Trade Spotting: Trade Week Analysis for 17/03/14

Last week: The weaker than expected Chinese Trade Balance released last weekend upset the developing momentum across some FX pairs and put a dent in risk appetite to start the trading week. There were only two TS signals last week and these were undermined by choppiness due to strong resistance and jitters due to ongoing Ukraine concern. E/U: -100 and Kiwi -30.

This week:

The big news and risk event for the week will be Wednesday’s FOMC.

The Forex index charts are still aligned for ‘risk on’ and I’ll be watching for any follow through with FX pairs.

The E/U, Kiwi and Cable are all trading at pivotal levels. Further bullish momentum on these pairs would mark a significant breakout but the significant resistance generated by these levels could also prove to be turning points for bearish reversal. The next major direction on these pairs is not at all clear as yet.

Fundamental based news-driven events will always trump developing technical moves on trading instruments and the current trading environment is definitely marked by this risk. Events in the Ukraine still have the potential to undermine any developing ‘risk’ appetite. Sunday’s Crimea referendum will be a significant risk event for the entire market and may trigger gaps on currency pairs at market open. This type of trading environment does not lend itself to taking longer term positions.

I have been away this week and so this update is shorter than usual.

Stocks and broader market sentiment:

S&P500 stocks were hit hard with risk aversion last week and this was triggered by the situation in the Ukraine as well as profit taking due to some general ‘market top’ jitters. The index closed back below the 'triple top' region and has broken down through a recent daily trend line. I don’t have a TS signal to short here yet though but there is obvious weakness. I’m watching for any continued weakness and pull back to the second daily support trend line.

I noted last week that I am seeing some divergence on the monthly chart and how this might be just warning of a pause, as the index navigates new highs, but that the chance of a pullback cannot be ruled out either. There has not been any deep pull back since the break up through the 1,577, 1,600, 1,700 or the 1,800 levels and the major break of the 1,577 level was only tested once. It's all a matter of scale and perspective here though. I see any pull back to the second daily trend line as normal, even though this would mean pulling back down to near the 1,800 level, but others would be seeing this current bearish action as a major warning sign.

I continue to watch out for further clues as to any new momentum move, long or short though! In particular I’m looking out for:

S&P500 daily chart: I’m watching for any break of the daily trend line but price is holding above this for the time being. I consider any pull backs to this longer term daily trend line to be normal and part of any healthy continued bullish move. I would read a breach of this trend line as a warning of a potentially deeper pull back. A more recent daily trend line was broken here last week though.

A condensed view of the S&P500 daily chart shows the three support trend lines in greater perspective:

Ichimoku S&P500 chart: a clear cross of the blue Tenkan-sen line below the pink Kijun-sen line. A bullish Tenkan/Kijun cross evolved on the daily S&P500 on Wed 19^th Feb. This cross was deemed ‘weak’ as it evolved below the Cloud but price is still trading above the Cloud which is bullish. Any new bullish Tenkan/Kijun cross above the Cloud would be quite significant. The last such bullish cross marked the start a long running uptrend.

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 but it failed to hold these levels for the January close. Price closed back above the monthly 200 EMA for February though and this is rather bullish. Price has held above this level again this week.

S&P500 monthly chart: a break of the monthly support trend line (see monthly chart). The monthly trend line remains intact. 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. I am seeing a bit of divergence creeping in now on the monthly chart. This may just be as the index pauses and ponders this new high or it could be warning of a pull back. Elliott wave suggests a big correction here though. I am still thinking that the 1,600 level might be the new base line for this index. The saying that ‘Old resistance becomes new Support’ holds here. I still believe that 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 breakthrough and I would expect a significant level such as this to be tested more than once. Maybe I’m wrong here though as there have now been seven consecutive months of candles that have closed above this key level, and, without testing this region at all. To add to this thought of bearish pull back potential, 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 even test this region again before any continued move upwards.

Items to watch out for:

Mon 17^th: nil
Tue 18^th: AUD monetary policy minutes. EUR German economic sentiment. USD building permits & CPI.
Wed 19^th: G7 meetings. GBP Budget, unemployment rate & bank rate votes. FOMC.
Thurs 20^th: NZD GDP. USD: Unemployment claims, existing home sales and Philly Fed manufacturing index.
Fri 21^st: JPY Bank Holiday.

E/U: Price chopped around between two major zones last week. There was support from the 61.8% fib level of the 2011-2012 bear move but resistance above from the major, monthly chart triangle trend line and the top edge of the monthly Ichimoku Cloud. A TS signal failed here last week but this wasn't too surprising given the resistance offered by this significant level and the ongoing concern with the Ukraine situation.

The E/U is certainly at a pivotal level. Whether this level marks a transition and a major break out for this currency pair or proves to be a turning point for a move back lower remains to be seen. I would expect any attempt at continued bullish movement to be marked by a fair amount of choppiness.

Monthly chart triangle breakout looming? The E/U is poised just below the bear trend line of a major triangle pattern that has been setting up on the monthly chart since back in 2007. Traders need to watch out for any triangle break here as the suggested move from any such breakout is of the order of upwards of 3,000 pips! The theory behind these breakouts is that the ‘height’ of the triangle represents the possible pip quota for any breakout move. I consider that I have been reasonably conservative with my target as I have only measured the height of the triangle from the 2011 region. The height measured from the 2007 region would suggest a much larger target. I can't see such a move being tolerated by the ECB but the technical pattern is what it is.

The E/U is still trading just under the top edge of the monthly Cloud. In fact, a move up through the monthly chart’s triangle trend line would also see the E/U move up and out of the monthly Ichimoku Cloud. This would be a most significant bullish development as it would mean that price would be trading above the Cloud on the 4hr, daily, weekly and monthly charts.

Price is trading above the Ichimoku Cloud on the 4hr, daily and weekly chart and is pushing up through the Cloud on the monthly chart.

The weekly candle closed as a small bullish candle.

I’m watching for any new TS signal on this pair, the 61.8% fib and the monthly triangle trend line.

A/U: The 0.89 and 0.905 remained as key levels for the Aussie again last week. Price broke up and out from the resistance of the 0.905 level on the back of some strong AUD data but Ukraine concern undermined this bullish momentum. The bullish ‘inverse H&S’ pattern on the daily chart is still valid for the time being though.

Daily chart inverse H&S? The theory with these patterns is that the suggested bullish continuation is equivalent to the height of the H&S, that is, the height of the ‘Head’ from the ‘neck line’. The height of this H&S is about 380 ~ 400 pips or so. This would suggest a target for any bullish follow through to be up near the 0.945 region. The Aussie is trading below the Ichimoku Cloud on the weekly time frame but the bottom edge of the weekly Cloud comes in at around the 0.94 region. This isn't too far from the inverse H&S target so it would seem like a good 'take profit' region.

Price is trading in the Cloud on the 4hr, above on the daily chart but below the Cloud on the weekly chart and in the bottom region of the Cloud on the monthly chart.

The weekly candle closed as a bearish coloured Doji candle reflecting the recent indecision.

I’m watching for any new TS signal on this pair and the 0.905 level.

Kiwi: NZD/USD: Price chopped higher this week and edged up to trade just under a major triangle trend line on the monthly chart.

Monthly chart triangle breakout looming? Like the E/U, this pair is poised for a possible triangle breakout that could be of the order of 1,500 pips. Price became choppy last week as it navigated this breakout region and also as Ukraine concern mounted. Whether this region marks a major break out or results in a turning point for this pair too remains to be seen but is worth watching.

Price is still trading above the Ichimoku Cloud on the 4 hr, daily, weekly and monthly charts which is most bullish.

The weekly candle closed as a bullish candle.

I’m watching for any new TS signal and the monthly triangle trend line.

G/U: The Cable chopped sideways and a bit lower this week whilst still just under the major monthly 200 EMA.

Like the E/U and the Kiwi, this pair is sitting at a major crossroad. It is important to remember that February was the first monthly close above the monthly 200 EMA since September 2008 and also the highest monthly close since the bear move of 2007-2009. These were major achievements. The close above these significant resistance levels suggests bullish continuation but I still remain cautious. I am wary given the Ukraine situation and would also expect the resistance of the monthly 200 EMA to be tested a few times before any potential bullish follow through. Whether this zone marks a demarcation before the next major move higher or marks a turning point before moving to trade lower also remains to be seen here.

A possible target for any continued bullish movement is best determined from the monthly chart. The 50 % fib level of the 2007-2009 bear move is up at around the 1.73 region and the 61.8 % fib is at the 1.82 region. Both of these levels might be possible profit targets. The 61.8% fib level is now only about 1,500 pips away 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 idea.

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

The weekly candle closed as a bearish engulfing candle.

I’m watching for any new TS signal on this pair and the monthly 200 EMA.

The Yen: U/J: The U/J chopped lower all week given a strengthening Yen in the wake of rising Ukraine concern.

The 61.8% fib of the 2007-2012 is well above current price now. This is a major demarcation point here. A continued hold below this level would be bearish but any new close and hold above would most likely signal bullish continuation.

Price is now trading below the Cloud on the 4hr and the daily chart which is bearish. November was the first monthly candle close above the Ichimoku Cloud since mid-2007 though and 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. Price has struggled since it emerged from the Cloud and we may still get a further test of this support but any continued hold out from this region would suggest bullish continuation.

The weekly candle closed as a large bearish candle.

Weekly Chart Bullish Cup’ n’ Handle pattern: 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.

I’m watching for any new TS signal, the monthly 200 EMA and the 61.8% fib level.

Nikkei: Fear gripped stock markets this week and the Nikkei didn't escape this sentiment. Price closed back below the 15,000 level this week and also below the previously broken trend line.

The Nikkei closed for December and for 2013 above the 16,000 level and, also, above a major bear trend line that had been in play for over 20 years. This was a significant development for this index and a rather bullish signal but geo-political concern may undermine this technical move.

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.

Gold: Gold rallied all week with a weak USD and with rising fear due to tension with the Ukraine situation.

Gold has now risen over $100 since I first posted the chart of the bullish-reversal weekly 'railway track' pattern back in early February! See the chart below for how this pattern appears now:

Gold is still trading above the Ichimoku Cloud on the 4hr and daily chart and is pushing up into the bottom of the Cloud on the weekly chart. The February candle closed up into the bottom edge of the Cloud and the March Cloud continues to push up through the Cloud as well. 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! I had been wondering whether Gold was simply rising to test the bottom of the monthly Ichimoku Cloud, following the earlier bearish break down, but price might now be continuing with its fight back up through the monthly Cloud.

The weekly candle closed as a large bullish candle.