Short Term Bullish (7-7)
The low on Friday was a technical low with positive RSI divergence on the SPX 15min chart and, barring any unexpected news over the weekend, that should deliver a decent move up next week. SPX is currently in a bullish sequence of higher lows and highs, and unless we see a break below the multiple support levels in the 1335-40 area, I’m leaning bullish for the moment, with an IHS (Inverted Head and Shoulders) target in the 1403-5 area, and trendline resistance currently in the 1385 area and rising at about 6 points per week.
Longer term, a bearish rising wedge appears to be forming and if that continues to form, it would suggest that we may see a bearish break downwards after reaching the upside target area in the 1388-1405 range. The signal for a significant break downwards would be a break of rising support from the early June low, currently in the 1325 area and rising at about twelve points per week.
Here’s the setup on the SPX 60min chart:
(Click on charts to enlarge)
Many analysts are calling for a strong move up into the presidential election, and that occurs into many presidential election years. I think it’s doubtful now. The economic numbers are weak; Europe is still being ‘saved’ from meltdown every few weeks, and is probably in recession; and the US may re-enter recession as well. I don’t generally forecast using fundamentals but the downside risk here seems large.
From a technical perspective, there has been no bullish confirmation yet from either bonds or copper. The setup on Dr. Copper looks ominous, with an almost completed head and shoulders pattern that would indicate falling below its 2008 low if it breaks down. This bearish topping pattern is not alone, there are many like it on equity indices worldwide. While that remains the case, equities look riskier than usual here, and if the US goes back into recession this year, that would normally look bearish for equities. Here’s the alarming setup on the weekly copper chart:
We shall see whether that rising wedge on SPX continues to form.
Euro Game Changer? (6/30)
Courtesy of Springheel Jack of Channels and Patterns
With the close just over the 100 daily moving average (DMA) on SPX, and just under the current rally high from the June low, there are now three main possibilities for the S&P 500 from a TA perspective:
- SPX tops out here and very soon, creating a double-top from the June low with a target back at that low.
- SPX makes it to the inverted head and shoulders pattern target in the 1403-5 area, topping out somewhere in the 1400-1445 range to make a much larger double-top with a target slightly above the October 2011 low.
- SPX makes new highs, breaks with confidence over the 1442 area pivot resistance and rises to test the 2007 highs over 1500.
Of these possibilities, the first now looks unlikely. I’m favoring the second option slightly over the third option, which was brought back from the dead by the EU Summit on Thursday and Friday. Here’s the SPX chart, with a healthy looking uptrend support trendline and with the close over the last of the key DMAs on Friday (click on charts to enlarge):
So what changed at the EU summit? Well the big debate there was whether Germany would be forced through intense peer pressure to guarantee much of the debt of its insolvent neighbors through Eurobonds. Most of Europe is in favor of the bonds, while the Germans are adamantly against the idea. To avoid Eurobonds, it appears that the Germans have agreed, as a lesser evil, to relax the restrictions on the ECB assisting troubled EU sovereigns.
It’s hard to overstate the possible importance of this concession by the Germans. It opens the path to potentially huge quantitative easing by the ECB, something that had previously been ruled out by German opposition. We could see the ECB respond to problems in Greek, Spanish and Italian bonds by printing enough money to buy all of those troubled bonds. Does that sound unrealistic? In terms of overall Euro-area debt outstanding, such a move would only bring the ECB roughly into line with the Bank of England, held up as a model of caution in these strange looking-glass times. (But note, the ECB does not have the authority (yet) to simply print money, so the question of where is this money coming from is swirling around in the Financial Universe.)
How with the eurozone solve its problem with un-payable debt? Bruce Krasting argues that the most likely course for the EU is to devalue the Euro: “There is one currency option left. Devalue the Euro by 20++%. This would make a difference. It would go a long way towards stabilizing the real economies of Europe. It would create inflation, something that is sorely needed to devalue the real size of Europe’s debts. Germany would agree to this as it preserves their export-competitive position within the EU, and improves it outside of the EU. The technocrats in Brussels would love it; it’s the only thing left that would preserve the monetary union.
“Is this feasible? I say it is. It has happened twice before in history. In 1985 the world got the Plaza Accord that devalued the dollar and in 1987 we got the Louvre Accord that revalued the dollar. In both cases, the global central banks (CBs) and acted together.“ (Devalue the Euro)
It remains to be seen how far this concession will stretch, but this is definitely a potential game-changer, and could push any Euro crisis a year or two down the road, or more. Don’t buy any Euros however, as in the event that there is massive quantitative easing in Europe, that will effectively devalue the Euro in the same way that QE1 and QE2 devalued the US Dollar. The technical setup on EURUSD looks dire and this won’t improve the fundamentals. We might see the usual relationship between the Euro and equities invert, with equities rising as the Euro falls.
Here’s the technical setup on EURUSD, with the rising channel from 2001 broken and a possible H&S forming:
The prospects for the US Dollar looked golden before the EU summit, and the prospects for the Euro looked grim. That hasn’t changed. What may have changed is the prospects for equities, with what might effectively amount to QE3 coming from the ECB. We’ll see how that goes, but for the moment I’m treating equities as being in an uptrend until we see a break below the rising support trendline on my SPX chart above.
[Edited by Cycle Editing]
Dark Stormclouds (6/24)
Courtesy of Springheel Jack of Channels and Patterns
The week ended ambiguously, with a deep retest of the Inverse Head and Shoulders (IHS) neckline on the S&P 500 (SPX) on Thursday. The SPX overshot the neckline by ten points, and then bounced back to close at the neckline on Friday. If SPX recovers and holds over the neckline, it would be a bullish setup with a target slightly over 1400:
Generally, at this stage in a US presidential election year, we would see a strong rally into the election that would take equities to new (post-2009) highs.
However, this is not a normal election year. Large storm clouds are looming over equities. The setup is potentially very bearish on many world indices. The MSWorld index, which includes all main world indices excluding the US, shows a declining channel from the 2011 high. A huge bearish head and shoulders pattern has formed over the last three years with a target in the 850 area, on a break below the current 2012 low – around 40% below Friday’s close and 7% below the 2009 low:
Is there any support for this very grim scenario elsewhere? Yes, there are significant reversal patterns in copper, oil, and other instruments that are normally correlated with equities.
One of the most striking reversals is with the US Dollar, which often rises as equities fall. There is an Inverted Head and Shoulders pattern on the Dollar, with a target at 90.5, well over the last USD high made as equities were falling in 2010. This would be a negative backdrop for equities if it plays out as it typically would:
This is part of a much larger bullish picture on the US Dollar suggesting a move to 105 on a break over 89. The chart below shows the shifting correlation over the years between USD and equities, with the usual inverse correlation for most of the period since 1980, but with two periods of positive correlation 1980-5 and 1995-2000. You can read more about this correlation and the bigger picture on USD in a post I wrote in mid-April here.
The open and ongoing support for the US stock markets by the Fed since 2009 is not a sign of underlying good health. The MSWorld index also gives an insight into what US markets might look like in the absence of the Fed’s support. These huge bearish patterns are a clear warning to be nervous about investing in equities at this time.