Thursday, 16 June 2011

Party Like its 2007!

Morning All,

I haven't posted for a while as I have been away from trading screens and have quite a lot on at the moment. In my last post, I talked about a potential buying zone in global equity markets as a good risk/reward trade. We did see a strong bounce up to the 1295 res level and 4600 on the XJO with strong underlying breadth. However, this has been firmly slapped down once more given the overnight move. The character of this market has really changed. Every buy the dip spot is not working for longer than 2 to 3 days. In fact, to me it all feels a bit like the initial sell off back in 2007. Certainly there is a huge level of complacency in the market with the VIX only just breaking above 20 last night despite an 8% wash out from the highs in the S&P500. We saw this back at the highs in 2007. It takes time to transition from Bull market to Bear. The hardest thing to do in trading is adapting to changing market profiles. I don't believe we are on the cusp of a market collapse but I do see more weakness down into 1240/1250. The best shorting opportunities will come in my opinion a month or so out once this initial downtrend has ended.

I thought I would show a number of charts focusing solely on the S&P 500 to illustrate some of my points. To me it seems we may be re-living a fractal of the initial move lower in 2007.

S&P 500 Cash Daily 2007:
Note the 2007 top came with a "Double Top" or failed breakout. The sell off from this high was overlapping and stair-stepped lower, eventually bottoming near the August 07 lows. I believe we are at a similar juncture i.e. near the March 2011 low. It was only when the rally out of this level and wedge pattern failed, that the stage was set for a genuine trend change and bear move lower.

S&P 500 Daily Current:
Similar to 2007, the market failed to break above its previous highs. The ensuing sell off has stair-stepped lower. Every bounce has been short lived thus far. However, we are entering the low end of the range thus the best shorting opportunities are not in this area. If the 2007 pattern plays out, look for a breakout of this wedge type pattern and look for shorting opportunities higher up.

S&P 500 Daily off March lows:
The big bull market trendline comes in around the 1250 zone. I have also added the 200SMA and the 200EMA. I do not use these as trading levels but many market participants do thus it is important to bear this in mind. For a good read on how to trade these "classic" moving averages, please read this:

S&P 500 Fib relationships:
There is also a strong confluence of fib supports coming in at 1235 to 1250. These are:
i) 1235- 38.2 retrace from the June 2010 low
ii) 1245- 38.2 retrace from the August 2010 low
iii)1250- 61.8 retrace from the Nov 2010 low

In sum, the S&P500 remains in a short term downtrend and I believe we will see more weakness in the ensuing days down to the 1250 zone. Price opened on its highs and closed just off its lows last night thus I would expect somekind of continuation at a minimum today. The bigger picture is looking eerily similar to the technical picture of 2007. If that scenario was to play out, expect a strong snapback out of the 1250 zone that fails at 1320-1330. The best shorting opportunities will be out of this strong thrust. In the short term, being nimble remains the winning play.

My biggest concern for this market is the EUR. Price has re-entered the previous breakout pattern and topped at a 76.4 retrace level i.e. a lower high and Wave 2 spot. Last night's action was bearish indeed and I believe there will be more follow through to the downside. Look for the recent lows to break at 1.40 and price to move to the upward trendline at a minimum.

The EURUSD topped at a 76.4 retrace of the 1.50 high to the 1.40 low. 1.50 is not a bad spot for a serious high