Daily Form August 25, 2010

Inter-market Technical Analysis using algorithmic pattern detection

WEDNESDAY AUGUST 25, 2010       11:00:00 GMT

It seems that almost every commentary and item of financial analysis that I came across at present is talking about metrics of historic proportions. To cite just a few examples

  • Yields on 10 year UK gilts and 10 year bunds are at their lowest ever.
  • Yields on 2 year US Treasury notes are at their lowest ever
  • The yen is registering highs against the US dollar not seen for at least 15 years and the highest level in 9 years against the euro
  • Debt to GDP ratios in many major economies including Japan, the US and UK are at their highest peacetime levels
  • Existing home sales, as reported yesterday in the US, are at their weakest level since 1995

And I could go on.

Perhaps the best (and most ominous) chart I can show today is the 20 year perspective on the Nikkei 225 as seen below. The index fell by another 1.7% in Asian trading but that is small change when considered to the almost 80% drop that this index has seen since the last trading day of 1989. When commentators talk about the possibility of a Japanese style deflation experience for some of the "old economies" it is worth keeping this chart in the mind’s eye.

The S&P 500 futures are currently trading in Europe within the confines of yesterday’s fairly extensive range. We should find out possibly today whether the "blip" below the 1040 level needs to be tested before any kind of relief rally can be mounted or whether the bears really are in the driving seat and ready to move into high gear.

The Russell 2000 came within 3 points of validating the comment made here this week that 585 was a near term target. The doji like candlestick is intriguing, but could well be indicating hesitation about how well lower levels have been robustly tested rather than a conviction that a rebound is now the path of resistance.

The call made here on Monday regarding AUD/CHF was timely and the suggestion is that even lower levels seem likely in the medium term. I have used the arrow to point to exactly the critical weakness point in the technical picture which was the failure to make it up into the overhead cloud formation following the break below the trend-line. Foreign exchange markets are relatively easier to discern with these kinds of patterns than the more algorithmically driven equity markets.

I just want to make reference to the trade setup which I discussed in yesterday’s column regarding CHF/JPY and how qualifications should always be made in regard to specific levels targeted. At the time of writing the pair seemed as though a move up to 81.40 would precede the move down that was anticipated. Soon after the newsletter was published the pair actually went down almost exactly to the 80.40 level without any rally up towards my proposed entry level of 81.40. In such circumstances the setup should be disregarded and not enacted after the initial target has been achieved.