Monday, 16 May 2011

The Top or Consolidation?

Going through my charts this weekend, I saw a number of consolidation patterns forming across a number of Equity markets. Certainly, the sell off in some assets such as EUR, Silver and Crude Oil does look impulsive indeed. Yet, Equities seem surprisingly resilient in the face of this. Dislocations like this are not a healthy thing no doubt and thus it could be argued that the equity market will be the last shoe to drop. I don't think we are at this point yet. The consolidation patterns I am looking at imply yet another surge higher and I believe this will coincide with even more dislocations and divergences similar to 2007. Either way, this will be quite a key week for markets as the low end of the range and supports will be tested. This need to hold.

S&P500 Daily: 
A simple Daily chart of the S&P500 shows 2 vanilla trendlines coming in right here. I have marked a target box here illustrating this potential zone of support from 1320 to 1330. The 55 exponential moving average is rising and also comes in right at this area. If we can see a bullish reversal out of here, I will be looking for a potential move up to the 1400s which may set up a "3 Indians" or 3 peaks topping pattern of some sort.

S&P500 60mins:
Short term, price is testing the low end of the recent range. I think we will see more weakness before a meaningful low ensues. An ideal bullish scenario would be a break of 1330 down to 1325 that fails to follow through. Any strong hammers or strength back above 1335 would be a good initial signal to get long, adding above the downward trendline in place. Note there is an open gap at 1320 and a potential A=C projection at 1319/1320.

Nasdaq 100 Daily:
The Nasdaq has been holding up remarkably well and I believe this is a strong bullish indication. We are building a short term consolidation pattern or flag at the top end of the range. Buy the breakout or short the breakdown. Simple as that and WAIT for your signal.

And to Asia. It appears to me that many markets are also tracing out consolidation patterns or triangles of some sort. Indeed, there has been no urgency yet in any of these markets to go higher or lower in fact. These patterns all imply more work to do before we can confirm that the uptrend is healthy once more.

China Daily:
Price held my 2800/2850 area that I talked about in depth: Note that there is a short term double bottom pattern in place as marked by the 2 arrows on this Daily chart. Obviously we need follow through and a lot of it before I can confirm a meaningful low. No doubt this area is key.

Nifty Continuous Daily:
India has been building a short term base and range right at the trendline. I believe the bigger picture is a triangle pattern of some sort.

Price also appears to be bouncing around in the midst of this wide range.

Recently I talked about how Australia often LEADS our international peers at important market turning points. The international flows begin right here in Australia. The next few days will put this theory firmly to the test. Looking at the 60mins chart, price has hit the 61.8 retrace at 4675 and held. There are strong bullish divergenes in place and a potential Ending wedge has formed. This morning we will probably see a retest of Friday's lows and if this is a genuine bullish turning point, price will hold in. Key short term resistance levels are 4720/4730 and then 4785/4800. Position traders should be looking for the latter levels to break before initiating new longs as the trend is still very much down. Key support 4670/4675.

SPI June 60mins:

In sum, Equities appear rather resilient having ignored much of the weakness seen in other asset classes. Price will be retesting the low end of the range come Monday thus we will see if this is genuine strength or whether equity investors are being blinded from the perils ahead. I believe there are a number of good consolidation patterns forming which traders can use to define precise entries with good risk/reward.

p.s. in case you missed it yesterday, BHP hit and held a long term trendline on Friday. Look for follow through to confirm.