Friday, 8 July 2011

Where To Now?

Morning All,

It is a beautiful Friday in Sydney, the surf is pumping, and we are looking at a nice gap up on the open. Tough to not like that. My gap strategy is firmly in play today and the basic outline of what I mean by this can be read at this post: We are looking at a wide morning range of 4605 to 4625 thus trade the levels until a clear break either way.

The S&P 500 broke out from the recent 2 day range and surged beyond my 1340/1345 fade zone. I was looking for some kind of bearish reversal candle out of this level if we were to continue to follow the 2007 scenario, but it was not to be. Thus, we move on and focus on this trend once more which is clearly up. This market is going higher. However, will this be the final hoorah? I think so but that's not tradeable for now. I try to be flexible and nimble throughout my trading and I do believe it is the key to success.

S&P 500 Daily:
Looking like 1370 is the next obvious target for the S&P 500.

S&P 500 Weekly targets:
1370 was looking like an interesting top right at the previous 07 support level and 76.4 retracement. Should we break through these levels in the ensuing days, the other possible targets are the 78.6 retracement at 1380 and then a previous pivot high right up at 1430/40. One step at a time though.

S&P500 Breakouts
I showed a similar chart a few days ago and thought now was an opportune time to update. Markets go through periods of contraction and expansion. Corrective moves lead to bases patterns and "tests", and the subsequent breakout from these patterns lead to new trends once more. The chart below shows the interplay between these corrective patterns and new impulsive trends throughout this bull market. Note how these trends have a habit of lasting for longer than deemed imaginable. Of course there are going to be setbacks and areas to fade along the way. However, focusing on short term consolidation patterns and retracements back into the trend is now the course of play until we see a clear Climax pattern or exhaustion.

I do think that there are enough patterns across markets to suggest an important high and turning point for markets as we approach the end of the summer. Some food for thought:

52 New week highs:
Despite US indices moving higher, new 52 week highs continue to diverge. These are the kind of divergences I look for at major market turning points.

NYSE Advancing Volume:
Similarly, the advancing volume continues to dwindle as the market moves higher. This is not indicative of broad investor buying and risk appetite. This is not the strongest part of the trend but a bull market in its final stages. Another factor to bear in mind.

Crude Oil Daily:
Looks like a broad topping pattern to me, similar to what happened at the last major market turn. Looking for this recent bounce to make a strong bearish reversal to confirm a tradeable turning point.

Crude Oil 2008 Daily:
The first break of the Head and Shoulders pattern was a "trap". The subsequent retest and failure at the neckline sealed the fate of this market. Looks similar to now?

USD Index Daily:
The USD seems to be tracing out a broad triangle which is in line with my AUD and EUR charts that I have been showing. It is hard to imagine a Equities top without a solid USD low. I think it is very possible that we will see a breakdown of this triangle and a retest of the May lows which would be a great area for a trend reversal i.e. to up. Note the very bullish divergences on the momentum indicator and also note that triangles often occur in positions prior to the final movement in the direction of the larger trend. In Elliott speak as 4th waves or B waves. After a triangle pattern is complete, the final move is often swift and short affairs.

Speaking of triangles, I have shown a lot of consolidation patterns throughout Asia that are now breaking to the upside. Is it possible we will see breakouts from these patterns that fail to reach new highs whist the US markets make new highs setting up all kind of divergences? A likely scenario to me.

Strait Times Index

And to Australia, I continue to believe that there is a great opportunity to get out of this market and even position on the short side in the coming weeks:

Thus in sum, overseas indices continue to steam roll ahead and there are some good breakout patterns appearing in Asia. I believe this rally still has some legs to it. However, there is certainly enough out there to warrant caution in the bigger picture. There will always be bad news and setbacks. Hedging as we move higher will be a great play in these final throws.