Daily Form July 30, 2010

Inter-market Technical Analysis using algorithmic pattern detection

FRIDAY JULY 30, 2010       06:54 ET

While waiting for release of GDP data from the US later today, European trading is showing a quite pronounced negative tone with respect to EUR/USD as the failure to make progress up to the 1.3150 level (a 38% retrace of key levels) is causing a fair amount of selling.

As the 240 minute chart suggests the key level to watch as the day unfolds will be the 1.2880 area which is where a key upward trend-line and the top of the cloud intersect.

The chart below captures the current level in a daily format for the S&P 500 futures.

The level on the chart is quite significant as it represents the base of the cloud and the intersection with the ascending dotted line tracking the lows since early July.

If this fails today then the July low would be a feasible target. If the level holds and we remain in the cloud I still feel that the bulls will have the opportunity during the thin trading levels of August to eventually test the 1130 level. It is what happens after that which will be really worth watching.

However if we drop below 1085 today then we may get the fireworks sooner.

Yesterday I discussed how the 2220 level probably needed to be tested on the Nasdaq Composite and in yesterday’s session there was a move down toward this level but I sense that a more robust test needs to be made.

In a similar fashion to the discussion above, from a technical perspective, if one is still moderately positive about the near term for US equities, this index needs to re-enter the cloud pattern sooner rather than later.

Earlier this week I looked at GBPJPY and discussed the key breakdown level which enabled me to make back the loss I saw in trading this pair on Tuesday.

The downtrend has proven to be more persistent than I thought as the yen continues to seek out higher levels against the US dollar and all other major currencies. But, after such a move, even though there is a temptation, I would not chase this down at present.

Daily Form July 29, 2010

Inter-market Technical Analysis using algorithmic pattern detection

THURSDAY JULY 29, 2010       06:45 ET

Yesterday I talked in terms of a volumeless rally in US equities and today I would like to flip that over and talk about a volumeless correction.

The indications in the early part of the session, following weak economic data, were that the bears were seizing the initiative to push the S&P 500 back down for a test of the 1095 area. However there was no dynamism to the move and no volume to the selling. The S&P 500 bounced off the base of the cloud and still seems to be set to gyrate its way through the cloud towards an eventual testing of 1130.

The daily chart for the Nasdaq Composite seen below shows a slightly different perspective using Ichimoku formations as guidelines. Yesterday’s close also tested the bottom of the cloud and survived the test (just), but as can be seen on the chart the level indicated by the arrow 2220 may be a more critical test for this index. As with the S&P 500 the very flat top of the cloud at 2337 suggests that this will also pose quite a hurdle if the bulls keep control of the agenda.

My favored speculative scenario or exercise in dreamscaping (by the way, in my estimation, Inception is a very good movie) for price developments going forward is for a gentle upward bias for equities and risk assets through August but with gathering clouds for risk aversion (see below for the FX perspective on this) as we move into September.

The daily chart below for CHF/JPY indicates that this pair is poised at quite a critical juncture. The fact that recent closes have dropped below the ascending trend-line and that yesterday’s close has pierced the top of the cloud should be monitored closely in coming sessions.

As suggested this cross rate is a good indicator of two things:

1. Likelihood of a safe haven play to the yen, especially since the Swiss franc is also considered a safe harbor during troubled times
2. An early warning that EUR/JPY may also be susceptible to downside (as is the case now) or upside as has been the case previously.

I shall discuss this chart later today on CNBC’s European Closing Bell .

Also up for discussion on the TV slot will be the chart of CHFUSD which shows the relationship from a Swiss franc basis with the US Dollar.

Again the advice would be to watch this closely as a failure to break above the recent highs at 96 would lend some weight to the view that we could be entering in the coming weeks(i.e. possibly late August/early September) a period when the Swiss franc would lose ground to both the Japanese yen and the US dollar. This scenario would almost certainly be an accompaniment to a period of risk aversion.

The 15 minute chart below for Sterling/Yen or GBP/JPY shows a profitable setup for the short trade on the pair which eluded me on Tuesday, as discussed in yesterday’s column, but which turned out to be a very profitable trade for me yesterday, in a relatively brief time frame.

The parallel upward sloping lines and the clear downward trend-line through the highs provided the clue to the imminence of the breakdown. The point marked by the arrow represents the decision point and the long red candlestick provided me with the entry signal on the short side. The sell off was abrupt with a quick gain of more than sixty points.

For those interested I did provide an early warning of this potential set up via my Twitter account which is @morph366 and which ideally can be monitored using a desktop tool such as TweetDeck.

Daily Form July 28, 2010

Inter-market Technical Analysis using algorithmic pattern detection

WEDNESDAY JULY 28, 2010       06:46 ET

The volumeless rally in equities continues and for the S&P 500, despite some whipsaw behavior in yesterday’s session, the expectation is that the 1130 target could now be seen in the next few sessions, possibly even today.

Plenty of cheerful commentators are to be found, and the Eurozone woes, which were hanging over the market just a few weeks ago, seem to have been relegated to the bottom of the pile of things to worry about, along with evidence of anemic growth in the "mature" economies, weak consumer sentiment and evidence that local and governments throughout the US are facing major budgetary crunches.

Just for perspective it is worth recognizing that current world GDP is about $60 trillion and about half of that total is accounted for by the US and EU states. The often cited powerhouse economies such as India and China together make up less than 10% of the total, although their rates of growth are far in excess of anything seen in western Europe and North America. Weighed against the bullish case for the BRIC economies, much of the rest of the world continues to de-leverage and as the consumers of last resort in the US, UK and other states which previously never saw a new product which they didn’t immediately want to own, have either exhausted all of their available collateral for credit or are too cautious to carry on with their previous profligacy.

Anyway back to the charts and purely from a technical perspective one would expect there to be strong resistance at the 1130 zone, although a nice false break above it could lure some cash off the sidelines.

Should we see a decisive break through the obvious flat cloud top (which serves to underline the strength of the resistance) on the chart, then the absence of any further cloud above suggests that the bulls could really run with the ball during August. However, as mentioned here last week, one should remember that the month of the year when many investors are more concerned about reaching for the suntan lotion than monitoring their portfolios, has had a track record of creating nasty surprises.

The Japanese yen could fall to the 112 level in this inverted chart of the more customary dollar/yen pairing before the uptrend would have been technically violated.

That would equate to 89.20 on the usual quotation method and I would suspect that level to be tested in coming sessions.

As part of my recent work for a book that I am writing and for workshops which I shall be presenting on inter-market analysis such as the following in London in September I am becoming more focused on the theme of forex basis rotation in which certain key currencies such as the yen, euro, dollar and Swiss franc seem to maneuver themselves in relation to other movements in the capital markets. One of the keys to trading FX, which continues to present the most interesting challenges, is to align one’s position in other asset classes in accordance with which currency base is in the ascendancy at the time.

As conjectured the recent era of the Japanese yen prevailing, with the euro as a basis trailing, is now in transition, but my suspicion is that a US dollar centric perspective lies on the not too distant horizon.

One of the most predictable inter-market relationships is between the yen’s performance and the Nikkei 225. As the yen retreats so the Nikkei rallies in almost 100% correlation. Trading in Tokyo on Wednesday fitted the bill exactly with a 2.7% rise.

The rally may find some resistance at the base of the pink cloud, but, if as I suspect the yen has further to retreat, we could see 10,000 on the Nikkei as we enter August.

One of the challenges in committing one’s thoughts about the markets to a daily chronicle is that it is easy for someone to point back to previous errors of judgment, and there are certainly enough to be found. But there have been some good calls as outlined below.

The last time I discussed the FTSE 100 was on July 13th and the reference can be found here .

I suggested then that the index would make it to the 5366 level which is exactly where it closed yesterday with a tail above the cloud.


The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions.
None of these setups should be seen as specifically opportune for the current trading session.
For a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm

DGL  PowerShares DB Gold Double Long  

Also discussed in this column on July 6th, for which the reference can be found here, was a prognosis that gold and the miners seemed vulnerable to a setback
The action in DGL is following a downward staircase pattern, but if you are short I would be exiting close to current levels as the 200 day EMA lies just below the steep drop yesterday. For the time being, apart from retiring short positions I would stand aside.

EEM  iShares MSCI Emerging Markets Index  

Although in the longer term my allocation preferences for equities are very definitely in favor of the emerging markets rather than US and European sectors, the lack of volume in the EEM sector fund suggests that there is not a lot of passion for these new economies at present. India and Brazil are showing signs of overheating with interest rate hikes now on the front burner, and I intend to remain flat for the BRIC sector for the time being.


In yesterday's session, which I actually found to be more interesting than a simple review of the closing prices on many charts would suggest, I was in and out of the GBP/JPY cross rate.

Essentially I misjudged the fact that sterling would be quite so aggressively bid up against not only the yen but also the euro as the data from the UK continues to be surprisingly good. Overall I ended up the session giving back all of the gains I made earlier in the session from shorting the pair.

As can be seen on the chart below - which again is an inverted view of the more customary presentation - the drop below the cloud and the 200 day EMA is significant. For now I would rather see further confirmation that this was more than a lot of Canary Wharf shenanigans before positioning myself on the long side of this pair as the euro based currencies (and I include sterling in that category) continue to rise against the yen.

EDV  Vanguard Extended Dur Trs Idx ETF  

The exchange traded fund EDV, which represents a play on long term Treasury prices, could have delivered a good profit on the short side as suggested here in early July.

DBC  PowerShares DB Commodity Idx Trking Fund  

DBC, a sector fund tracking overall commodity prices, has failed again to take on the $22.80 level

Daily Form July 26, 2010

Inter-market Technical Analysis using algorithmic pattern detection

MONDAY JULY 26, 2010       07:38 ET

The price action in a number of sectors suggests that equities are looking to move ahead but there are two main concerns that I have with this scenario.

1. Volume is lethargic and, even considering the time of year, one would expect to see more conviction from real investors rather than the algorithmic variety to sustain a move back towards the chart levels which are acting as temptation for the bulls.
2. The FX backdrop is not as supportive for a new risk on phase, at least at present, as one would hope to see (but see my comments below regarding USD/JPY).

Meanwhile the S&P 500 futures in Europe are sliding slowly and, as the chart suggests, there is a bearish flag formation developing. There seems to be a growing belief that equities are ready for a summer rally and while this may transpire there are bound to be plenty of scenic diversions along the way.

I bought CHF/JPY close to the level indicated by the arrow in early trading in Europe this morning and have taken a small profit and will be looking to exit the rest of the position at 83.20.
As suggested in Friday’s column this pair needs to close above 83.85 to give a clear buy signal on equities in my estimation.

The exchange traded proxy for the Russell 2000, IWM, made a nice move up on Friday from a price perspective and peeked above the descending trend-line, but as highlighted the volume was relatively modest.

If the S&P 500 is headed to 1130, which seems like the likely target, one would expect the higher beta Russell 2000 to be headed to 680.

As is often the case the Japanese yen is taking its own course in trading this morning in Europe. The current level is just above 87, and the drop since trading moved from Asia to Europe in the last few hours is not what one would expect to see to support a full blown risk on initiative by large macro funds. Having said that, if we get a sudden reversal during the North American session, this would be a good signal that the tacticians had boosted the yen in an FX market with relatively low liquidity, in order to lay in the foundations for the normal inter-market correlation of risk assets up as yen goes down.

Daily Form July 23, 2010

Inter-market Technical Analysis using algorithmic pattern detection

FRIDAY JULY 23, 2010       06:08 ET

The futures for the S&P 500 (mini) are moving higher in European trading on Friday morning and are approaching the test of the 1095 level, probably on their way to 1100 which could be seen in early trading when New York opens.

In yesterday’s commentary I suggested that the FX movements which I monitor closely were becoming more aligned as positive for risk on strategies and the upbeat tone to sterling (following much better Q2 GDP figures than expected) and the euro (EUR/USD and EUR/JPY) (which also had positive news from Germany’s IFO data) should allow the bulls to seriously take on a challenge of the 1100 level.

The key question which I intend to address in a TA slot on CNBC’s European Closing Bell this afternoon will be whether the S&P 500 can move back to, and then possibly beyond, the 1130 level. Readers may wish to review the last chart in today’s letter which will be one of those that CNBC will be rendering during the segment which takes place at about 16:40 London time.

The broadcast slot will be just ahead of the release of the stress tests for European banks which could be a market moving event, although I am perhaps cynical enough to believe that if there were dramatic bad news to be released it would have been leaked already. Besides, the stress tests were not conducted independently and the banks, according to reports this morning, were not asked to model the scenario of any EZ sovereign defaults. So just how much confidence one can have in the results I shall leave to the reader’s discretion.

All I would say is that August has shown itself to have a nasty track record for throwing up major financial surprises and the fiscal situation in a number of Club O’Med (notice the addition of the "O" to cover Ireland) is almost certainly no less worrisome than it was a few febrile weeks ago.

Part of the answer to whether the S&P 500 will reach back to the 1130 level will become clearer in the price development of the CHF/JPY pair which I discussed here yesterday.

As discussed yesterday a break above 83.85 would validate a more robust risk on posturing and we came quite close to that level yesterday. Within the last 24 hours 83.77 is the highest point reached and once again I would suggest that 83.85 will become a test case for inter-market strategists as they try to take the S&P 500 up to 1100. Incidentally I was right about my call yesterday that the 83.85 level would need to be taken out for the S&P 500 to close above 1095 - and even today, while I remain pretty confident that we are headed to 1100 near term I shall be watching the Swiss/Yen for inter-market validation.

The Nikkei 225 moved up 2.3% in Friday’s trading, and while it did not produce exactly a morning star as anticipated here yesterday it has registered Thursday’s doji star as an "island" candlestick as expected.

Reviewing the action in the Nikkei over the last two months there are an extraordinarily large number of overnight gaps revealed on the chart. The way I would interpret this is that it suggests a market which lacks any clear conviction and is highly responsive to the action on Wall Street the day before and the movements in the yen. For a global asset allocator the prospect of committing capital to a major equity market which seems so convictionless is not an inviting prospect.

One of the charts which I shall discuss on CNBC Europe this afternoon is the inverse form of the more commonly quoted pair EUR/AUD which has been flipped to show AUD/EUR.

The general point that I shall be making is that the FX correlation dynamics are transforming away from strength in the commodity currencies leading the way to increasing risk appetites back towards a more "conventional" perspective that confidence in the euro portends a more adventurous approach to asset allocation than simply hiding out in US Treasuries.

Notwithstanding this transition in FX/ETF correlation dynamics I would suggest that while the euro probably has further to go - probably to $1.3150 in the next week or so against the dollar - all of the EZ structural problems have not gone away. They are simply being less focused on as European policymakers prepare to head off to their various haunts for a nice quiet August!


The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions.
None of these setups should be seen as specifically opportune for the current trading session.
For a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm


GBP/USD is surging back towards the previous high seen on the 240 minute chart below which is at $1.5475. Surprisingly good GDP numbers, released this morning, are propelling sterling back to a test of the $1.55 level and if that should be penetrated (of which I am doubtful) the next target for the upside would be the 100 period SMA on the weekly chart at 1.5665 and beyond that the cloud top on the weekly chart in the region of $1.60.

If we see a 1.6 handle on sterling this summer then clearly the hedge funds loading up on emerging markets and other risk on sectors will have plenty to celebrate.


The 30 minute chart for USD/JPY was captured around 9.30 on Friday morning in European trading.
At present the pair is still in a downward looking channel but, as intimated earlier this week, if the longer term interpretation which I gave on Monday, that future gains for the yen may not be easy to come by then a reversal out of this bearish pattern (from the dollar's perspective) would manifest itself by a weekly close today above 87.50.

S&P 500 Cash Index    

The S&P 500 cash index needs to break into the cloud formation which lies just above yesterday's close around the 1095 level and will then likely trade in a fairly erratic manner while it remains within the cloud. The clear upside target is the very flat top to the cloud at exactly the 1130 level.

As long as there are no major surprises from the Eurozone in the coming weeks I would suggest that 1130 is a feasible target. In my estimation, the risks of a sharp correction during the ascent through the cloud or at the attainment of 1130 will increase in proportion to the speed with which the move takes place, and especially if there is not a corresponding relaxation in the anxiety which is keeping ten year US Treasury yields below 3%.

Daily Form July 22, 2010

Inter-market Technical Analysis using algorithmic pattern detection

THURSDAY JULY 22, 2010       06:06 ET

S&P 500 futures have moved up abruptly during early European trading this morning and broken above the 30 minute cloud top displayed on the chart below.
The other area highlighted on the chart shows a fake breakdown from the upward trend-line following the range constriction which developed in Asian trading overnight.
For now the key test for the bulls today will be to re-challenge yesterday’s high. This would alleviate the concern that the activity above the descending red line on the chart (which dates back to the last major triangle breakdown) was itself a false breakout.
In general, because equity and FX markets are fairly critically poised at present I would be wary of taking "breakaway" patterns too seriously until they are validated with major moves accompanied by much heavier volume than is currently being seen.

The daily chart for CHF/JPY, which includes Thursday’s action until the time of writing, reveals the reversal behavior seen in Tuesday’s session and underlines my contention that for this key FX pair, which can act as an alert to major shifts in risk appetite and sentiment, we are now at a vital juncture and could be close to finding out whether to expect further yen strength and the usual accompaniments when that is seen, which are further movements into safe haven sectors such as Treasuries and the so-called risk off ETF’s such as IEF, SHY, AGG and TLT.
In European trading on Thursday morning, a weakening yen has seen CHF/JPY move above 83.30 which may portend a short term positive for risk on strategies, but I would want to see a close today above 83.85 to reassure me that the S&P 500 will be heading back towards the 1095 level in the near future.

The Nikkei 225 has closed Thursday’s session with a drop back towards recent lows around 9200. The tiny doji star could be the precursor to a morning star candlestick following tomorrow’s session - which would be a sign that a tradable base is in place - but this will not be resolved until the US trading session is completed today, and an even more important clue will be provided if there is greater clarity regarding the short term direction of the yen.

The Australian dollar AUD/USD lies at an interesting conjunction of several key technical levels and essentially at the midway point between the November high and the May/June low. I would suggest that the pink cloud top should provide short term support but also that the 0.8900 level (the 62% retracement from the low) will also be a barrier.
There is a range trading opportunity for short term FX traders who are nimble but a decisive break out of the channel between 0.87 and 0.89 will provide important clues as to the longer term appetite for risk amongst macro asset allocators.


The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions.
None of these setups should be seen as specifically opportune for the current trading session.
For a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm


Here again is my comment from Monday's newsletter

The KBW Banking index has been unable to break above the descending trendline illustrated and the price progression seems likely to reach down to the base of the triangle before the more critical issue of longer term directional bias has to be resolved.

XLF  Financial Select Sector SPDR  

The daily chart of XLF, the exchange traded fund for the financial services sector, shows the abrupt reversal from yesterday's session and a failure at the base of the cloud and the intersection of the 50 and 200 day EMA's. As already suggested so many sectors are at unusually critical technical levels and XLF is no exception.
A break below $13.30, just below Tuesday's low, would suggest that the financial sector could be in danger of taking out its low from last February.

KRE  SPDR KBW Regional Banking  

Perhaps as a foretaste for what lies ahead for the banking sector and XLF as just discussed, can be seen in the daily chart for KRE, a sector fund which acts as a proxy for the regional banking sector. Yesterday KRE broke to a new multi-period closing low and almost touched the level seen in the May 6th "flash crash".
I am reminded of all of the skeptics who claimed that the May 6th low was an aberration and of all the misguided chatter about "fat finger" traders etc. It turns out that the intraday prints on the ETF charts from May 6th have been extraordinarily prescient in anticipating where certain sectors were headed.

JNK  SPDR Lehman High Yield Bond  

Without too much stretch of the imagination it is possible to diagnose the chart action since May 6th in JNK, a surrogate for the high yield bond sector, as one extended bear flag pattern.
Even if such an interpretation is not valid I am persuaded that the risk/reward profile for this sector does not favor the bulls.

Daily Form July 19, 2010

Inter-market Technical Analysis using algorithmic pattern detection

MONDAY JULY 19, 2010       06:30 ET

Last week I used some inverted forex charts to throw a slightly different perspective on the behavior of key pairs to those that are normally used. For example, USDJPY is the customary way that the dollar/yen is quoted with the US currency as the base currency and the yen as the quote or terms currency. As USDJPY drops so the dollar is weakening against the yen.

If however the chart is inverted and the pair is expressed as JPYUSD, with the yen as the base currency, the strength of the Japanese currency over the last three years becomes especially apparent.
The monthly chart below reveals how the yen has become a safe haven play since the beginnings of the great unwinding of leverage which began in mid 2007. The retreats in the yen reveal the periods when risk on dynamics have prevailed and the renewed strength in the yen coincide with risk off period.

From recent action the Japanese currency appears to be discounting a new period of risk aversion ahead.

The interesting issue, to put it simply, is when does the safe haven play with the yen coincide with the safe haven play into the US dollar?
When such coincidental movements arise it could be claimed that, in effect, this is the canary in the coal mine suggesting that it is time to fasten one’s safety belts. The theme of today’s newsletter is that there are some signs that that such a coincidence may lie ahead in the coming weeks.

The daily JPY/EUR chart below shows the damage to the euro during May and June before the trendline was broken and the yen could now be finding support at the top of the cloud.

Does this mean that the yen will continue to appreciate against the dollar? Not necessarily, but it could suggest that the euro may be coming close to the end of its recent rally against the dollar and even if yen/dollar remains relatively stable, a renewed slide in the euro would see the yen move back towards a re-test of the high on the chart below.

One other scenario worth contemplating is that the yen could be topping out against both the dollar and the euro and that would really unsettle the FX/ETF correlations which inspire so much algorithmically inspired asset allocation decisions of many macro funds. If that happens not only would safety belts be appropriate but crash helmets could be advisable as well.

The weekly chart for the Nasdaq 100 (NDX) shows that a key trendline has been violated (not illustrated) and that the level indicated by the arrow around 1650 is fairly critical for this index and I would expect it to be tested in coming weeks.

Referring back to the matter raised in comments on today’s first chart there are early signs that the recent and abrupt retreat of the US dollar may be overdone and ready to take a pause. The weekly chart for USD/CHF looks to me as though the risk/reward ratio is now shifting towards one of buying the USD on weakness against the Swiss franc rather than selling it on strength.


The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions.
None of these setups should be seen as specifically opportune for the current trading session.
For a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm


The chart below is another example of using an inverse version to the more customary chart and shows the Canadian dollar as the base currency against the US dollar.
Once again it is not too difficult to see that the major move up in the Canadian currency may have been seen and while there could be a complex topping pattern in progress - which could take some time to evolve - there is a likelihood that a longer term trend reversal may be in the pipeline.

DBV  PowerShares DB G10 Currency Harvest  

A week ago I commented that my earlier recommendation to go long DBV had reached my target near $23 and that I was now flat. With a little more conviction I should have reversed and gone short!

GDX  Market Vectors Gold Miners ETF  

In line with several comments here over the last couple of weeks the intermediate outlook for the precious metals and the mining stocks remains bearish. GDX shows a text book version of the bear flag formation and AU discussed here last week has, unsurprisingly, a similar appearance.

However I would hesitate to overstay one's welcome on the short side with AU as it may find support at the 200 day EMA near $40.

SLV  iShares Silver Trust  

Here are my comments from the July 15th newsletter.

SLV is still tempting me on the short side - the bear flag has caught my attention but I have refrained from taking a position so far. Any move up towards the descending trend-line would allow me the excuse to pull the trigger.

IYM  iShares Dow Jones US Basic Materials  

Here are my comments from July 12th's Daily Form.

IYM is one of the sectors to be long when the risk on dynamics move to the fore. However, the chart below does suggest that, in the near term, the easy money may have already been made in this basic material sector last week.

BIK  SPDR S and P BRIC 40  

BIK - a play on the BRIC economies - is at the apex of a triangular formation and, in line with other recent resolutions of similar patterns, one might expect a false breakaway pattern initially only to be eventually followed by the next major directional move. If I was betting on the way that this will play out (I don't intend to take a position for the time being) my suspicion is that we go up before we go down.


The KBW Banking index has been unable to break above the descending trendline illustrated and the price progression seems likely to reach down to the base of the triangle before the more critical issue of longer term directional bias has to be resolved.

Daily Form July16, 2010

Inter-market Technical Analysis using algorithmic pattern detection

FRIDAY JULY 16, 2010       06:47 ET

Thursday’s action in US equities reinforced my decision, expressed here yesterday, to sit on the sidelines as the intraday whipsaw behavior observed reflects the strong cross currents - both technical and fundamental - that are currently creating turbulent conditions for the S&P 500. I would expect another test of 1100 in coming sessions, the outcome of which may alleviate my unease about taking a firm view, but equally a break below yesterday’s low on the S&P 500 futures at 1076.25 would be bearish.

My focus again today will be on the Japanese yen. The chart below is somewhat unorthodox in that it shows the JPY/USD rate - which is the inverse of the more common version USD/JPY. The possibility of triple top pattern is still undecided as this is being written and again the outcome will be useful for detecting the way that macro funds using FX/ETF correlations strategies are currently leaning.

Traders in the Nikkei 225 in Asian trading overnight were clearly not enamoured with the chart above and the continued yen strength, and the index sold off hard with an almost 3% decline.
An evolving downward staircase pattern could be emerging, and as global investors seem to be avoiding the US dollar at present, if the safe haven appeal of the yen was to continue in earnest then the 9200 level could be taken out and this would be a notable negative for this market. The arrow indicates the "death cross" on this chart and the recent action has served to underline that, amongst global equity markets, the Nikkei 225 is often at the bleeding edge of asset re-allocation shifts.

EUR/USD is testing the $1.30 level as this is being written and the remarkable shift in sentiment towards the EZ currency highlights the bi-polar nature of investor sentiment which currently prevails. In yesterday’s session there was considerable profit to be made from a long EUR/USD position and an adjustable short EUR/JPY position depending on the expected direction of USD/JPY - which yesterday was fairly easy to predict i.e. it was to sell any rallies.
The fibonacci 38% retracement grid shown on the chart indicates that the $1.3145 area could be an intermediate term target but for today I would not be surprised to see sellers emerge at the $1.30 barrier.

EUR/GBP is at a fairly critical level and I shall be watching this cross rate closely today. Despite the technical violation of the downward trendline, my intuition is that the euro will falter against sterling near current levels, but I would rather see just how much short covering still needs to be done on EUR/USD before taking a stance.