Daily Form March 7, 2011

Inter-market Technical Analysis using algorithmic pattern detection

MONDAY MARCH 7, 2011       09:24:00 GMT

The pattern which is emerging for the S&P 500 futures during trading in Europe on Monday is one of a range where the boundaries are becoming compressed, and this may well develop into a narrow apex before the next major directional move occurs.

The upper boundary seen on the chart below lies at approximately 1343 and the bottom at 1293 and the fibonacci grid shows that the 50% level sits at 1318. As can be seen there have been a series of lower highs and higher lows as the index moves sideways with a clear line of resistance around 1332.

My outlook for this index remains relatively positive, although the risk/reward ratio - heightened by the possibility of further adverse geo-political mayhem and escalating energy prices - suggests that the best trading stance is to buy pullbacks and look to take quick gains.

A break below 1295 would keep me on the sidelines however until the larger macro picture develops.

The Nikkei 225 dropped 1.8% in Asian trading and the index has pulled back to the 50 day EMA level with further possible support from the cloud formation just below this level.

The MACD chart segment shows minor negative divergences and if the short term momentum turns more sharply down then a test of the 200 day EMA around 10,100 becomes feasible.

When discussing the EUR/USD slot on CNBC’s European Closing Bell last Thursday I made the point that the larger time frame picture points to a slowly descending downward channel with a level around $1.43 at the top of the upper descending trend line.

My intuition is that the euro may attempt to reach back towards the $1.43 level as last seen in Q4, 2010 and may sit at this level up until the next meeting of the ECB in April. If M. Trichet delivers the 25 bps increase which almost everyone now expects, but softens slightly his language about vigilance, then traders might well take this as the excuse to sell off the EZ currency and take it back down towards a test of the lower boundary of the range. This view is further supported by increasing signs that the Eurozone bond market - especially for the usual suspects - is suffering from a lack of interest from the private sector with the only real support coming from ECB purchases.

Spot gold is showing a fractal formation which has resemblances to chart patterns which have been seen since Q4, 2009, and which are precursors to further upward breaks.

The $1500 level now seems to be a feasible target during coming weeks and the action over the last few sessions indicates that this next move could be an abrupt one.