Look at the ES Hourly graph for past few days. ES has largely been confined to the range between 908.5 and 919. This graph is from 3 hours ago. And not surprising that about an hour ago, a rally attempt in ES was rejected precisely in the 918-919 region.
ES did make a foray out of this trading range, but swiftly returned back on Tuesday. Let us see what Wednesday presents itself with. I will continue to trade in the range unless proven wrong. I will be looking at TICK to tell me if we have broken out of the range and are trending.
The inverse correlation between the US dollar and the US equities has been a bit out of whack for past couple of days. These correlations are not universal and work until they stop working. One must keep an eye out for the fact that this correlation that has existed for such a long time might now be coming to an end.
At the same time, I am not assuming that it has come to an end. I will let the market tell me. I will once again reiterate “Wise is not the one know what is coming. Wise is the one know whats that he CANNOT know what is coming and keeps his mind, eyes and ears open”.
The chart that I will be watching a close eye on tonight is the EUR/USD chart. Euro currency fell in a waterfall fashion all day long only to reverse slightly – it has bounced back up from 1.3900 mark. I expect this bounce to be short lived and the downdraft to resume. Usually the trend of Euro is set for the night soon after the European markets open at 3AM ET.
I am sorry to disappoint you that I don’t have any bold forecasts here. I will however say that I am positioned for a downside move tomorrow (Thursday) and possibly a test of May lows either tomorrow or on Friday. Should we start moving down, I will close 50% of my short positions at Monday’s lows and the remaining 50% at SPX 875-880 region.
Flashback: Nov 2008 – Feb 2009: From Nov 10, 2008, SPX formed a technical pattern, what is known as Penant OR the Symmetric Triangle. This technical pattern is a CONTINUATION pattern. It resolves in the direction in which the penant was enetered.
In Nov 2008, the penant was entered going down. As a result the expected outcome was that the penant will resolve to the downside – which is exactly what happened on Feb 16, 2009 (in hindsight, the fate was sealed on Feb 10th, even before our much adored Timmy (Geithner) opened his mouth to speak about the “Bank Plan”. I still remember “tape gazing” that morning and watched the indices plummed 2 to 3% as the CNBC anchors laid out of the summary of the plan. Those were the day – right
Fast Forward to May 29, 2009: What was bestowed upon was YAP (Yet Another Penant). The difference being that the penant was entered going up. So, the expected resolution was to the upside.
Which is exactly what happened in the last few minutes of May 29, 2009 – S&P futures ripped through the upside of the penant, spiking more than 20 handles in matter of minutes. The markets gapped open big time on Monday June 1, 2009 and left a gaping wide gap that is yet to be filled.
Fast Forward to June 14, 2009: What has happened since the penant resolution is quite bullish IMO.
SPX has consolidated nicely in a more or less sideways fashion putting in higher lows and higher highs. In fact the leading index for this rally, QQQQs have also put in higher lows and higher highs.
Coming Attractions: More upside! SPX should test 975-980 this coming week. What is an even exciting prospect is that if 1000 level on SPX is taken out, then there is a region of 100 points to the upside where there is virtually no resistance and whenever we get there “WE WILL RIP THROUGH THAT 100 POINT REGION IN LESS THAN A WEEK”. I am not suggesting that we will get there because it is some ways out in the future and it will be arrogant of me to even try and think that I can predict that. However, what I feel comfortable predicting and putting my money on is that we have more upside in this coming week – we will, in all probability see new highs for this rally on SPX. As always, if you got something out of what you read, please do share some love. Also, I have enabled DISQUS here – so additionally feel free to leave any thoughts/comments/criticism (always welcome)/suggestions/contrary ideas – whatever – everything welcome
Continuation of my previous post, where I talk about very short-term target of 1.4000 in tonights Globex session, here I am exploring short-term, intermeidate-term and longer-term targets for EUR/USD. Down-trending Line3, which marked the top in September and December, gets tested again in next few days, taking it back up to 1.4300. This should coincide with SPX high of 970 or so.
After that I foresee a quick retracement to 1.3500 to the underside of the upward channel, Channel3. This should take SPX down to 880 region. A more severe, but less likely scenario is going all the way back to 1.2500 coinciding with a much larger retracement on SPX down to 790 – 820 region. I believe that given the amount of optimism, a 10% retracement from 970 to 880 is all we will get.
I will talk about more longer term outlook in another post tonight. My longer term outlook is some more inflation followed by severe deflation. As always, if you found something useful in this post, please feel free to share some love.
In the currency update, posted yesterday, I stated that we will bust through 1.4100 AND that 1.4100 – 1.4150 area (see blue tint in the chart below) will pose some resistance. Over the past 4 days, EUR/USD has developed a nice upward channel. At this point, I am expecting a retrace down to 1.4000 in the Globex session tonight, which should coincide with ES coming down to SPX 934 levels.
Failure to bust through 1.4100 – 1.4150 region is closely related to why SPX got rejected at 955 levels. The currency action suggests that the upmove in the indices is not finished yet. SPX will touch 934 and then start to move back up again.
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In my prior posting on Friday, June 5, 1.3750 – 1.3800 was posted as the most probable downside target for EUR/USD. This target was achieved with a great precision on June 8, 2009. The chart below shows that EUR/USD bounced back up from 1.3805. The same chart also shows what has happened since that dip. EUR/USD is now back up above 1.4000.
In the chart below, we can see that 1.4100 acted as strong support initially. Once busted, the move to 1.4000 came very quickly. Now on the way up 1.4100 is acting as a resistance. The first attempt to bust to the upside was rejected on Wednesday morning. In the Globex session, EUR/USD has started to move up again and should challenge 1.4100 overnight or Thursday morning. If busted, the initial target will be 1.4300, which should take SPX to 960-970 region.
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The currency markets have been used to explain what is going on in the markets lately. The principle that underlies the currency markets and ultimately everything else is supply and demand. Last year in the fall, the indicies plummeted like most of us had never seen before in our lives. We all watched that in amazement, but what happened then has serious implications now. The ease with which indices fell last fall seemed like slicing butter with red hot knife. The thing that most of us forget is that once we have sliced butter with hot knife, pulling the knife out is EVEN MORE easier. What this means is that if indices were to enter that free fall zone of last fall, then we will rip through that region. The move up through that region will be pretty much the way we moved up in mid to late March… in a blink of an the move would be over.
Posted below are the charts that highlight these regions for SPY, IWM, QQQQ, XLF, IYR and OIH highlight some interesting supply and demand regions. For your convenience I have typed up the name of the concerned security in big bold font on each chart.
Also, instead of typing up my conclusions at the bottom of these charts, I am writing it here in case you get fed up of the charts and don’t get to the bottom of the post: IMO, I would even say I strongly believe that the downside is very very limited. The QQQQs will power us up and then IWM and OIH (along with other commodities) will quickly pull SPY through to $100 which will power it to $110 mark… by end of July. That is where we will see any meaningful retracement, possibly down to $92.5 on SPY…
The way I WILL PLAY this is to go long QQQQs now and then move to small caps and commodities. Finally as SPY is nearing $110, depending upon how we move up (supply-demand) will determine which sector is the best to ride the 20 odd percent move down. That IMO will be the B leg of this A-B-C primary {2}.
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QQQQ: We are already in the “NO” resistance region and we should keep powering up with minor retracements. This is what tells me that we keep going up from here.
IWM: We are 3% away from the “NO” resistance region. A decent up day will get us there and the small caps will just power through to $65.
SPY: This one is a bit tricky. The region shaded in yellow tells us why we have been range bound for almost month. Going back to late last year and early this year, there was a LOT of supply in this region. Having broken through 92.5 on SPY, we are now in a region of far less supply. However, whenever we get up to $100 on SPY, we will get to $110 in NO time… may be 4 to 5 days at max.
XLF: This chart best summarizes why FAZ has been going nowhere for a month. Lots of supply from late last year being burnt through. Even if XLF breaks through $13 mark, there is still a lot of supply to contend with. Given this FAS will not be a good play even if we are moving to the upside. There will be a lot of chop chop which will kill a lot of gains in the FAS. Shorting SKF might be a very good idea. The only region of relatively low resistance on XLF is $16.5 to $18.5. But I don’t think we will ever get there.
IYR: Pretty much like XLF – lots of supply all the way up. SRS is going to get murdered through the summer. I had called for $3 by end of year. I am revising that to $3 by late July or August.
OIH: NO resistance all the way up to 145. And we are just bordering that region.
Let us look at the monthly chart for EUR/USD. This shows a very clean trendline that is supported by corrections in late 2005 and late 2008. Below that is the daily chart, which shows two more support lines, Line3 and Line1. Line3 is a horizontal support line at around 1.3750 – 1.3800. Line1 is the line that has supported EUR/USD in this rally from March lows. And finally Line2 is the longer term support time. We will definitely visit 1.3800, which will take us to SPX 900-910. Visit to Line1, around 1.3500 should take us to 880, and finally if we make a visit to the longer term line, Line2 (which is VERY UNLIKELY IMO), then we will get to 790-820.
Folks all over the blogs are wondering – why the heck are we going up, up and only up. This article is in a series of two articles. Here I want to show you why we are going up. And then in the second article, I will prove to you that we are not necessarily going up.. In fact, we might have gone down quite significantly over the past week or so
Below is the 2-hour chart for EUR-USD (EUR-USD accounts for more than 60% of the dollar index.. so I have chosen to focus on that only and not on the dollar index for now). You will notice that EUR-USD has been in a perfect upward channel since early mid-April. And as long as it continues to be that way, we will continue to melt up in higher.
For any significant downward move in the indices, this channel has to be broken conclusively. At this point, it would amount to first breaching the channel, which would be going below 1.4100 AND in my opinion taking out 1.3800 (which is where the previous bounce up point was). Going down to 1.4100 should take us to 930 and down to 1.3800 will take us to 910 region.
Ok, now I have talked a lot of facts, which a lot of you already knew. Where is this chart headed next? IMO, the reversal is quite near. And here is the reason why? I am a big believer of sentiment, and extreme sentiment often creates tops and bottoms. Today, everyone, almost everyone knows that dollar is tanking.. even the newspaper boy (no offense intended here) knows that… Everyday there is some headline talking about how dollar is continuing to tank. When something becomes a household/common talk, it ceases to be the reality. (Some fascinating examples that I have read elsewhere of extreme sentiment: (a) The day FOX launched their business channel was the top of S&P 500 back in 2007, (b) Back in late 2007, there was an article in newspaper that said that in Google even the person who offers massages to employees is a paper millionaire now – guess what, that day marked the peak of Google stock price).
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Here is the chart that plots both the ES futures and EUR/USD. You can clearly see that the “direction” of the moves are very highly correlated. Note that magnitudes may not be, but the direction is clearly correlated.
Ever since we breached the 23.2% retracement of primary {1} on April 29th, SPY has been range bound between 88 and 93. It has gone up and down nicely in channels, as is evident on the 30 day hourly chart seen below.
At the same time, if you would observe the daily chart (below) for the same period, one will notice how the stochastic is come down from overbought to almost oversold in this time period. So, the overbough conditions are being relieved with sideways movement. This is what sideways consolidation is known as.
We all know and agree that what we are witnessing is a bear market rally. Its just of a different nature.. different from the ones we witnessed all year long in 2008. The depths of March were reminiscent of what happened in 1930’s. When the market bounced back.. there were instances where the move from the bottom was as much as 80% in some cases. So don’t be surprised if after some more sideways consolidation we start going up again. The first leg of this move up was fueled by financials, then the commodities.. IMO big cap is going to move up next. Please don’t forget to share some love.
