Inter-market Technical Analysis using algorithmic pattern detection
MONDAY MARCH 28, 2011 07:51:00 GMT
Many asset managers remain unconvinced by the value of Technical Analysis (TA) and there is sometimes a rather condescending attitude taken towards its practitioners. The argument often proceeds along the lines that price and value are determined purely by fundamentals and that looking for patterns in charts is almost like looking for a predictable sequence through analyzing previous lottery draws.
The chart for EUR/USD should be sufficient evidence to refute this hostility to TA. The fundamentals for the Eurozone continue to deteriorate and yet the single currency seems destined to test the upper level of the descending trendline through the highs which has been drawn on the weekly chart.
Here are just a few of the weaknesses in the fundamentals:
1. Portugal seems certain to join Ireland and Greece as yet another territory without access to private sector funding - and its sovereign debt market is only still functioning thanks to the largesse of the ECB
2. Yields on Portuguese 10 yr government debt are approximately 8%, on Irish equivalents they are 10% and Greece is approaching 13%. In other words "haircuts" are already being priced in.
3. The talks in Brussels between EU ministers on Friday failed to make any progress on the EFSF replacement and the really key structural issues are not being addressed.
4. Angela Merkel’s CDU party lost control of Baden Wurttemburg over the weekend and her ability to hang on in political office is waning at exactly the time when Germans have their least enthusiasm for preserving the euro.
Reverting back to the chart, it is my view - which I have consistently maintained since the last ECB meeting in early March is that the FX market is expecting a 25 bps hike from the next meeting (which is scheduled for Thursday, April 7th) and unless there is a bold statement that more tightening should be expected, it would not be surprising to see EUR/USD heading back towards $1.38 and then eventually $1.35.
The S&P Midcap index really does deserve a special mention as it is one of the few major indices which is at historic highs and which appears to be heading towards the 1000 level - which is 2.5 times the low registered in the 400 zone during the 2008 crisis.
The comments here last week about the relative strength of the micro-cap and medium cap stocks have also been published in the following article entitled Micro-Cap stocks decoupling from macro risk at the Global Economic Intersect website which can be found here. Incidentally this is a very useful site and one with which I am glad to be associated.
The Shanghai Index managed to go against the trend in trading for most equity markets on Monday in Asia - as it eked out a small gain.
The index is hovering around the 3000 level but still needs to mount a convincing rally to take it back to and then beyond the 3200 level as indicated on the chart.
The diagonal line drawn across the chart also underlines the significance of this level and a failure to move above the diagonal line at the 3200 level would represent a technical failure pattern of some consequence.
The daily chart for GBP/USD shows that a key level at $1.60 has now been breached and that the next plausible target would be the base of the cloud formation at $1.5820.
TRADE OPPORTUNITIES/SETUPS FOR MONDAY MARCH 28, 2011
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 weekly chart for AUD/CHF clearly reveals the vulnerability of the Aussie dollar - as well as the safe haven quality of the Swiss franc - when capital markets suffer from high risk aversion as they did immediately following the Japanese earthquake and tsunami of March 11th.
What is quite remarkable is how quickly the cross rate has recovered and the willingness of asset managers to go back to the RISK ON camp and bid up the Aussie currency which is now at multi-year record levels against the US dollar. The cynic might also conclude that this latter fact highlights just how unloved the US currency is, and one should expect this condition to prevail as long as the Fed continue with their massive support operation to protect US equity prices.
One of the most notable charts of the many hundred that I look at each week is that for the daily gyrations of AUD/JPY.
From a trading perspective it would be reasonable to believe that the risk/reward characteristics at this stage are not in favor a bullish continuation of this move.
Although the Australian currency provides the best insight into the attractiveness of spread trading amongst certain FX pairs, the less followed CAD/CHF rate is also instructive.
In particular in the FX/ETF correlation analysis work that I do each week there has been a notable increase in the degree to which CAD/CHF is correlating with many risk on ETF's and also negatively correlating with prices of UST's and other fixed interest instruments.
The technical characteristics of the longer term pattern on this weekly chart are in rather striking contrast with the AUD/CHF chart and suggest that from a relative performance perspective the Canadian dollar is less likely than the Aussie dollar to feature strongly as a beneficiary of improved perceptions of macro risk.
Indeed the case could be made that this rate is now in a long term correction mode with a possibility of heading towards the 2008 lows.