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S&P Gap, Possible Trap and Repeating US Dollar Pattern

S&P Gap, Possible Trap and Repeating US Dollar Pattern

2012-06-29 21:16:00
Jamie Saettele, CMT, Sr. Technical Strategist
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***

I didn’t see today’s rally coming and I have no problems admitting as much. At this juncture, the key question is whether today’s USD decline and risk rally fits within the context of a larger USD bull market and bear market in risk. The answer is a qualified yes. In fact, there are quantitative similarities between today’s NYSE internals and internals consistent with at least short term tops. A test on gaps and end of day change in the SPY is presented below in that regard. Also included in this week’s issue is a comparison between the US Dollar Index in 1995-1996 and 2011-2012.

***

“THE MARKET(S)” a.k.a. “RISK” – Weekly Bars

Friday_Gap_and_Trap_US_DOLLAR__body_all.png, S&P Gap, Possible Trap and Repeating US Dollar Pattern

Prepared by Jamie Saettele, CMT

Despite today’s action, there is no change to the longer term implications from multiyear topping patterns. “We’ve focused on charts similar to the one above since March, in these pages and at various seminars around the world. It’s time for an update. The story being told by markets remains one of slowing global economic growth. Interest in the story is on the rise as key markets such as crude oil and copper approach multiyear support lines (head and shoulders necklines). The downward sloping neckline on crude portends an especially weak market (Some may take issue with this because these charts are of continuous futures, rather than spot. The crude spot market shows a much higher right shoulder and upward sloping trendline but does indeed show a multiyear topping pattern). Breaks of these long term supports will probably trigger the panic portion of the story in the coming weeks and months. US stocks have been lagging but may play catch up over the summer with a secondary top potentially in place this week (see next chart).

Of particular interest to FX traders is the emergence of topping patterns in both the Euro and Japanese Yen (Yen futures shown to correlate with EURUSD). Both currencies have been carving out topping patterns since late 2010. Viewed through this lens, it’s not out of the question that we’ll soon see a much stronger USD against both the Euro and Yen (and a more or less sideways EURJPY). Specific to the Yen, the divergence between the Yen (not a new record high) and 10 year Treasury note (new record high) remains in place and is characteristic of long term reversals.”

S&P 500 Index ETF (SPY)

Friday_Gap_and_Trap_US_DOLLAR__body_SPY.png, S&P Gap, Possible Trap and Repeating US Dollar Pattern

Prepared by Jamie Saettele, CMT

Impressive as it may be, today’s surge in the SPY has resulted in a test of the 61.8% retracement of the decline from the April high. The rally from 6/4 low also divides into Fibonacci proportion, with the rally from 130.85 = to 61.8% of the 127.14-136.25 rally. If this surge extends into next week, then we could see a test of the early May gap at 138.99 but that seems unlikely given the implications from the gap study (see below).

Friday_Gap_and_Trap_US_DOLLAR__body_Picture_11.png, S&P Gap, Possible Trap and Repeating US Dollar Pattern

Prepared by Jamie Saettele, CMT

Created with TradeStation Copyright TradeStation Technologies, Inc.

This equity curve goes back to 2008 (the conditions for the signal were not met until that time). The rules are to sell short SPY at the close when the market opens UP at least 1.8% and closes the day UP at least 2.5%. The holding day is 1 day. The profit and loss is reported as 10 SPY shares in order to correlate to roughly S&P index points. A visual of when the conditions are met is included below (red dots). Given current wave structure, today seems most similar to October 27th or November 30th. Keep in mind that this is a test and that PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

Friday_Gap_and_Trap_US_DOLLAR__body_Picture_10.png, S&P Gap, Possible Trap and Repeating US Dollar Pattern

Created with TradeStation Copyright TradeStation Technologies, Inc.

Prepared by Jamie Saettele, CMT

S&P 500 Index ETF (SPY)

Friday_Gap_and_Trap_US_DOLLAR__body_SPY_1.png, S&P Gap, Possible Trap and Repeating US Dollar Pattern

Prepared by Jamie Saettele, CMT

US Dollar Index (ICE) Continuous Contract Weekly

Friday_Gap_and_Trap_US_DOLLAR__body_usd.png, S&P Gap, Possible Trap and Repeating US Dollar Pattern

Prepared by Jamie Saettele, CMT

US Dollar Index (ICE) Continuous Contract Daily

Friday_Gap_and_Trap_US_DOLLAR__body_dx.png, S&P Gap, Possible Trap and Repeating US Dollar Pattern

Prepared by Jamie Saettele, CMT

The relationship between the US Dollar Index in 1995-1996 and now was pointed out to me by ElliottWave-Forecast. The charts tell the story and it’s uncanny. Not only do the patterns show remarkable similarity in form, but also in time and amplitude. The first number denotes the number of days that the specific leg consumed. The second number in parentheses denotes the number of days since the start of the pattern. The numbers with decimal points are percentage and measure the change from low to high of each leg in the pattern with the number after the slash measuring the net change from the start of the pattern. If the pattern continues (and there is no guarantee that it will of course), then the USD would trade sideways to down throughout July and into August before bottoming just above the May low. This should be interesting to follow.

Friday_Gap_and_Trap_US_DOLLAR__body_dx_1.png, S&P Gap, Possible Trap and Repeating US Dollar Pattern

Prepared by Jamie Saettele, CMT

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR)

Weekly

Friday_Gap_and_Trap_US_DOLLAR__body_usdollar.png, S&P Gap, Possible Trap and Repeating US Dollar Pattern

Prepared by Jamie Saettele, CMT

Jamie – The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is pressing against the April high at and 13 week moving average. The 40 level acting as support in RSI is a bull market characteristic as well on the daily. Given implications from the SPY analysis and US Dollar 1995-1996 similarity, I’d not be surprised to see a strong USD in early July followed by weakening thereafter. The implications next week are for a move back towards 10200.

Euro / US Dollar

Weekly

Friday_Gap_and_Trap_US_DOLLAR__body_eurusd.png, S&P Gap, Possible Trap and Repeating US Dollar Pattern

Prepared by Jamie Saettele, CMT

Jamie – “Weekly RSI is at a level that is consistent with a sideways/corrective market for 3-5 weeks before bearish continuation.” The EURUSD held up for 5 weeks now. I maintain that “there is nothing about the rally from 12287 to suggest that the larger trend has turned up. The overlapping advance is the model of a correction. A test of the low may not be in the works next week but expect July fireworks.” A move above 12747 could trigger a test of 12825 and still be within the confines of a correction but there is also potential for a triangle to form within the last 5 weeks’ price extremes. In other words, I am not chasing today’s rally.

British Pound / US Dollar

Weekly

Friday_Gap_and_Trap_US_DOLLAR__body_gbpusd.png, S&P Gap, Possible Trap and Repeating US Dollar Pattern

Prepared by Jamie Saettele, CMT

JamieAfter today’s surge, the GBPUSD is little changed over the last 5 weeks. Expect resistance in the coming weeks at the 52 week average of 15850 (if reached) and the 61.8% retracement of the decline from 16300 at 15909. Also like the EURUSD, the current range trading can certainly continue between below 15800 and 15400.

Australian Dollar / US Dollar

Weekly

Friday_Gap_and_Trap_US_DOLLAR__body_audusd.png, S&P Gap, Possible Trap and Repeating US Dollar Pattern

Prepared by Jamie Saettele, CMT

Jamie “I’d like to think that a top is in place given the level that the AUDUSD reversed from (April low, 50% retracement of decline from February high, 100% extension of rally from 9580 and 13 week average) but I’m also aware of the arduous topping process common to the AUDUSD (and NZDUSD). In any case, I am bearish even in the event of a new high. A new high would probably be minimal and downside potential is far greater. Levels for next week are 10115 and 9920, 9820.” What a week as the AUDUSD dropped to 9968 before ending the week near 10250, with almost all of the gain coming on Friday. I stand by previous comments and am bearish as this level is defended by the 50% retracement of the decline from the February high and 13 week average (52 week average is at 10320).

US Dollar / Japanese Yen

Weekly Bars

Friday_Gap_and_Trap_US_DOLLAR__body_usdjpy.png, S&P Gap, Possible Trap and Repeating US Dollar Pattern

Prepared by Jamie Saettele, CMT

Jamie“Bigger picture, the USDJPY is trying to put in a low above the February low. The RSI turn at 40 on the weekly is promising in that regard.” After a big Monday reversal, the USDJPY clawed back Friday to end the week down about 60 pips. It’s a bit disconcerting that the USDJPY couldn’t rally more than it did Friday given the move in Treasuries as that move is still reflected in the other Yen crosses. In any case, the larger structure is constructive against 7765.

--- Written by Jamie Saettele, CMT, Senior Technical Strategist for DailyFX.com

To contact Jamie e-mail jsaettele@dailyfx.com. Follow him on Twitter @JamieSaettele

To be added to Jamie’s e-mail distribution list, send an e-mail with subject line "Distribution List" to jsaettele@dailyfx.com

Jamie is the author of Sentiment in the Forex Market.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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