Daily Form September 28, 2010

Inter-market Technical Analysis using algorithmic pattern detection

TUESDAY SEPTEMBER 28, 2010       09:12:00 GMT

I have been invited to present charts for analysis on CNBC’s European Closing Bell this afternoon (at 16:40 London time) and will be showing, time permitting, the following three charts below. This also explains why today’s commentary takes a big picture view on material which has been covered in finer granularity in recent commentaries.

The target which is now on the agenda for the S&P 500 cash index, and could even come this week, is the 1173 intraday high from May 12th in reaction to the May 6th mishap. As also discussed here the Nasdaq 100 has already achieved the equivalent target and seems destined to head towards the April high.

If forced to express an opinion about the direction of the S&P 500 over the next 30 days (as one tends to be on a TV slot) my suggestion is that the 1170 could well be touched but, given the risks attached to other strategic targets which are outlined below (including the NDX scenario), the potential benefit of maintaining a long position in the S&P 500 beyond this 1170 level- waiting for a re-visit to 1200/20 - would not fit my risk/reward trade-off criteria.

The long term weekly chart for AUD/USD reveals that the highest weekly close on this currency pair was observed for w/e July 20th 2008, which was a pretty good ringing of the bell marking the exhaustion top of the leveraged carry trade at that time and which preceded the financial meltdown of H2, 2008. As can be seen the value registered, in terms of closing values, was 0.9727 which is only about 100 pips from where this pair has been during the last few trading sessions.

My contention is that the risk/reward ratio for being long this pair is becoming unfavorable. This is not the same as suggesting that one should be instigating a short position - yet.

The way in which I reconcile these comments with the view expressed here yesterday regarding the target of 81.80 for AUD/JPY is as follows:

1. I would not be surprised to see another run up in AUD/USD towards the 9730 level in coming sessions
2. I would not be surprised to see a weakening of the yen against the dollar towards the 86 level

The net result would be that AUD/JPY will strive to hit the 62% retracement level discussed yesterday, but, given the other conditions around this, my sense is that the 81.80 level could well be an intermediate milestone, and certainly a place to exit any long positions in AUD/JPY.

USD/JPY is drifting back to the levels around 84 where the BOJ intervened on an industrial scale during Asian trading on September 15th.

As suggested here yesterday my intuition is that the BOJ is really struggling with the Chinese central bank over this rate and I suggest that the PBOC could be moving into more politically treacherous territory as its currency management operations are antagonizing many central bankers and politicians.

I have drawn a line at the 88.50 level which I believe is a level which has to be contemplated as a possible target for the yen against the dollar if only market forces (and not currency manipulation) are allowed to express themselves.