Trade Week Analysis for 27/01/14

Last week:  The start of the week was slow but USD weakness later in the week triggered a bunch of signals: U/J= -60, EUR/AUD= 60, E/J= 60, E/U= flat, A/J= 300, U/J= 130, EUR/AUD= 330, AUD/NZD= flat and GBP/AUD= 350.

NB: I am away until Tuesday 28th so this is only a brief update and please excuse any typos.

This week:

Risk aversion gripped stock markets late last week and I'm on the lookout to see if this filters through across the currency pairs. The E/U and Cable held up fairly well thus far but I'll be watching to see if sentiment changes with them at all.

FOMC on Wednesday may be a major trigger for moves with the USD this week. Watch Gold with this news as it has made a recent bullish break but FOMC might impact here.

Friday will be the last day of the trading month so watch for how monthly candles close and for new monthly pivots in the following week.

Stocks and broader market sentiment:

Armageddon? S&P500 stocks closed below the 1,800 level and the ‘Double Top’ looks to be setting in. This move has triggered a few emails suggesting that the stock Armageddon is upon us. We had an Australian MP, later to become Prime Minister, who was once much maligned for noting a period of economic gloom as 'the recession we had to have'. I may risk the same ire here but I believe we need a market pull back in order to underpin any possible healthy period of bullish continuation. The daily and monthly charts of the S&P500 and Russell 2000 put this latest pull back into better context:

• Daily S&P500: a pull back to the daily support trend line, or even to the 78.6% fib level of this latest bull move that is near the 1,685 level, would be healthy as part of any larger bull move. Respect of these levels would support bullish continuation. These levels have not been tested yet. Further bearish movement may trigger a TS signal to short and I'll be on the lookout for this.

• Monthly S&P500: My Elliott Wave indicator suggests that a pull back even down to 1,300 would fit within the boundaries of a normal uptrend! For me, a pull back to the monthly trend line, or even the 1,600 level, would seem reasonable here though. 

• The Russell 2000 is often regarded as the 'small cap' stock benchmark and vulnerability is often spotted here before any major market upset. There doesn't seem to be any major indicator ringing alarm bells here just yet though. Daily and monthly support trend lines can be seen to be intact for now:

I don't claim to have any idea about where this latest market move will eventually take us BUT I see this pull back as healthy until all of the above major levels are broken. I would have to say though that my resolve would be well tested if the 1,300 level ends up being attempted on the S&P500!

I'm still continuing to watch out across a range of instruments for further clues as to any new momentum move, long or short! In particular I’m also looking out for:

Ichimoku S&P500 chart: a clear cross of the blue Tenkan-sen line below the pink Kijun-sen line. A bullish Tenkan/Kijun cross though evolved back on Wednesday 23^rd October! This bullish cross was deemed a ‘strong’ signal as the cross was positioned above the Cloud and this signal has delivered a strong performance. This signal is still open at the moment although the bearish action of last week has brought price down to trade in the top edge of the Ichimoku Cloud. A bearish Tenkan/Kijun cross may be on the way shortly too and I'll be on the lookout for any such signal.

EURX chart: The November and December monthly candles closed above the major S/R level of the monthly 200 EMA. November was the first monthly close above this S/R level in almost 2 ½ years! This was a major achievement for the index and I’ll be watching to see if price can hold above this major level. Price closed back above this key level this week.

Items to watch out for:

• Mon 27^th: AUD Bank Holiday. EUR German Ifo Buisness Climate. USD new home sales.
• Tue 28^th: AUD NAB business confidence. GBP GDP. USD consumer confidence. G7 meetings.
• Wed 29^th: USD FOMC.
• Thurs 30^th: NZD RBNZ cash rate. USD advance GDP, pending home sales & unemployment claims.
• Fri 31^st: NZD trade balance. AUD PPI.
• Sat 1^st: CNY manufacturing PMI.

E/U: The E/U chopped sideways this week in a triangle pattern formed up by more recent daily support. Some weak US data but strong European data helped to boost this pair later in the week. Price rallied to give a new TS signal and a triangle break. Bullish sentiment may fade here though if risk aversion continues across stock markets. Caution is needed here.

Price is now trading above the Ichimoku Cloud on the 4hr and daily charts which is bullish.

The weekly candle closed as an almost bullish engulfing candle.

• There is an open TS signal here but watch for any continued 'risk aversion' across stocks.

E/J: Price has traded under a bear trend line for the last 3 weeks and price continued to trade under this level this week, apart from a brief upwards blip mid-week. Price broke down through key support on Friday though and triggered a new TS signal. The E/J fell below the 61.8% fib level of the 2008-2012 and this may lead to the H&S being triggered. I would need to see a hold below the 61.8% fib level ‘neck line’ into next week though to confirm this bearish pattern.

H&S Pattern: The bearish Head and Shoulder pattern may be forming up on the daily chart. The ‘neck line’ of this H&S is at the important junction of the 61.8 % fib level; at around 140.5. There has been a daily candle close now below this neck line but I would need to see price hold below this level to confirm this pattern. The height of this H&S pattern, from the ‘neck line’ to the ‘Head’, is about 500 pips. The theory here would suggest that any such bearish follow through with this pattern would send price down by an order of 500 pips. This is where it gets interesting! A 500 pip move below the neck line would bring price to around the 135 level. This is roughly where the top of the monthly Ichimoku Cloud is currently sitting. The November and December candles were the first to close above the resistance of the monthly Ichimoku Cloud since 2008!  I had thought that price might pull back down to possibly test this key, monthly Cloud break out. This possible shorter term bearish H&S pattern on the daily E/J chart might just help to achieve this pull back.

I see any short term pull back with the E/J as tying in with possible similar moves on the S&P500. The correlation chart of the E/J and S&P500 shows their positive relationship of late:

Price is still trading above the Cloud on the daily, weekly and monthly charts but below the Cloud on the 4hr chart.

The weekly candle closed as a bearish candle.

• There is a new TS signal here and I'm watching for a hold below the 'neck line' to confirm the H&S pattern as well.

A/U: The Aussie put in a small bounce earlier in the week after some positive CPI data but weak Chinese data soon brought an end to any enthusiasm. There was further bearish movement following RBA comments and the Aussie closed the week below the 0.89 ‘neck line’ region. The choppy action with these moves meant that no clean TS signals were triggered.

Weekly chart H&S pattern building? This second weekly close below the 'neck line' seems to confirm the weekly chart’s H&S pattern. I had expected price to test the broken 'neck line' level and it came fairly close back up to this key region during the week before resuming its decline. The theory behind these patterns is that the predicted bearish move below the 'neck line' is equivalent to the height of the 'Head' of the pattern. The neck line of this weekly H&S is at the 0.89 level. The height of the ‘Head’ on this weekly pattern is about 850 or so pips. Thus, the projected bearish move for this possible pattern would put price down near the 0.80 cent level. This is near the 61.8% fib pull back from the last major up move (2008-2011).

Price is trading below the Cloud on the 4hr, daily and weekly chart and near the bottom of the Cloud on the monthly chart.

The weekly candle closed as a bearish candle.

• I’m watching for any new TS signal.

G/U: There was bit of positive European data and USD weakness this week that helped the Cable. It broke out from the symmetrical triangle and gave a move worth 200 pips. Sadly, the lack of real momentum with this move failed to trigger any new TS signal. The resistance of the monthly 200 EMA remains as a barrier above current price and the Cable was rejected by this level on Friday. 'Risk aversion' set in across stock markets late in the week and this would not have helped the Cable either. 

A possible target for any continued bullish movement might be the 61.8% fib level of this same move. This 61.8% fib level is about 1,800 pips away at the 1.82 area and might seem an impossible task but I’d advise you to look at the monthly chart of the E/J and U/J before you reject this.  Price might continue to struggle with the monthly 200 EMA though and I’m watching for any reaction here and will trade with the next momentum move, either up or down!

Price is now trading above the Cloud on the 4hr and the daily suggesting a bullish bias.

The weekly candle closed as a bullish candle but with a long upper shadow.

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

The Yen: U/J: The U/J traded under the neck line of a possible inverse H&S pattern until Thursday. Price fell later in the week and triggered a new TS signal and also seems to have voided this possible pattern.

Price is trading below the Cloud on the 4hr and only just above on the daily chart. The November candle though was the first monthly candle close above the Ichimoku Cloud since mid 2007! A look at the monthly Cloud chart shows how a test of the monthly 200 EMA, and even the top edge of the Cloud, would seem quite reasonable even if there was to be bullish continuation. This level may well be tested with this current pull back.

The weekly candle closed as a large bearish candle.

Weekly Chart Bullish Cup’ n’ Handle pattern: The bullish break out from the ‘Cup ’n’ Handle’ pattern on the weekly chart has still peaked at 600 pips for the time being. The ‘Handle’ of this pattern is the same as the triangle or ‘Bull Flag’ that was watched on the daily chart. The theory behind these patterns is that the height of the ‘Cup’ pattern is equivalent to the expected bullish move from the ‘handle’ breakout. The height of the Cup for the U/J weekly chart is around 2,400 pips. The interesting point here is that a 2,400 pip bullish move up from the ‘Handle’ would put price up near the 124 level. This level is the last major swing high for the U/J from back in 2007 and represents the 100% fib pullback for the move down in 2007 to the lows of 2012. Possible targets along the way include the 61.8% fib retrace level at the 105.5 region and the 78.6% fib up near the 112 region.

• There is an open TS signal on this pair.

Nikkei: The Nikkei pulled back this week. The monthly candle has another week until it closes but price, for now, is still holding above the previous bullish trend line break. This trend line had been in play for the last 20 years and was a major bullish break. I am not at all surprised to see this trend line break being tested but I’ll be watching next week to see if price can hold above this level.

Note how the 15,000 level is near the 38.2% fib retrace level of this huge down move. The 61.8% fib level is back up near the whole number 20,000 level and would be an obvious target for any continued bullish momentum.

EUR/AUD:  The EUR/AUD continued to chop around either side of the significant resistance of the monthly 200 EMA to start the week. AUD weakness and EUR strength then combined to create a 'perfect storm' here and sent this pair off and running. This move triggered a new TS signal and price also then closed above the previous ‘triple top’ resistance zone.

The monthly chart looks bullish and suggests that price has broken through key resistance of the monthly 200 EMA, tested this level and looks poised for bullish continuation.

The monthly chart also shows how this pair made a big move down from 2008 to 2012. The 61.8% fib retrace level of this big down move is back up at the 1.75 region. The monthly chart shows how the 1.75 is also a major S/R level for this pair and would be a possible target for any continued bullish movement.

The E/A is trading above the Cloud on the 4hr, daily and weekly charts which is bullish.

The weekly candle closed as a bullish candle.

• There is an open TS signal on this pair.

Gold: Gold traded lower again this week after butting up against the S/R level of $1,255 and the bear trend line. The $1,255 level is also the ‘neck line’ of the possible bullish ‘inverse H&S’ forming up on the daily chart. Price rallied on Thursday to close above this ‘neck line’ and the Friday close above this level seems to confirm this bullish pattern now.

Gold is now trading above the Ichimoku Cloud on the 4hr chart, in the Cloud on the daily chart and below the Cloud on the weekly and monthly charts. It is worth remembering that the November candle was the first monthly candle close below the Ichimoku Cloud since January 2002, a period of almost 12 years! So, price may still just be trying to test this broken S/R level before further bearish follow through.

The monthly and weekly charts shows how the December candle tested the June low of $1,180, a level that was just above the 61.8% fib pull back level of the 2008-2011 bull move.  A break of this $1180 level would be quite bearish. The next major support after this 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 bullish candle. 

FOMC on Wednesday might dictate the next wave of movement for Gold and, thus, this news would need to be monitored if trading this metal.