 1101.5.

If ES can get past that declining resistance, then I could still see SPX riding EURUSD's coat-tails up to near 1150. Here's how that would look on my primary SPX bear scenario:

That's pretty far out on a limb stuff. 1150 SPX looks a long long way from here, and resistance just over 1100 ES looks pretty solid. If that breaks though, then 1150 SPX will be the target I'm expecting to be hit on the next rally.

Arthur Hill & jesterx both mentioned the IHS forming on the RUT. I've had a look at it & maybe. It is pointing to an almost complete retracement of the fall since April from here & I'm having trouble visualizing that in the near future but it is worth bearing in mind:

Updates will be erratic until Thursday as I'm away from home and my internet connection is a bit unreliable.

The BP Long Case - Hold the rotten tomatoes

Obviously there are few companies in the US less popular than BP right now. They may even have overtaken GS as the least well regarded big company there. Listening to the talk in the US media, and from US politicians, bankruptcy is on the cards, along with seizure of all assets and perhaps public lynchings for all senior executives.

Looking beyond the media storm though, BP is now dropping to a support level that has held for many years:

In the bankruptcy talk there also seems to be an assumption that BP is a single monolithic entity, which it isn't. The US operation owning the well is BP America Production, which is a fully owned and limited liability subsidiary of BP Company North America Inc, which is the same in turn to BP Corporation North America Inc, which is the same to BP America Inc, which is the same to BP Holdings North America Ltd, which is the same to the overall parent company BP Plc.

That is a lot of layers of limited liability, and while anti-Brit sentiment in the US, and therefore the US courts, is running high, the top two companies in the chain would fall under the jurisdiction of the British courts, where anti-Brit sentiment is at a low ebb.

Here's the BP corporate structure with the affected BP subsidiaries in red:

Looking around for info on the web, the view seems to be that the whole operation in the US has assets of $50bn, against BP assets of $160bn worldwide.

Estimates of potential liability are hard while the leak is ongoing, but the highest consensus view seems to be up to $50bn, for a company generating over $20bn a year worldwide. That liability may in any case be shared with other companies involved with the well, including Transocean, the rig owner, Halliburton, Mitsui and Anadarko, among others.

Liability on these offshore wells is capped in US law to $75m, not including class action and other lawsuits I think. US politicians are looking at changing that retrospectively, but these sorts of targeted retrospective law changes, while perfectly normal in (say) Russia or Venezuela, have been traditionally regarded with hostility by both US and international courts, and with good reason as they are a direct attack on the rule of law.

However BP has been offering to effectively ignore this cap, which may in any case be stripped away in the event that BP America Production is found guilty of gross negligence. If gross negligence is demonstrated (and that would be in a US court) then BP America Production and its subsidiaries may well be bankrupted and liquidated, but the question then becomes whether this would spread further up the line.

That seems unlikely, as unless it could be demonstrated that BP America Production and its parent companies were effectively being operated as one company, then the limited liability will stand legally, and any attempt to strip it away by legislators is much less likely to be supported in the courts than a retrospective change to the liability cap would be, as limited liability is a legal cornerstone of US capitalism  in a way that doesn't really allow for exceptions made at the whim of politicians.

All-in-all I don't believe BP US as a whole is going to go under, and if it does then bankruptcy in the US wouldn't seem to threaten more than 40% at most of BP's global assets in any case. BP's share price has fallen 50% since the leak started, so bankruptcy in the US looks more than priced in already.

I don't think that there's any realistic chance that BP worldwide could be liquidated as a result of this mess, and any attempt to do so by US legislators would be unlikely to achieve anything more than irritate the British government, whose people are already doubtful about the UK's very close alignment with the US in recent years, and not at all impressed about Obama's habitually anti-Brit attitude in any case.

Support for BP at $27 may not hold, but at the least BP looks an interesting speculative long there as it is the key major support level for BP in the last fifteen years.

I thought that these articles were interesting, among others:

http://dealbook.blogs.nytimes.com/2010/06/15/bps-options-to-limit-liability-from-the-oil-spill/
http://ftalphaville.ft.com/blog/2010/06/14/260101/for-bp-breaking-up-is-hard-to-do/
http://www.nola.com/politics/index.ssf/2010/06/treasurer_kennedy_seeks_state.html
http://ftalphaville.ft.com/blog/2010/06/21/266581/bp-and-anadarko-turn-on-each-other/
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7840455/Oil-spill-BP-to-sue-partner-in-Gulf-oil-well.html
http://www.bbc.co.uk/blogs/thereporters/markmardell/2010/06/the_gulfs_heavy_price_for_bps.html
http://www.wired.com/wiredscience/2010/06/bp-nightmare-email/
http://www.brightknowledge.org/news/null,3346,AR.html

The Friday Teddy Bear's Picnic

My sons are out at an annual Teddy Bear's Picnic at their school today, and I think that might well also be the theme for the market today, as overnight ES broke range support at 1070.5, and that has opened up the next range support target below at 1048.40:

I posted a chart in the afternoon yesterday showing the importance of these ranges in recent trading. So far in this decline we have not seen ES break down through a range support trendline and then break back up again. Here's yesterday's chart which makes interesting viewing:

We will get a snapback rally at some point, and it could be today. If we break back up through 1070.5, then the next target is the top trendline of the declining channel at 1075. If that breaks then I would expect a snapback rally with a target in the 1090 area today.

Until that declining channel breaks though, the bears remain in control here.

After yesterday it isn't that easy to be upbeat on the bull side here. Vix broke up through declining resistance and another key resistance level. It didn't get much further, but that was very definitely bearish.

The mystery behind the strange sight yesterday of a rising channel on EURUSD while ES was in a declining channel looks resolved today, as all the recent EURUSD moves seem to be part of a larger declining channel. Again, that looks bearish for equities:

GBPUSD made a new rally high yesterday and is declining back towards the lower trendline of that rising channel. Less important but bullish for USD today and therefore bearish for equities:

There is one ray of bullish light that I found, and that was on the Nasdaq, which has formed a very nice looking falling wedge. Not enough to go long here yet, but if that strong declining resistance line breaks, the pattern target would be for a full retracement of this week's decline:

Definitely a day to be cautious. Key trigger levels for a snapback rally are:

• ES - Break of 1075 with confidence.
• NQ - Break of 1850 with confidence. 

In the absence of such a break up, we may see 1052.5 today. S2 Pivot support is just under 1052 and range support is at 1048.5. 

Looking for an ES interim low here

Overnight the strong range support level at 1084 was broken, and ES is clearly still trading within the declining channel that I posted yesterday:

We can now see significant and growing positive divergence on the RSI and MACD on the ES 60min chart though, and I'm doubtful about reaching either the next range support level at 1070.5 and the S2 daily pivot also there at 1070.83.

EURUSD broke out of that declining channel yesterday and broke back up into the range above. The same positive divergences that we see on ES can be seen on the EURUSD chart, with EURUSD about a day ahead, which is in itself another very significant positive divergence IMO:

The Vix on the 60min chart broke just above the downtrend resistance trendline I had drawn on it yesterday and then slid down an invisible declining trendline there. After a careful look I've redrawn the original trendline and am happy that it is valid. That is a key line in the sand for today, any break above the line would look very bearish for equities:

We are at the crossroads now in my view. A break much below here and the recent rally will look finished, and a retest of the lows would become high probability. The levels I will be watching today are as follows:

• ES - Break up with confidence through range resistance at 1084 - Bullish
• ES - Break up with confidence through the channel upper trendline (currently 1089.5) - Very bullish
• EURUSD - Break down with confidence through lower range support at 1.2255 - Bearish
• Vix - Break up with confidence over declining resistance at 28 - Very bearish

Perfect declining channel on ES

I'm a big fan of rising and falling channels for trading, and it has been a disappointment that in recent weeks there has been a distinct dry spell on ES for these. No longer, as the decline this week has resolved into a perfect declining channel:

Now the question of course though is whether we are likely to continue declining from here. On the upper side of the channel, the trendline reinforces the already strong range resistance trendline at 1101.5. If that trendline is broken with any confidence then the chances are very strong that the decline this week is over, and that we should expect a new short term high over 1130 ES in the near future.

On the other hand if we should reach the lower trendline of the declining channel, we would have to break through the important support level at 1084 ES, and that would seriously undermine the idea that this was just a correction before a continuation upwards. In the short term that would open up the lower trendline of the next range down at1070.5 ES, and if that was broken then 1048.5.

My view is that this is just a pause on the way up as the USD currency pairs that I watch, particularly EURUSD, have not yet reached their upswing targets, but we've already had one return to retest the lows, and I wouldn't be that surprised to see another.

In terms of EURUSD I posted a chart yesterday showing a falling wedge on EURUSD that has since broken upwards. These wedges frequently turn out to have been a diagonal slice of an unrevealed declining channel though, and this one has been testing the upper trendline of that theoretical declining channel for the last four hours as I write. If it breaks up that would be a weakly bullish signal for both EURUSD and equities, and a further move with confidence above 1.235 would be very bullish.

There is some positive divergence on EURUSD in relation to ES already. As both rose they established parallel trading ranges, and the first strong signal for me on Monday that the equities upswing was finishing was EURUSD breaking support. Yesterday ES broke down into a lower range and EURUSD did not, which was a very significant positive divergence. If EURUSD should break that range support at 1.2255 with confidence this morning, that would be a strong bearish signal for both EURUSD and equities, and on EURUSD the lower trendline of that range is at 1.2166, which would be the obvious next target:

I posted a Vix chart yesterday morning showing the likely upswing target if this is just a pullback and it was reached yesterday. RSI & stochs both look overbought now:

Oil generally moves up and down with the market and a falling wedge has developed on the oil futures (Sept) this week. As with the other falling wedges though, this might yet resolve into a declining channel and I've marked in the possible alternate trendlines if that is the case:

Key Support Levels Broken

I mentioned in my post yesterday that we hadn't seen any kind of meaningful retracement on ES since the low and here we are. The gap I wasn't expecting to fill filled, and we had a serious reversal day.

Since then ES has returned to retest the rebroken range support / resistance level at 1016.5, and then fallen back to near the lower range trendline at 1101.5. I am expecting a test of that trendline today, and if broken the next target is the lower trendline of the range below at 1084 ES:

Fortunately I cancelled my long orders on ES when EURUSD broke down through an important resistance level yesterday, followed then by ES, GBPUSD and Oil, among others.

I don't think that this is the major top that I am looking for, mainly because the USD currency pairs that I'm watching have not yet reached target. EURUSD and GBPUSD particularly are halfway to their targets, and have stopped at natural internal resistance levels. After this retracement I am expecting their climbs toward target to resume. Here's what I mean on the EURUSD:

There is no pattern on EURUSD that gives a retracement target, but I have found a right angled and ascending broadening formation on GBPUSD with a target in the 1.46 area. This is a medium probability pattern however, and it may not make target:

I also have a retracement target on the Vix of just under 28. There is a declining trendline on the Vix that may well contain any retracement for the moment:

Oil broke the recent rising channel yesterday. Unfortunately a broken channel gives us no retracement target, but I have marked the two obvious retracement targets on the chart.

There are no really solid retracement targets to give here. The highest probability target for me on ES is 1084, as that would be an almost exact 50% retracement from the most recent major low, but 1101.5 may not be broken. More significant will be when we break back up with confidence through an upper range trendline, as that will be a strong signal that the retracement is finished. Until then the range trendlines are still the most important support and resistance levels and should be used for short and long entries cautiously while this retracement continues.

A possible rising channel on ES

ES gapped up over the weekend and left the last week's range at 1102 - 1116.5 well behind. It is at 1123.5 ES at the time of writing and it looks as thought we may now have a tradeable rising channel:

One of the prime beneficiaries of the flight to safety trade, along with gold and Yen, was 30 year treasuries, and I was watching last week to see whether it would break the strong rising support trendline of the last few weeks, and it has finally broken it over the weekend: Gold is the last holdout now.

There are a couple of things to note about the ES chart though, mainly that we have been trading in a series of ranges since the recent low, and that those ranges varied in size from 15 to 20 points, with 15 points being the most common size. That's important for two reasons.

Firstly it means that we have not had a serious retracement on ES since this recent rally started, which something to bear in mind. We may not get one until this rally blows out, but until we get one this has the look of a single wave up. This may well be a C wave though., as the recent low was higher than the previous one. If so, a break of support through into a lower range may signal a major interim high.

Secondly, and more short term, in every range so far, ES has returned to unsuccessfully retest the broken upper range trendline, and in the last three ranges since 1070 ES was broken, that broken trendline was retested twice. As we're seven points over the most recent broken range trendline at the time of writing, this doesn't make ES look a compelling long right here, and if we reach 1130 ES again, it would begin to look like a compelling short. On a retest of 1116.5 though, that would look like a low risk long entry.

One caveat though is that the broken trendline has already been retested once overnight, but a second retest looks like a reasonable bet. There has not been a third retest of one of these broken trendlines since the last low, so if you're thinking of going or hedging long here, I'd take the next retest. 

More often than not when there is a gap outside the range of the previous day, it doesn't fill the gap, and looking at ES today I would say that a gap fill seems unlikely today.

Trading in a range - leaning bullish

ES is trading in a tight range. 1102 ES has turned into solid support since being broken earlier this week and on the upside we have strong resistance at 1115 ES, a level that took a long time to break through at the end of 2009. A break in either direction will probably define the next couple of weeks.

If we do break down through 1102 ES, I'm seeing some weak rising trendline support at 1096 ES, but if we break down through that, then the downside looks wide open again:

Some of the USD currency pairs are looking fairly bullish today. AUDUSD has broken up from a recent ascending triangle with a target of 88:

GBPUSD has broken the neckline of an H&S indicating to the top of the current broadening ascending wedge in the 1.50 area. The RSI looks rather overbought though and we may see a retracement first:

One interesting chart showing potential weakness, though not at all correlated with equities, is the chart for gas, with a rising wedge that is running out of road now:

Overall the picture looks bullish on balance, but the key in my view is the range on ES. We'll break out of it one way or the other soon, and when we do, I'm expecting a big move. 

I've really been enjoying writing these daily market analyses every day for the last three months, but I've been spending too much time on it, and less time on reading and trading as a result. I need to rebalance my time better, and I also have a very busy offline summer looming, so I'm going to keep posting an interesting chart most days, but I'm only going to do a serious write-up once or twice a week.

The Big Picture Bear Scenario

ES has broken up to break yesterday's high overnight, and EURUSD has broken up to test 1.24, so the picture as I write looks bullish for today. Rising trendline resistance on ES is at 1128/9, and if reached, I would definitely be shorting that for a retracement.

I've been looking again at my main bear scenario for the summer today and here is my SPX daily chart again with the patterns and levels of interest marked:

Backing up this scenario on the currency side, I have a very strong broadening descending wedge on EURUSD, which rallied from the second recent touch of the lower trendline, and has a target just under 1.30. In the event that that declining resistance trendline is broken, I would take that as a very strong signal that my bear scenario for SPX was in serious trouble.

EURUSD tends to form wedges on big moves up or down and of the last four since 2006, three played out to target and the fourth made it halfway to target before failing. If this wedge were to break up, the target would be the November high at 151.44:

GBPUSD is of less importance than EURUSD, as it is a far smaller component of the USD index, but I follow it closely too and that is also in sync with this picture. On GBPUSD we have what I thought was a falling wedge, but on closer inspection appears instead to be a declining channel. I haven't shown it here, but the upper trendline of that channel is also a strong declining resistance trendline from the last GBPUSD high in 2008 shortly before it fell more than 50 cents.

GBPUSD, like EURUSD and ES, is about halfway back up towards that key resistance trendline, which would be at 1.54 today and should be in the 1.53 area when if reached in a couple of weeks. As with EURUSD, I will be watching for a break on that trendline as a signal that my primary bear scenario might be in trouble:

:
So that's my scenario, clean, logical and compelling.However it is only one view and there are most definitely other ways it could go. To illustrate the complex technical picture here let's consider two other indices, the Nasdaq and the Dow.

Much has been made on ES / SPX of the fact the the February low held, and also of the fact that the most recent low was higher than the previous one.

On the Nasdaq futures we can see that picture reinforced, with the February low never seriously threatened, the flash crash low being the lowest low of the three, and with the next two higher lows on an ascending trendline. A good clean bottoming process:

Looking at the Dow the picture reverses entirely. The February low was clearly broken on a daily basis on the last low, and of the three lows the flash crash low was the highest, with the next two lows on a declining trendline:

On all three indices we have clearly made a significant low, and all three are trading back above their daily 200 SMAs, but the picture is more complex than just looking at the SPX would suggest, and that reminds us all that as often as not, life is messy and only partly predictable.

In the short term I'm seeing 1102 ES as a very key support level here, and if we break back down through it with confidence then my upside target at 1164 SPX will be weakened, as that level is the upper trendline of the recent trading rectangle, and also the neckline of a possible IHS.

If the 1102 ES level is broken, then the rising support trendline from the recent low is at 1090 ES, and if that is broken with confidence that the rally in recent days may be in very serious trouble.

1102 ES Resistance Broken

The bulls finally rediscovered their mojo and broke the very strong resistance at 1102 ES yesterday. SPX also closed above the 200 daily SMA, and in my view that makes it unlikely that we will be revisiting the lows in the near future. For my money, the interim low is now confirmed as in, and the question is how far this rally will go.

In the short term ES bounced off rising trendline resistance at the high yesterday, and as I write is retesting the 1102 level. That may well now prove good support, but if it breaks I see a possible fall to the next strong support level in the 1084 area, which is also close to probable rising channel support. If we get there I'll be seeing that as a buying opportunity:

I've been looking hard at the SPX 15 min chart and on that I'm looking at the recent trading range as a rectangle with a target at 1164 ES and a possible IHS with a target in the same area. I have a strong uptrend resistance line, as with ES, but support looks mushy and undefined. I'm hoping that trading over the rest of the week will confirm a tradeable rising support trendline:

On the SPX daily chart with my model bear scenario, I've marked in the broken 200 SMA line and also the break yesterday of the 50 level on RSI, both very bullish signals. If we were to rise over the next two weeks to my model target, that would be in the 1164 SPX area as well, and that is the primary scenario that I'm considering now:

Vix broke down to under 26 yesterday and I've marked in a declining resistance trendline on the 60min chart that I am expecting should hold for the duration of this rally:

NYMO is probably the most interesting chart that I was looking at last night. Here's the daily chart showing that we have moved from extremely oversold to extremely overbought over the last three weeks. If you look at the chart, a move as fast as this from under -100 to over +80 has happened only twice in the last three years, once in the October 2008 rally, and again at the March 2009 low. The November 2008 to Jan 2009 move is also worth a look though:

This confirms in my mind that we have made a very significant low, though it is obviously very ambiguous over whether the move up that we are watching now is a rally or a move to new highs. I favor the former, but I'm bearing the latter possibility in mind too.

Lines in the sand

There has been a lot of very bullish talk after last week's rise, and I'm fairly bullish too at the moment, on balance at least, but I was still expecting a bounce off strong resistance at 1102 ES yesterday and we got one. Now we see whether the bull case has real legs in the next few weeks.

Upside resistance remains at 1102 ES, and a break with confidence at that level would be a strong sign that the bulls are back in the saddle for the moment. I'm thinking that we may well see more retracement today though, and am looking mainly at downside support levels that should not be broken if this rally is to be sustained this week.

ES has been trading for weeks within a large and not particularly classical rectangle. Having reached the top of the rectangle yesterday, from a pure patterns perspective, the next target is the bottom of that rectangle at 1037 ES. There are two very important support / resistance levels within the rectangle and we bounced off the top of the pattern to the higher of those levels at 1084 yesterday. I have rising support from the recent low at 1072 - 1074 ES, and if ES trades any lower than that then I will be considering 1037 ES as a serious short term target:

On EURUSD we have seen a big move up, which seems at the moment to be within a broadening ascending wedge. The lower trendline should be strong support and any move below it, currently at 1.215, will be a signal that this rally might well be unravelling:

GBPUSD has also been trading within a sloppy looking rectangle for some weeks. It broke upwards from it yesterday, which was bullish medium term at least, and is currently trading within a shorter term rising channel. A break of rising support within that channel would be a signal that we may see a deeper retracement than expected across the board, and so any break below 1.4585 would be a strong warning signal:

CADUSD is now in a strong uptrend going back three weeks and more and has a slightly sloppy looking rising channel with a strong support trendline. A move below 0.947 would break that support trendline:

I'll be watching these USD currency pairs very carefully today. The last serious move down on ES was signalled by the USD currency pairs breaking rising support trendlines, and if rising support on ES is to be broken this week, then I would expect to see the same again.