The Butterfly Effect

The famous Butterfly Effect is the idea that small changes in a non-linear system can cause large differences to a later state. The idea is that a butterfly flapping its wings in (say) Greece might cause a hurricane to form in (say) the US. I'm no expert on butterflies but I can say with confidence that in the current market any eruption of wind from a greek politician or from one of the many empty heads of state at the G-20 in Cannes may show up in equities moments later. Be warned, and let us all hope that politicians in Europe everywhere today can avoid eating brussels sprouts and baked beans, as well as sounding off to journalists. :-)

Notwithstanding the news, the technical picture is looking bullish on balance today, though less strongly than it did yesterday morning. It's less strongly bullish mainly because a number of instruments are at resistance levels, though there are a lot of bull flags forming under those levels. On ES the W bottom I was looking at yesterday has been playing out and if resistance at 1260 breaks then I'd expect a run further up. The bull flag target would be in the 1280 area:

On NQ the W bottom there is also playing out as I was suggesting yesterday morning and a bull flag has also formed overnight. That's been weakened somewhat by a drop following a statement by Merkel as I've been writing but still looks OK. Obvious resistance is in the 2390 area:

TF broke back above the resistance level at 738 that I highlighted yesterday and has now therefore broken back up into the broken rising channel. The recovered support trendline has been retested overnight, and this setup is bullish until TF breaks down through it again. I've often pointed out channels in the past where support trendlines break, are then recovered, and then break down harder on the next break down. On another break TF may break down vey hard so it's worth watching. Meantime support is the channel support trendline and strong resistance is still in the 769 area:

I'll illustrate the case for reversal here with Vix, which is now retesting the important support level at 30 and is close to filling the most recent gap up. A break with confidence below 30 would be bullish for equities, but a reversal at 30 would obviously be bearish for equities:

On EURUSD the current setup looks bullish, with the triangle I posted yesterday having broken up and the broken upper trendline retested. I have the triangle target in the 1.41 area though there's resistance at 1.39 and EURUSD has so far reversed twice at the 38.2% fib retracement at 1.385. EURUSD looks bullish unless it breaks back down through triangle resistance:

The bullish setup on GBPUSD is clearer as I was saying yesterday. The rising wedge has turned into a rising channel of course, there is a W bottom paying out, and a falling wedge cum triangle has also broken up there. The obvious target is the last high at 1.615 resistance. Support is at 1.60 overnight and at main channel support in the 1.59 area:

I was talking about the bull flag on oil yesterday and that has broken up to a marginal new high. I'm seeing the bull flag target in the 98.5 area and a reversal at the current level would be a failed breakout and very bearish:

Last chart for today is 30yr treasury futures (ZB). The double top base has now been broken and the double-top target is in the 138'120 area. That's looking bullish for equities today:

Overall I'm leaning bullish on the technical picture this morning and the odds are decent for a big move. My WAG into Monday is that we see a strong move in one direction today followed by a strong reversal on Monday. It looks like that first move should be up but I'll be more comfortable about that when ES gets over 1260.

Two big bits of news today. The non-farm payrolls were positive though not obviously bullish on ES so far. The other big news today is the confidence vote in Greece, as the government there may fall as a result. Listening to greek politicians last night however, it seems clear that regardless of today's vote, greek politicians from both major parties are absolutely determined that the Euro bailout deal will be settled shortly without any reference to the electorate in either a referendum, or in the possible coming general election. Another triumph for Europe which takes the view that important questions of policy should never be put to voters, as they sometimes say no which can be inconvenient.

Shotgun Wedding

A wild night on the futures. First the rising channel / bear flag broke down at 1225 and looked as though it would break down towards main 1190 area support today, then news came that the greek referendum was most likely cancelled and there was a wild recovery, with ES up over 30 points in five hours. News apart, the development now looks bullish for equities, with a higher low on ES and a possible W bottom made:

On NQ, a new low was made at a key support level and on sharply positive divergence. that now looks like a W bottom very similar to that seen at the October low on SPX. Declinng resistance from the highs has broken and NQ now also looks bullish:

TF has been the strongest of these three indices this week, and partly as a result the setup there looks least bullish at the moment. A possible H&S is forming there that is still in play and TF is close to testing strong resistance in the 738 area that would also be the natural target for a right shoulder top. A break over 740 with confidence would look very bullish however:

At the time I capped the chart the setup on EURUSD looked like a triangle. That has since broken to a new high for the week and looks likely to rise further:

For the really bullish looking forex setup you have to look at GBPUSD though. There the rising wedge that broke and retested the other day has now evolved into a rising channel. That also formed a smaller falling wedge that has now broken up, and the marginal new low overnight was made on strongly positive RSI divergence. Until this rising channel breaks down this setup is strongly bullish:

30yr Treasury futures (ZB) made a new high overnight, which looked bearish until it reversed there, leaving a double top on sharply negative RSI divergence. Once the double top base breaks the downside target is at 138'10, which would be strongly supportive of equities:

On oil I'm considering the possibility that the slightly declining channel there is actually a bull flag. A break to a new high on oil would look strongly bullish:

Overall there's obviously a significant chance we'll see a trend up day today. Against that the (now) 40 point move up from the overnight lows is looking a bit stretched, and the news that the EBC has cut rates in the Euro area by 0.25% has depressed the Euro rather so far, and EURUSD and equities have been very strongly correlated recently. We'll see what happens with this huge gap up at the open, but if it keeps running up then we may well have a trend day.

Regardless of the short term picture, this isn't healthy and the correlation between 2008 and now still looks very striking. The queue of potential Lehman Brothers analogues for the current sovereign debt crisis isn't a short one. Greece may comply with EU demands with a gun at its head, but their enthusiasm may be limited. The lat time Greece was coerced into closer integration by force into a European group headed by Germany (in the 1940s) didn't go that well longer term of course.