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Bouncing on support at 1.2875. • EUR/USD has successfully tested the key support at 1.2875. Resistances for a bounce are given by 1.2973 (07/12/2012 high) and 1.3046 (04/12/2012 low). • The underlying trend is negative (see the succession of lower highs since May 2011 peak). Therefore we expect limited upside potential given the strong resistance at 1.3172 (17/09/2012 high) and the overall overbought conditions.
This is just a brief follow up since tomorrow morning I will be busy and today’s inconclusive price action with another small range body (Spinning Top) does not add anything new to the short-term potential scenarios I have discussed in the weekly technical update.
For the immediate time frame price remains range bound between the immediate support at 1398.23 and the immediate resistance at 1423.73.
Theoretically, despite being close to a potential break out the daily Spinning Top is suggesting weakening of upside momentum, but it is unlikely to expect a meaningful pullback ahead of the FOMC.
It seems that the market remains, so far, careless to Risk off news from Europe and a potential, at least, short-term reversal of the EUR, the approaching FOMC meeting may be the reason behind this benevolent attitude.
Therefore, at the moment there is no clear edge within the potential EWP options that I showed this Sunday.
Also, it is strange that at today’s EOD we have VIX up Equity up and bonds up.
Below in the 30 min SPX I show the same ideas:
Additionally, the scenario of a ZigZag with a wave (C) unfolding an Ending Diagonal is still possible as long as 1410.90 is not breached.
If this ED pattern plays out it could have a bearish outcome by ending the assumed wave (B) off the September 14 high since we would most likely have negative divergences in the final wave (V) of the ED.
Regardless of a potential pullback I maintain a bullish bias (until technical evidence shifts to the bears camp) since the pattern off the November lows is not complete yet.
• EUR/USD has weakened after failing to break the resistance at 1.3140 (17/10/2012 high). Monitor the test of the key support at 1.2875. An hourly resistance is at 1.2973 (07/12/2012 high). Another support can be found at 1.2834 (intraday low).
• The underlying trend is negative (see the succession of lower highs since May 2011 peak). Therefore we expect limited upside potential given the strong resistance at 1.3172 (17/09/2012 high) and the overall overbought conditions.
The TV pundits all contribute their fair share to the conditioning process by clouding thoughts of any market player. To the extent that all ambiguities presented will bait investors to thinking IRRATIONALLY! Like, waiting for a 1000 point rally to emerge once the fiscal cliff is resolved.
Fortunately, underneath all the headlines a visual and graphical interpretation can be mathematically extracted. It is here, in these very charts, where you will find an answer that illustrates what is really going on, so that us technicians can observe, scrutinize, and formulate a particular bias.
The information provided does not tell you why, or when, but what!
In this case, ‘the what’ is a bear market rally. These particular rallies are very sneaky and most convincing, but can be properly identified when using the right tools.
For starters, a basket of heavily weighted companies, ‘THE NIFTY FIFTYs,’ which offer the bulk in the performance in the averages -all now have chart patterns that cannot sustain the continuation of this advance. Invariably, when volume remains light during an extended window of time, the result is an inevitable sharp collapse back downward to the previous lows or worse, new lows that can no longer support a bull market.
The S&P 500 index is a case in point, which is still in rally mode, and perhaps can continue higher if there is further consolidation. But if only mother market is ever so accommodative to our own expectations.
And it is because of her complexities that make it an impossible arena for perfection. The current rally back is clearly overworking itself to recapture the previous drop in November and rather than guessing where exactly it will end, think of it in terms of direction. The future course of these violent counter trends ultimately end in a scare plunge; and all the pumping in the world cannot uphold the violent cascade of selling pressure that will implode on the masses.
Consider the technical chart below, which projects a disaster waiting to happen, and with only a small chance of one last leg higher before this rally is all said and done.
S&P 500 – Daily Chart
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The first week of the month is always the most interesting, with global purchasing managers indexes, U.S. ISM’s, and employment data released. Overnight we see continued weakness in Europe’s economic data and perhaps some more “green shoots” in China. Europe is sporting “beige shoots” at it is reaching the stage where things are so bad it is difficult to go down further.
Euro-zone manufacturing activity contracted for the ninth consecutive month in November, albeit at a slower pace than in October. Markit’s Eurozone manufacturing Purchasing Managers Index (PMI) rose to 46.2 in November from October’s 45.4, though it stayed below the 50 mark dividing growth from contraction for the 16th straight month.
The new export orders index was revised up to 46.4 from the preliminary reading of 45.9 two weeks ago, and it now reads more than a full point higher than the October reading.
Manufacturing accounts for around a quarter of the euro zone’s private economy and is dwarfed by a services sector that fared badly in November, the data two weeks ago showed.
China seems to be “recovering” not due to the private sector, but government led:
The final reading for the HSBC Purchasing Managers’ Survey (PMI) rose to 50.5 in November from 49.5 in October, in line with a preliminary survey published late last month. It was the first time since October 2011 that the survey crossed above 50 points, the line that demarcates accelerating from slowing growth.
An official PMI survey of China’s non-manufacturing sectors also ticked up, to 55.6 in November from 55.5 in October, led by expanded activity in construction services. But growth in air and rail transport and food and beverages both slowed.
Growth accelerated for large firms for the third month in a row, but medium and smaller companies saw a retrenchment, with the decline more pronounced for the smaller firms, the NBS said in a not accompanying its official manufacturing PMI survey. “The improving numbers are mostly because of government investment,” said Dong Xian’an, economist with Peking First Advisory, referring to the official PMI.
As for the U.S. we have ISM Manufacturing this morning at 10 AM; consensus for 51.7 – flat with last month. Construction spending also hits at 10 AM – expectation 0.4% growth.
Wednesday ADP employment which hopefully with some recent changes is “somewhat” closer to government data on a month-to-month data (before revisions) – expectations of 125K versus 158K. Sandy should be an issue. ISM Non Manufacturing, expectations of a drop to 53.6 versus 54.2.
Friday is the much watched (Jack Welch) employment report – expectations of only 80K versus last month’s 171K, again Sandy impacts here. Unemployment rate expected up to 8.0% versus 7.9%.
As for the technical picture, we have a gap up this morning on any myriad of “positive” news items – China PMI (despite China stock market falling yet again), European PMI not getting worse (European markets acting WELL), or Spain asking for bailout funds for its banks (no surprise, but algos read the headline and futures popped). Evidence continues to mount for a continuation of an inverse “head and shoulders” bottom move; if this continues there should be a move to the mid 143os to upper 1440s (depending on what you use for the head and neckline – up for some interpretation). Now if that happens this would create the first “higher high” in the S&P 500 since the correction began in mid-September, but if that is all the move has in it would be a particularly nasty spot to reverse since everyone would say “a new high” and the trend is changed. But we’ll see – this market has become famous since 2009 for “V shaped” moves that continue in one direction (not the boy band) without relent so the talk of “performance chasing” and “underinvested longs” and “repeatedly scarred shorts” should be relentless over S&P 1435.
At the time I write this the S&P 500 is gapping up to the 61.8% retrace of the entire two month correction. As posted Friday, the ability for the market to move sideways to consolidate gains was a positive – so the corrections in this move up have come mostly via time rather than price.
Yesterday SPX fulfilled the script of a narrow range body, it’s the common candlestick (in this case a bearish Hanging Man) that usually follows a white Marubozu. It means consolidation of the previous gains and hesitation.
This pattern could evolve into a bearish reversal pattern ” Evening Doji Star” if today we get a gap down and go. But this is not my preferred scenario.
Regarding the overall count from the September 14 high, I don’t even change a comma, since I remain firmly confident that the current “countertrend” rebound will top in the target box that I have been highlighting in the last few days. Critical overhead resistance is now not far away, either 1397 or a kiss back at the previous trend line support off the October 2011 now converted into resistance.
Once/if price confirms my preferred scenario the last wave (C) down, which could match the length (89.1 points) of the previous down leg; wave (A), is expected to complete the EWP off the September 14 high, hopefully with positive divergences.
For the short term the 10 d mas = 1375.17 could be the demarcation between a mild pullback and something more bearish.
Regarding the labelling of the current rebound so far we have a 3-wave up leg or a corrective variant (DZZ) therefore we have 3 options:
The “oversold” bounce is over ==> the wave (B) is done.
Price has established the wave (Y) of a larger Double ZZ.
Price has established the wave (A) of a larger Zig Zag.
So we need to see the internal structure of a pullback in order to increase the confidence on a count.
For the immediate time frame yesterday’s down leg after completing an Ending Diagonal suggests that there should be at least one more down leg.
As I mentioned yesterday I am watching:
1. EUR: “Since in my opinion the internal structure of the rebound off the November 13 lod is clearly suggesting that in the near future price has more business to the down side. So far bulls here are struggling to reclaim the 200 d ma, which coincides also with a strong horizontal resistance, while slightly above there is the steep declining 20 d ma. Barring “good news”, with the current weak structure, which could be shaping a bearish Flag, price should reverse in the range of the Trend line resistance in force since the October 17 high and the next horizontal resistance at 1.2876″.
So far price is maintaining the sequence of higher lows hence if price breaks above 1.2840 (trend line resistance off the October 17 high) then within the corrective pattern in progress price could extend the move towards the next resistance located at 1.2876.
2. VIX: we now have to watch the trend line support and the possible “sell equity signal” that would be issued with en eod print above the Bollinger Band of the Envelope > 15.50.
Yesterday’s doji + oversold Stochastic are favouring at least a bounce attempt, although ahead of Thanksgiving holiday it may not be a reliable indicator.