Trade Week Analysis for 12/08/13

Last week: There were only a couple of TS signals last week. Momentum seemed to slow a bit as the USD fell to test major weekly support and the EURX bounced back off the resistance of the monthly 200 EMA. The TS signals are becoming more reliable though and this is suggesting to me that a new momentum move may be in store.

This week: The USD and the EURO indices are both butting up against major S/R levels. I discussed this in detail in my post from yesterday here. I have two main trains of thought with the EURO (EURX) and USD (USDX) indices for possible scenarios:

• USDX bounces off support and EURX falls: would expect stocks, risk instruments (E/U, A/U, G/U, Kiwi) and commodities to fall.
• USDX falls though support and EURX breaks up through resistance: would expect stocks, risk instruments (E/U, A/U, G/U, Kiwi) and commodities to rally.

I’m keeping an open mind about the direction of any future move and will be watching to see which way momentum shifts.

BTW: I do see a bit of a conundrum with the USD/JPY vs Stocks (S&P500) though which I have discussed in my U/J notes below.

Stocks and broader market sentiment:

I'm watching for clues as to any new momentum move. In particular I’m looking out for:

S&P500 daily chart: a break of the daily bull trend line. A ‘Bull Flag’ evolved and price has now closed above the previous high (1,685 area). Price closed the week sitting right back on this key level. I don’t expect this level to be given up easily either.

Ichimoku S&P500 chart: a clear cross of the blue Tenkan-sen line below the pink Kijun-sen line. There was a bearish Tenkan/Kijun cross recently but these crosses, positioned above the Cloud, are deemed ‘weak’ signals. There was not a lot of bearish follow through with this and price has now moved back above the Cloud after giving a bullish Tenkan/Kijun cross, albeit a ‘weak’ signal too. Price is still well above the daily Cloud for the time being.

EURX monthly chart: a break of the monthly support trend line (see monthly chart). Price is getting closer to this support level now.

S&P500 monthly chart: a break of the monthly support trend line (see monthly chart). A break of this support level would suggest to me of a more severe pull back or correction. The look of this ‘market top’ appears quite different to that of the previous two market tops from back in 2000 and 2007. Elliott wave suggest a big correction here though. I am still thinking that the 1,600 level might be the new floor for this index even though I do see that a pullback at some stage must evolve. The saying that ‘Old resistance becomes new Support’ rings for me a bit though here.

BTW: I have updated my Stocks: Aug page with a few stocks that look ripe for a breakout.

Some key events to watch out for include:

• Mon 12th: JPY GDP.
• Tue 13th: GBP CPI. EUR Eco sentiment. USD retail sales.
• Wed 14th: NZD retail sales. GBP claimant count. USD PPI.
• Thurs 15th: GBP retail sales. USD CPI, unemployment claims and Philly Fed manufact index.
• Fri 16th: USD building permits and consumer sentiment.

E/U: Price struggled again for the first few days at the weekly 200 EMA. A new flag pattern then formed up and price finally broke free from this and from the weekly 200 EMA and gave a technical trade worth 70 pips or so.  I’ve analysed the charts again and drawn in new S/R levels. Price is trading within two symmetrical triangles on the monthly/weekly charts. The bear trend line of the smaller triangle is just above current price and the bull trend line is just under price. The bull trend line of the larger triangle is edging up closer to current price action too so I’m keeping an eye on both of these trend lines. Price is trading above the Ichimoku Cloud on the daily and on the 4 hr charts which is bullish. The weekly candle closed as a bullish ‘engulfing’ candle and above the weekly 200 EMA. This level had been a significant hurdle for the E/U and I wouldn't be surprised to see price test this level again even if price action remains bullish.

• I’m watching for any new TS signal and the weekly 200 EMA.

E/J: Price broke down from a triangle pattern this week and, although not yielding a new TS signal, the move did give up over 110 pips! Price has subsequently pulled back to test the broken trend line and then fallen away again. Price is now trading below the Cloud on the daily and on the 4 hr Ichimoku Cloud which is bearish. The weekly candle closed as a bearish engulfing candle and with price back sitting just below the major S/R level of the monthly 200 EMA! A new TS ‘SHORT’ signal has almost formed.

• I’m watching for any new TS signal.

A/U: Price has rallied this week and managed to get back up over the 0.90 level and even up to the 0.92 level! This move produced a new TS signal that gave up to 190 pips! Price is trading just under the Cloud on the daily but is back above the Cloud on the 4hr chart which suggests choppiness, but, with a bullish bias. The Aussie could rally further if the USD continues to fall and also if Gold continues to rally. The weekly candle closed as a large bullish candle but also as an ‘inside’ candle and these suggest ‘indecision’.

Any further moves back below the 0.90 level: I don’t see much support until down at the 0.83 level! The 0.83 is the monthly 200 EMA. After that there is the 80 level that is near the 61.8% fib retrace from the last swing low to high level so this isn’t too ridiculous a notion! Any continued pause or pull back with the stock market might see price visit these low levels.

• I’m watching the 0.92 level. There is an open TS signal already on this pair.

A/J: Price chopped downwards below the 0.89 level all week and formed up within a trading channel. The 0.89 area is the 61.8% fib level from the recent swing high to the last swing low, a previous triangle breakout zone and a major S/R level for the A/J. Price broke out and up from the trading channel on Friday and gave a new TS signal. I am expecting that the 0.89 level might be tested again at a minimum, even if there is no further bullish follow through. Price is still trading below the Cloud on the daily and in the bottom edge of the Cloud on the 4hr time frame suggests choppiness.  The weekly candle closed as a very interesting and eye catching, bullish ‘hammer’ candle though. These are often signs of imminent bullish reversal.

• I’m still watching the 0.89 level but there is an open TS signal on this pair at the moment.

G/U: Price traded higher all week on the back of some good data. It stalled though as it reached a bear trend line from the triangle pattern off the weekly chart. Price is now trading above the Cloud on the daily and 4hr time frame which is bullish. The weekly candle closed as a large bullish, almost ‘engulfing’ style, candle.

NB: Go Market charts have an error for my weekly 200 EMA with the G/U. I have advised them about this.

• I’m just watching this pair at the moment.

Kiwi: NZD/USD: Price gapped lower to start the week on the back of the tainted milk scare. I do find it ironic that this ‘milk’ scare upset my ‘Cup and Handle’ pattern! Price rallied from the market open on Monday though and even clawed its way back above the 0.80 level. The weekly candle closed as a large bullish candle. Price is trading just above the top of the Ichimoku Cloud on the daily and above the Cloud on the 4hr which is bullish. As with the A/U, any recovery with risk sentiment might help to boost the Kiwi but a fall in stocks would most likely see the Kiwi fall heavily. The monthly 200 EMA, at around 0.68, would seem to be the next level of support if this pair returns to being bearish.

• I’m watching the 0.80 level.

EUR/AUD: A bearish ‘Head and Shoulder’ pattern formed up here during the week and eventually gave up to 260 pips! It is trading above the Cloud on the daily but below the Cloud on the 4hr time frame which suggests further choppiness. The weekly candle closed as a bearish coloured ‘inside’ candle and sitting right at the monthly pivot!  These candles are often viewed as indecision style candles.

• I’m just watching this pair at the moment.

The Yen: U/J: Price broke out from the triangle pattern on the daily chart and, even though there wasn't a new TS signal with this move, it gave up to 200 pips. Part of this move gave a break below the key S/R level of 0.97. Price subsequently pulled back to test this level before stalling just below the 0.97. The weekly candle closed as a large bearish, almost ‘engulfing’ style, candle. Any rally with the USD might impact here and help to lift this pair so I’m keeping an open mind.

Price is now trading below the Ichimoku Cloud on the daily, 4 hr and hourly time frames which is bearish. This might prove to be a significant shift for this pair. I was at a presentation last week given by Vito Henjoto, Senior Technical Strategist for Invast. He noted during his talk how most Japanese trading rooms would reveal charting platforms showing Ichimoku and Eastern charting. These traders would thus be quite aware of this latest formation on the Yen so it will be most interesting to see how this pair moves from here.

Possible lower targets: The weekly U/J chart shows how this pair has rallied hard since last September. Price has pulled back already to test the 38.2% fib level. A 61.8% fib pullback would see this pair visit the region of the weekly 200 EMA near the 88/87 level. 

• I’m watching the 0.97 level.

Extra thoughts about the U/J vs S&P500:

I am aware of the historical correlation between the U/J and S&P500. The 5 year comparison chart below is an overlay of the U/J and S&P500. It shows that these two instruments usually, but not always, trade directly with each other. This 5 yr chart shows that there was one fairly lengthy period though where the U/J traded inversely to the S&P500; this was from about mid 2010 to mid 2011. I have tried to 'arrow' this region:

The 2 year comparison chart shows how this direct correlation has held up fairly tightly over that period up until just recently. Again, I have 'arrowed' the area in question:

The 3 month comparison chart shows this recent divergence more clearly:

The conundrum I have is this: If the USD was to fall through the strong weekly support trend line then I would expect the U/J to also fall but the S&P500 to rally. Historically though, these two instruments generally trade in tandem...hence my conundrum. The U/J and S&P500 are trading inversely at the moment and some parts of history (eg mid 2010) suggest that this divergence could continue. So I am keeping an open mind about the future direction of the U/J.

GBP/AUD: Price formed up into a ‘Flag’ pattern this week and ranged sideways within this for most of the week. Price broke out and down from this on Friday though. It is trading above the Cloud on the daily but below on the 4hr chart which is suggests choppiness. The weekly candle closed as a bearish coloured, ‘inside’ candle suggesting indecision.

• I’m just watching this pair at the moment.

AUD/NZD: I'm just watching the trading channel here:

Silver: Silver traded down to test the lower edge of the triangle pattern on the daily chart. Price then rallied to break up and out of the triangle and gave a new TS signal. Price closed the week out of the daily triangle pattern and above the key $20 level. The weekly candle closed as a bullish engulfing candle.

The next major support below $20 seems to be down at $15, near the monthly 200 EMA. Silver is trading above the Ichimoku Cloud on the 4 hr, in the Cloud on the daily and below on the weekly and monthly charts so.....it might be prone to some further choppiness!

Gold: Gold gave a triangle break this week that gave up to 200 pips.  Price then rallied though to close back in the triangle and above the key S/R level of $1,300. A new TS signal formed with this move. Price closed the week just above the key $1,300 level. The $1,300 level is the 50% fib pullback from the last swing low to swing high.

The next major support after $1,300 seems to be down at the whole number, $1,000 level and, after that, at $850 in the monthly 200 EMA. The weekly candle closed as a long legged Doji candle and suggests indecision. Gold is trading in the Ichimoku Cloud on the 4hr and daily, below on the weekly and in the top edge of the Cloud on the monthly so.....it might be prone to some further choppiness too!