Trade Week Analysis for 21/10/13

Last week:  Waiting for US Government news again proved challenging for the first half of the trading week. There were only a few TS signals in low momentum to start the week but news of a US resolution soon changed that. The USD then fell heavily and kicked the FX Index charts back into Ichimoku alignment, triggered some news TS signals and helped some existing ones: A/U 190, E/U 80, G/U 110, EUR/AUD 80 and GBP/AUD -50.

Although some momentum based signals struggled at the start of the week other technical pattern breaks delivered results: a bullish descending wedge break on the A/J delivered almost 300 pips and a triangle break on the Kiwi delivered up to 170 pips.

This week:

The Euro index has closed the week above a significant support/resistance level and this is a major achievement and one that has been brewing since January. There is no guarantee that this level will hold but, if it does, then I would expect some trending markets to soon return.

The Euro and USD index charts are aligned for ‘risk on’ across the 4hr and daily time frames. I’m looking to see if this alignment holds and, then, for new TS signals in line with this momentum. The ‘Polarity Shift’ I mentioned a few weeks ago seems to still be evolving and I discussed this yesterday in my FX Indices Review post. The USD is looking rather weak and, given the state of recent US politics, this has got some people casting thoughts back to the 1940s and the demise, back then, of the GBP as the 'global currency'. 

I read a report this week suggesting that the traditional RORO (risk on/risk off) paradigm is no longer valid and has been replaced by another, more complex, paradigm. I acknowledge that RORO has been challenged since January but I see this being due to the pause with the EURX whilst it gathered steam for another attack on the key resistance of the monthly 200 EMA. Thus, I see this as a major contributing cause for the RORO disconnect. I am now wondering whether conventional RORO may return though given that this key EURX resistance has been breached. I am watching this situation very closely and very keenly!

A few currency pairs are trading close to major trend lines and these need to be monitored for potential break out trades.

BTW: there is a lot of US data due out on Monday!

Stocks and broader market sentiment:

Stocks had a positive week and rallied after the resolution of the US Government debt impasse. The daily support trend line on the S&P500 held all week and price also held above the key support level of 1,685. Price closed the week above the psychological 1,700 level and after having printed a new all-time high which is yet another bullish signal.

I still don’t see a confluence of technical signals pointing to any major bearish stock market and, thus, ‘risk’ reversal just yet but I am keeping an open mind. A major bearish turning point could evolve if the EURX is categorically rejected again by the key resistance of the monthly 200 EMA. This index has made a close above this key S/R level now though and I’ll be watching to see if it can hold. With all of this in mind then, I'm continuing to watch out for further clues as to any new momentum move, long or short! In particular I’m looking out for:

S&P500 daily chart: a break of the daily bull trend line. Price held above the key 1,685 level all week which is rather bullish. The index also closed above the psychological S/R level of 1,700 and printed new highs during the week.

Ichimoku S&P500 chart: a clear cross of the blue Tenkan-sen line below the pink Kijun-sen line. Price action looks like it might be setting up for a possible bullish Tenkan/Kijun cross though! Any such bullish cross that might evolve would be deemed a ‘strong’ signal as the cross would be positioned above the Cloud.  Price held above the Cloud all week which is bullish.

EURX weekly chart: Price has made a weekly candle close up through a major S/R level of the monthly 200 EMA. A break and hold above this key S/R level with a monthly candle close would be quite bullish. A rejection of this level could prove to be a bearish turning point though.

S&P500 monthly chart: a break of the monthly support trend line (see monthly chart). The monthly trend line remains intact at the moment. A break of this support level would suggest to me of a more severe pull back or correction. The look of this ‘market top’ still 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. The saying that ‘Old Resistance becomes new Support’ rings for me a bit here. It would not be at all surprising to this 1,600 level tested again. It has only been tested once by a monthly candle since the bullish break and I would expect a significant level such as this to be tested more than this. The August and September candles closed above this key level and without testing it at all throughout the month. Also, the previous candle close highs from back in 2000 and 2007 were down near the 1577/1580 area so it is entirely feasible that price may test this region again as well before any continued move upwards.

BTW: I have updated my Stocks: Oct page with some trades that I have on my radar.

Some key events to watch out for include:

• Mon 21^st: USD: CPI, PPI, retail sales, building permits, unemployment rate, existing home sales & trade balance (Whoa!)
• Tue 22^nd: nil
• Wed 23^rd: AUD CPI. GBP BoE data.
• Thurs 24^th: NZD trade balance. CNY PMI. EUR PMI. USD unemployment claims & new home sales.
• Fri 25^th: EUR IFO.GBP GDP. USD core durable goods.
• Sat 26^th: G7 meetings.

E/U: Price chopped sideways above the 1.35 level until Thursday. The US debt resolution sent the USD tumbling and, consequently, this pair rallied and triggered a new TS signal. Price closed the week out above the key S/R level of 1.365. Cast your eye across the monthly chart and you can see how significant this 1.365 level has been. The other key feature to note on the monthly chart is that price is only about 350~ 400 pips below the major triangle trend line (this is also the 'neck line' of the monthly bullish 'inverse H&S'!) so there is some space for this current move.

Price is trading above the Ichimoku Cloud on the 4hr, daily and weekly chart which is bullish. Price is now just under the monthly Cloud which is rather thin and flat and may not pose too much resistance. It is worth noting that the bear triangle trend line of the monthly chart (mentioned above) is in the same region as the top of the Cloud on the monthly Ichimoku chart at around the 1.40 level. A break above the 1.40 would be a rather bullish signal. The weekly candle closed as a bullish candle.

• There is an open TS signal on this pair.

E/J: Price essentially chopped sideways above the 133 level this week. It seems that the heavy U/J kept this pair in check a bit. Price is now trading above the Cloud on the 4hr, daily and weekly charts which is bullish. It is close to emerging from the top of the monthly Cloud too. The weekly candle closed as a small bullish candle. I still see the 140 level as a possible target if any bullish sentiment prevails.  

• I’m watching for any new TS signal.

A/U: I caused some eyebrows to left a little when I suggested a few weeks ago that 0.97 would be a possible target for a bullish A/U. Price is now trading just under this level! The Aussie opened the week quite bullish on the back of positive Chinese data and gave a new TS signal that has currently delivered up to 160 pips. This signal was helped along by bullish action following the US debt resolution. Price is trading above the Cloud on the daily and on the 4hr chart which is bullish. The weekly candle closed as a large bullish candle. Caution is needed though as price is currently outside the weekly Bollinger band so it may pull back or pause a bit before any continued bullish movement.

I had been stating that any continued bullish behaviour with the A/U could see a 50% pullback of the last major swing high move to about the 0.97 area. This was also the region of the daily and weekly 200 EMA and so a possible target for any continuing bullish moves. Now that price is up there though one needs to look a little higher for possible, further targets. The 61.8% fib is up at the 0.99 area and would have to be considered a possibility if the USD remains weak.

Further bearish movement back below the 0.92 would suggest much lower targets though. As mentioned in previous posts: I don’t see much other 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.

• There is an open TS signal on this pair.

A/J: Price continued higher after breaking out from a bullish broadening descending wedge the week before. This move has delivered up to 270 pips. Price is trading above the Cloud on the 4hr, daily and monthly charts. It is nearing the top edge of the Cloud on the weekly chart too so it is starting to look like it could become very bullish! The weekly candle closed as a bullish candle.

Bullish targets: A 61.8% pullback to the last major swing high would be to about the 98 area. The 50% fib pullback is in the 96 area. These might be targets for any continuing bullish moves.

• I’m watching for any new TS signal.

G/U: Price chopped sideways under the 1.6 level for the first half of the week and gave the daily support trend line a lot of grief. That was until the US debt resolution was announced and, then, price rallied hard above the 1.6 and triggered a new TS signal. Price is trading above the Cloud on the 4hr, daily and weekly time frames which is bullish. It is trying to move up through the Cloud on the monthly chart. The weekly candle closed as a large bullish candle. Price is only about 250 pips or so below a major monthly triangle trend line and this needs watching. A break above this level would be very bullish.

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

• There is an open TS signal on this pair.

Kiwi: NZD/USD: Price broke up and out of from a triangle this week but didn’t produce a new TS signal. It also broke above the key 0.835 S/R level and this bullish break out gave up to 170 pips. Price is now trading above the Ichimoku Cloud on the 4hr, daily, weekly and monthly charts which is very bullish. The weekly candle closed as a large bullish engulfing candle. Price is now only about 150 pips below a major wedge/triangle trend line on the monthly chart. A break above this level would be very bullish and thus it needs watching.

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 for any new TS signal. 

The Yen: U/J: I've written a slightly longer analysis of the U/J this week. I'm conscious that USD weakness can often tend to drag this pair down. USD weakness often boost stocks though and strong stocks often trade in tandem with a strong U/J so, there is an inherent tension here. I've taken a bit of a look at this conundrum linking the USD, U/J and stocks. I am not an Economist so this is just my own, very humble, attempt to try to read this pair!

UJ vs S&P500: I am conscious that the U/J and S&P500 have traded in tandem for much of the last 12 months although some divergence has set in over the last few weeks (chart below). A 5 yr chart shows various relationships between these two though from inverse to direct relationships so, no single pattern seems to dominate. It might not be out of the ordinary to see any continued stock strength joined by a stronger U/J even if the USD does continue to weaken.

U/J (black) vs S&P500 (green) one year:

U/J (black) vs S&P500 (green) five years:

Yen and Nikkei: I am keeping an eye on the Japanese Nikkei stock index too. This is trading just under a major bear trend line on the monthly chart and the key psychological 15,000 level. A breakout above these two levels would be quite bullish:

The U/J and the Nikkei have been quite positively correlated for much of the last 12 months as the following chart shows. Thus, any bullish breakout on the Nikkei may help to drag the U/J along with it. I'm watching both instruments to see if this positive correlation continues to hold:

U/J: So, in light of this, back to the U/J charts: Price chopped sideways on either side of the 4hr 200 EMA this week.  It had looked like it was trading in a channel but a break out did not continue so I've got it in more of a wedge now. Price is now trading in the Cloud on the 4hr and below on the daily chart which is looking rather bearish. Price is also still struggling to break up and out of the Ichimoku Cloud on the monthly chart. The weekly candle closed as a bearish coloured ‘inside candle’ suggesting some indecision. This pair still looks like it is simply poised and gathering steam before it makes another attempt at breaking through the monthly 200 EMA resistance area.  I still see what looks like a possible bullish ‘Cup ’n’ Handle’ pattern setting up on the weekly chart though. So, some mixed signals here.

• I’m watching for any new TS signal here as well as the Nikkei and S&P500.

EUR/AUD: Price has again been choppy/bearish this week and still holds little appeal for me. A close below the 1.4 level would seem to confirm a bearish downtrend though. The E/A is trading below the Cloud on the daily and on the 4hr charts which is bearish. The weekly candle closed as a large bearish candle.

• I’m watching for any new TS signal.

AUD/NZD: Price was rather directionless and choppy last week.  USD weakness has helped both the AUD and NZD hence, this cross pair suffers. The 1.12 has formed a triple bottom level. The 1.12 level is a major S/R level as can be seen on the monthly chart. This level represents the 78.6% pull back of the last move up from the swing low back in 2005 to the swing high of 2011. Thus, it is major support. The 1.145 is a resistance level above current price. I’m watching for any break above the 1.145 or below the 1.12. Price is trading below the Cloud on the daily but in the top edge of the Cloud on the 4 hr time frame which suggests choppiness. The weekly candle closed as a small bullish candle.

• I’m still watching the 1.12 and the 1.145 levels for reaction.

GBP/AUD: This pair has been rather choppy again this week but did break and hold below the flag trend line. Like with many of the cross pairs, the USD weakness is messing things up a little and making these choppy. Price is trading below the Cloud on the daily and on the 4 hr chart which is bearish. The weekly candle closed as a bearish candle.

• I’m watching for any new TS signal.

Silver: Silver had a choppy week but rallied after the US debt resolution to close back above the key $21.50 and, also, it has made a small break out and up from the bullish descending wedge. The $21.50 level is key support and was a turning point back in 2007. Continued USD weakness might help to support commodities like Silver and Gold.

Silver is now only trading below the Ichimoku Cloud on the weekly and monthly charts. It is in the bottom edge of the Cloud on the daily and above on the 4hr chart. The weekly candle closed as a bullish candle with a long lower shadow.

The next major support level below $20 seems to be down at $15, near the monthly 200 EMA.

Gold: Gold also had a choppy week but rallied after the US debt resolution to close back above the key $1,300 and it also broke out and up from its bullish broadening descending wedge. Continued USD weakness might help to support Gold.

The $1,300 level remains a key level as it is the 50% fib pullback from the last swing low to swing high. The next major support below $1,300 seems to be down at the whole number, $1,000 level and, after that, at $850 in the monthly 200 EMA.

Gold is now only trading below the Ichimoku Cloud on the daily and weekly charts. It is above the Cloud on the 4hr and near the bottom edge of the Cloud on the monthly chart. The weekly candle closed as a bullish candle.