Saturday, 23 June 2012

S&P 500 downside potential is considerable in coming months and years while nearby resistance holds

On Wednesday I posted that the S&P 500 is a low risk short right now. The decline from the mid-week peak adds confidence to that view, and so long as the market remains below nearby resistance, the bearish potential in coming months and years is considerable. Now is a time to keep the big picture topmost in your mind.

Largely repeating what I said in Wednesday's post, the first chart shows the big picture on a monthly candlestick chart. Mid-week the S&P 500 tested the top line of a trend channel that has contained more than 90% of market action since mid-1997. Betting on a clean break higher, is betting against that much history. Also note the bearish momentum (MACDH) divergence leading in to the March peak, warning of weakness.

The following daily candlestick chart suggests that the resistance zone extends slightly above last week's high, to 1380. A move below the June low would probably make that observation completely academic.

This evening I toyed with the idea of including some Elliott Wave counts for the S&P 500, to illustrate the main near term potentials. I decided not to, as I suspect that most of my readers are unfamiliar with EW. I am a huge fan of Elliott Wave. Why? Simply, it is the best tool for describing how markets behave. Please don't misunderstand that to mean it can be used to predict markets in any more than probabilistic terms, there is no tool/theory/principle that can do that. What I mean is, EW is the best language for communicating a market's current trend, so long as you speak the language. I use it as a way of brainstorming different future potentials, and it is also an important input to my risk management and position sizing decisions. 

Do you want to see more Elliott Wave on this site? Or none at all? Or don't care? Some posts about trading? Risk management? Let me know. 

ASX 200 looks headed for re-test of trend line drawn from 2009 low

Weekly candlestick chart suggests the ASX 200 is headed for a re-test of the trend line drawn from the 2009 low. A break of the trend line would confirm a continuation of the bear market that began in 2007. As discussed in several previous posts, only a rally above 4200 would delay the resumption of the bear market. 

Big picture monthly candlestick shows that a continuation of the bear market would open up considerable downside risk, toward either the mid-channel line at 3000ish, or perhaps the lowest channel line at 2000ish.

DAX still trending down

The German DAX continues to trend down, as shown on the following daily candlestick chart. Clarke and Dawe give as good an explanation as I have heard from anyone (don't forget to laugh)... they don't focus on Germany, but needless to say, as Europe goes, so goes Germany, eventually. Unless Europe breaks up...

Weekly candlestick chart supports a continued bearish outlook.

AUD/USD sets up a kiss goodbye from long term up trend line

The weekly candlestick chart shows the AUD/USD this week tested the trend line drawn from the late 2008 lows, setting up a potential kiss goodbye to that trend line, to be followed by a move lower toward another test of the illustrated support zone, formed from significant lows and highs of recent years.

The daily candlestick shows that the AUD/USD attempted a rally above the trend line drawn from the February high, but failed to hold above that line. To my eyes this suggests that while this week's high (1.02) holds, the bigger picture kiss goodbye is the operative scenario, and the AUD/USD will push lower.

EUR/USD downside potential is considerable unless it can rally over 1.30

The weekly candlestick chart shows the EUR/USD continuing to trade between resistance surrounding the January 2012 low, and trend line support drawn from the 2001 and 2002 lows.

The trend channel on the following daily candlestick chart shows that the 1.30 area must be beaten to indicate an end to the recent down trend. Until/unless that level is beaten, the market is likely to re-test trend line support on the previous chart.

USD/JPY rallies away from recent trend channel

USD/JPY is rallying upwards from the trend channel that contained market action since mid-March, as shown on the following daily candlestick chart.

Zooming out to the big picture shows the USD/JPY wedging in to a bottom over a number of years - a bullish set-up with a target of over 120, where the wedge began. This week's rally takes the market back above the mid-1990s low, and is a small baby step toward building confidence in the infant up trend. There is a lot resistance overhead, to state the (very) obvious.

Gold the May high and low are key

I showed last Tuesday that most years since the current Gold bull market began in 1999, it has made a significant bottom in June or July. How do I use that knowledge? Well firstly, I watch market action to tell me whether to be long or short. If I get a signal now to be long, the seasonal background would encourage me to deploy my maximum single trade risk. Obviously I don't deploy maximum risk on every trade! There are many factors that influence this decision, but that's a whole other topic. 

Gold continues to test the trend line drawn from the 2008 and 2009 highs, as shown on the weekly candlestick chart below. To my eyes, this could go either way. The May high and low are key. A break of the May high would indicate that Gold was drawing upwards away from that trend line, while a break below the May low would open up considerable downside risk.

Daily candlestick chart shown below for completeness, but for me the levels suggested by the bigger picture are the ones to watch.

GOLD.AX watch for possible break of long term up trend line

The GOLD ETF traded on the ASX (GOLD.AX) is a proxy for Gold priced in Australian dollars. The monthly candlestick chart shows that a break of the May low would confirm a trend line break (149.50).

Not surprisingly the chart of Gold priced in Australian dollars holds the same message.

Silver a break below last week's low would open up large downside risk

The weekly candlestick chart shows Silver testing the trend line drawn from the early 1990s highs. A move below last week's low would mark a return to the main trend channel, and open up large downside risk.

The daily candlestick chart shows a continuation lower from the trend line break I posted about on Thursday. It also shows potential support at the late 2011 lows, if last week's lows are broken. If those lows break, the big picture suggests "Look out below!"