Fallen Heroes

Equities saw a strong bounce last week that was almost entirely wiped out on Friday. If strong support in the 1425 SPX area is lost next week then I would expect a further move downwards into the strong support in the 1385-1400 area that I was looking at last week. We are also seeing the retracement on gold and silver that I was talking about last week and I’m expecting more there as well.

This week I’d like to look first at USD, which has gone from being very technically strong before the run up into the QE Infinity (QEX) announcement to being very technically weak now. That was only to be expected as quantitative easing is in essence devaluation, and USD moved down strongly during both QE1 and QE2. USD broke strongly below rising support from the 2011 lows and the 200 DMA on the QEX announcement and made a low precisely at the May 2012 low and possible head and shoulders pattern (H&S) neckline there. Since then there has been a bounce into declining resistance from the high, tested twice so far and taking the form of a bear flag.

This setup may yet not play out, but on a break below the H&S neckline with any confidence the pattern target is at 73.1, effectively a test of the 2011 lows, a move that would most likely play out into Spring 2013. If that is going to happen then it would most likely reverse downwards now. If that isn’t going to happen then that strong declining resistance trendline from the high will break, though USD would need to recover over the 200 DMA at 80.67 and hold above it for the setup to start to look bullish again. If it does recover back over the 200 DMA, then a new bullish rising channel will have been established:

I have mentioned the bearish setup on AAPL a few times and AAPL is now getting to the stage where it is starting to look interesting as a long again. On the daily chart the 100 DMA broke at the second test on Friday, the H&S target is in the 590-600 area, and the main target is a test of the 200 DMA in the 580 area. The best entry would be close to that test of the 200 DMA so an entry in the 583-5 area would be a decent one. On the bull scenario there would be a strong reversal back up there, and in percentage terms the retracement from the high would be a bit larger than the last retracement in April/May 2012.

It’s worth mentioning though that on the long term AAPL chart there are five previous retracements in the last 20 years on strongly negative weekly RSI divergence like this retracement. While the last retracement was about 15% the next smallest retracement was 42% in 2006. You can see that long term AAPL chart here. AAPL may well therefore fall further, and if it does, then there are two possible H&S necklines below in the 567 and 520 areas. I would favor the higher 567 area neckline as it would fit with a possible drop into long term rising channel support on the LOG scale chart around 400. On a bounce from the 567 area I would be looking to exit in the 600-620 range, and on a bounce from the 520 area I would be looking to exit in the 600-40 range. Those targets are derived from the heights of the left shoulder bounces on these still currently theoretical H&S patterns:

As long as AAPL holds the 200 DMA area though, it would be a straight long play from major support there on a stock with a great market position and an unusually low (nowadays for a tech stock) historic P/E ratio in the 14 area.

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