Daily Form January 18, 2010

Inter-market Technical Analysis using algorithmic pattern detection

MONDAY JANUARY 18, 2010       07:42 ET

Although it is a public holiday in the US today - Martin Luther King day - and normally I would not publish a daily column I thought it might be worth sharing the following three "Big Picture" charts developed for an appearance this afternoon - Monday 16.30 pm London time - on CNBC’s European Closing Bell .

Essentially these represent intermediate term views on three different markets and are based primarily upon technical characteristics but intermingled are some thoughts based on my concerns about the overweighting which asset allocators are giving to emerging markets in particular.

The Bovespa Index in Brazil has one of the most pronounced "V" formations of any of the major global equity indices. As can be seen on the chart last Friday’s close is venturing back towards the 72,500 level which represented the highest weekly close from May 2008. The upper Bollinger Band is almost perfectly located at this level suggesting that recent volatility dynamics could make this a target in the relatively near term. However as the RSI indicators are suggesting there is some dissipation in the momentum/energy for the moves ahead and I would suggest that if we reach back towards the May 2008 highs there is a growing probability that a correction would arise (somewhat similar to the double top seen in the US markets in 2007) and a revisit to the 58,000 level would be a reasonable technical target.

On a related theme, and somewhat inspired by a column in today’s Financial Times by Martin Wolf, there is developing a tendency to lump together all of the emerging markets under the BRIC moniker which is a meme that has been planted in the popular consciousness by Goldman Sachs and specifically Jim O’Neill.

While undoubtedly there are good economic conditions ahead for much of the emerging world, there is a danger in not differentiating sufficiently between the prospects of each. China is a very different economy to both Brazil, as discussed above and also Russia. The Indian economy itself has particular challenges ahead as the inflation genie appears to be out of the bottle as is also the case in China.

The best play for the Russian market for the typical investor is the popular ETF, the Market Sectors Russia fund, which trades under the symbol RSX. Once again there is evidence on the weekly chart that the RSI and MFI are showing negative divergences with recent price activity. The fact that the weekly closes have moved above the pink cloud is a positive from a technical perspective but a setback to the dotted line of support/resistance drawn on the chart would put the index back into the cloud formation. The projected cloud moving 26 weeeks forward (not shown), which has an upward bias may also will act as a source of price resistance. In the intermediate term this index has the characteristics which suggest a 15-20% correction could be forthcoming.

The third chart which I intend to discuss on the CNBC slot this afternoon is one which I have featured recently in some technical analysis workshops that I presented in London in conjunction with Thomson/Reuters.

The chart takes a long term view of the USD/CHF exchange rate and I have annotated the chart with, what I believe to be is a convincing Elliot Wave diagnosis of the weakness in the US dollar stemming from the Nasdaq collapse and all of the bubble shenanigans of the last decade where the Federal Reserve has done its utmost to reflate the US markets at the expense of dollar debasement.

If the count is correct then we should expect a C wave to develop in the coming months which would support my general view that 2010 will, at least in the first half, see a stronger US dollar.