Eurostoxx 50 - approaching critical level

The Eurostoxx is at a very important juncture. The index is retesting the 2009 and 2011 tops at 3100. A successful weekly close above this level would argue for a move to 3500 or even 3700.

Analysis

-          The weekly chart (chart1) shows a supportive MACD, with no divergences and higher highs confirming the move in price

-          Breadth (red line) is very positive , posting new highs in line with price. Volume is supportive as well (bottom panel, chart2)

-          The monthly chart (chart3) shows a bullish breakout of the macd above its long term resistance. We have seen similar moves in other market at the beginning of the year (S&P, FTSE etc) and as you know this is a signal which I rely quite a bit on because it has a great track record. As you can see from the monthly chart the 2  channels cross around 3500-3700 and as of today this is the only target I could find. Price action will give us more hints going forward

Chart1

 

Chart2

 

Chart3

S&P - update

Conclusion

The S&P so far is collaborating with my December rally scenario. Moreover, the index is tracing patterns that allow us to identify pivot points, ie levels at which a certain movement has to be considered exhausted.

These levels can be exploited in many ways, depending on the type of trading one employs. I think that the best way of using them is in conjunction with options. More specifically put options bought today should have a strike around 1740-1780.

Please see below for full analysis.

Analysis

The wedge pattern

As you know from the middle of this year I’ve highlighted multiple times the appearance of “wedge” patterns, where the market oscillates in shorter and shorter cycles with higher highs and higher lows.

This pattern normally signals *distribution*, ie a period when larger investors (or strong hands) slowly exit their positions. Buyers are retail investors (or weak hands) who are relatively undercapitalised and therefore unable to keep their positions if the market rolls over. This is why a break from a wedge on the downside is normally a sharp retracement to the base of the pattern.

This is obviously what has not happened this year since wedges have actually been *accumulation* periods. This is relatively more common in commodities but quite rare in equities. The end result is an acceleration on the upside, ie an increase in the rate of ascent that creates the long term parabolic rise that is evident from the chart.

Implication

The most important implication of these bullish breakouts is that we can use the breakout level as a pivot/threshold level. As you can observe from the chart below, every time there is a break, the market spends some time consolidating above and then starts a new pattern.

 The levels I’ve identified are :

-          1740-1780: a break of this level would imply that the latest move (3^rd wedge) is now over and argues for a full retracement of the 2^nd wedge. This implies a move down to the lower pivot point at 1530-1600

-          1530-1600: this level should offer more resistance than the one above: the pattern is much larger (and therefore more time and volume has been spent here to accumulate a position) and also coincides with the 2000 and 2007 tops. A break of this level would be highly significant but it is not something that we should be worried about in the short term (1-3 months).

Given what I said above,  I would use the 1740-1780 area as a strike for our put options, so that our exposure is reduced if the market corrects once this parabolic move will stop.

S&P500 - end of the year rally scenario

Yellen said that she sees no bubble, so maybe she want to show the world that she can create one! ;-)

More seriously, yesterday price action in the S&P500 and some of the underlying sectors has increased significantly the probability of a blow off top. The move from February to the intermediate top in May is a perfect example of what I would expect to happen.

Some people have tried to build models of parabolic moves and this is probably the best model around for the more mathematically inclined: http://www.hussmanfunds.com/wmc/wmc130415.htm

This is what these models look like, they point to a top in late dec/early jan:

 

In my charts below you can find:

-          The move up in May

-          My  target area for the movement: between 2040 and 2200. Big caveat: it is very difficult to project in advance a target for a parabolic move and indicators/oscillators become meaningless. Volume is probably the only input that we can use, in the sense that we should see an higher than average volume at the end of the move (silver in 2011 is probably the best example)

-          Charts of staples and discretionary (but you can look at industrials, healthcare or materials, they all show the same behaviour) that shows clearly how we have broken consolidations area on the upside

 

Analysis

 

The technical reason is a breakout on the upside of a wedge pattern. A wedge is a  reversal pattern and price is “expected” to break on the downside. If it breaks on the upside, it signals an increase in acceleration and it is even more reliable because of the low probability of this occurring ( a bit convoluted I admit)

 

May 2013

 

  

S&p500

 

 

STAPLES                                                                                                                                                                                                                                            

 

 

DISCRETIONARY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

European Basic Materials

Bottom line

This sector has created a (potentially) bullish chart pattern.

Prices have been falling since 2011 in both absolute and relative terms and have now the possibility  to start moving higher on both terms (absolute and relative).

Another brief correction (ie not a new low) is possible before the index starts its uptrend but a weekly close above the white line in Chart1 would increase significantly the probability of a more sustained move higher.

A break of the lower boundary on the contrary would be very bearish and probably accelerate the speed of the correction.

Analysis

Chart1 shows a potential falling wedge formation, confirmed by the MACD oscillator.

The MACD is showing strong bullish divergence and has also broken its resistance line on the upside, a move that more often than not is a good warning that the same is going to happen to price

Chart 2 shows the relative performance vs the DJ 600: we have another bullish divergence and a retest of the 2009 low. Basically the sector is as hated today as it was in the midst of the 07-09 bear market.

Chart1  - DJ600 Basic Resources

Chart2 - DJ600 Basic Resources RELATIVE CHART (ie relative to broad DJ600)

Topping patterns on FTSE and S&P500

I think it is important to signal that FTSE and S&P are forming topping patterns  on the weekly chart.

Bottom line: monitor support levels closely because a break would mean that the cyclical (bullish) trend that started in 2011 has ended.  

 

analysis

Both indices had weekly divergences with the respective MACD indicator for a while and have recently started to weaken.

The s&P shows a clear rising wedge formation (bearish reversal pattern) while the FTSE has a diamond/head and shoulder (bearish reversal as well).

What I’ve noticed looking at them on a daily basis, is that they have been so far unable to move above previous highs and we have now a sequence of lower highs and lower lows, either intraday (SPX) or on a daily basis (FTSE).

In both cases we have clear support levels which have not been broken yet: 6000 on the FTSE and 1600 on the S&P (see charts below).

FTSE100

S&P500

Similarities between the S&P in early 2009 and gold today

I’ve touched on the subject before but today the similarities have increased even more!

 

1)      In 2009 we had a very large reverse head and shoulder pattern (indications in red) in the S&P500 which signalled a potential bottom after the 2008 bear market. The right shoulder of this pattern was in itself a (normal) head and shoulder (in green). A normal H&S argues for lower prices while a reverse H&S points to higher prices. Obviously one of the 2 has to fail and in that case it was the bearish pattern that failed, giving a clean signal that the trend was up

2)      If you look more closely to the green pattern in the SPX, you can see that prices perforated the neckline and after a couple of internal days they reversed strongly up, triggering a bear trap

3)      Now look at the 2^nd chart, showing gold as of today. You can see exactly the same pattern developing, including a break and the potential failure!

To be more confident that the pattern is going to repeat itself, we have to wait for gold to close above 1400, where the neckline passes but I suggest a close monitoring of price action since gold can move very fast sometimes.

  

SPX                                                                                                                                                                                                                                                       

GOLD

 

Gold mining stocks

After the Fed announcement every single asset (apart from the USD) staged a rally. Some had a jump up and then drifted lower but others are still rallying very hard this morning.

Precious metals are up between 4% and 7% this morning alone and gold miners yesterday had the highest volume day ever (using GDX, the ETF).

Furthermore , the chart shows a potential reversal formation that if confirmed (ie gdx closes above 30) signals a move to 40, ie almost 40% higher from here.

Given the absence of gold mining stocks from almost every portfolio, I wouldn’t be surprised if the short covering/long buying pushes prices very high, very fast.

A failure to hold the 25 level would signal a continuation of the bear market.

Eurozone Telecoms

European Telecoms have returned in the news recently following a couple of very interesting deals, especially looking at the companies/people involved. More than the Nokia deal I am referring to Carlos Slim deal in the Netherlands: http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/telecoms/10232706/Carlos-Slim-moves-into-Europe-with-6bn-KPN-offer.html

When the richest man in the world and telecom mogul decides to invest in the most hated/underinvested sector in developed markets, something is going on.

Fundamentals

I do not want to spend time on the fundamental side which many of you would know much better than me. What personally caught my eye (on top of Carlos Slim) are:

 

-          Complete fragmentation of the market , with 40 + players vs 4 in the USA for a similarly sized  market

-          Total absence from investors’ portfolios. Now it has become almost accepted to invest in some selected European banks but no PM would dare turning into a meeting with an overweight in telcos. Most people have actually a zero weight

-          Regulator pushing for lower and lower prices which are “unsustainable”, at least at the present level

But at the same time I also heard:

-          The regulator may move from a national regulation to pan European regulation, thus looking at concentration levels on a much bigger market

-          An interview with the CEO of Wind who was openly talking about a new wave of M&A

 

Technicals

 

Conclusion first:

-          On a long term relative basis telecoms have gone back to the level they were trading in the late 80’s, before the bubble started

-          On a shorter time frame (and relative to broad market) they have now breached the downtrend and are turning up

-          On a stand alone basis they are back to where they were in 1994 and are giving tentative signs of bottoming

-          Some selected stocks within the sector have completed important long term patterns and are giving signs of life

 

It is very important to understand the charts I’ve been using to come to this conclusion cover very long periods of time so the potential turnaround would not happen in a matter of days or weeks but rather over months and years.

 

I suggest to monitor the area closely for potential investments. A sector undergoing a secular consolidation wave has a tailwind that most other areas do not have. This means that these stocks may raise even in a bearish environment, exactly like  “old economy” stocks did in the 00-03 period.

  

Analysis

The chart below (chart1) shows the long term relative performance of telcos vs the broad market (SXXE, euro Stoxx). The bubble period and the subsequent collapse is evident. We also can notice a divergence between price and MACD which signals a potential turnaround

 

Chart1

Zooming in (chart2) on the weekly  relative chart, we can see:

-           A completed  abc pattern

-          A projection level has been hit

-          Macd has broken its resistance line, a move than normally gives very good warning signal of an impending break of price (higher)

 

Chart2

Moving to pure price charts, chart3 shows how we have gone all the way back to 1994/96, before the bubble rally in the second half od the 90’s.

More precisely, price has so far found support just above 200 and a clear monthly divergence has formed, both bullish signals.

 

Chart3

 

The weekly chart (chart4) shows other bullish signs:

-          Another bullish  macd break

-          A falling wedge (reversal pattern) that has been broken on the upside

 

Prices could well fall a bit more and retest the lower boundary of the wedge but the long term picture in my opinion is univocally bullish.

It is very important to understand the charts I’ve been using to come to this conclusion cover very long periods of time so the potential turnaround would not happen in a matter of days or weeks but rather over months and years.

 

Chart4

 

 

To finish, an example of a telecom stock that has dropped 97% from the top over almost 20 years and that now shows a completed abc correction: Telecom italia

I am not suggesting to buy it, I only want to show that if even an over levered, badly managed and politically interfered company like this can rebound, anything can happen.

 

Chart5

 

 

 

 

 

 

 

 

 

 

USDJPY

Comment

USDJPY has had a strong day today and managed to break above a significant short term resistance level (see chart1).

If things continue to move in the same direction I reiterate my target of 110 (chart2 for the details). The Nikkei had a similar move today so this reinforces the idea that the consolidation that started in May has run its course and the index/FX will be moving higher in the coming weeks.

A close below 94 would invalidate my analysis.

 

Analysis

Prices have moved strongly above the diagonal resistance line that has contained  price action since the top in May. MACD has broken its resistance a week or so ago, giving another good warning signal that the same may happen to price.  

From an Elliott wave perspective we have completed a wave 4 so we should continue higher before the movement can be considered complete

Chart1

 

The weekly chart clearly shows how the wave 5 target also coincides with a long term resistance level (not shown, is the white line on top) increasing the probability of 110 as final target.

 

Chart2

 

 

US Dollar Index

Intro

The US Dollar has been moving in a sideway fashion for the best part of 6 years. More recently the trading range has become even narrower and the Dollar index has been fluctuating in a 7% band for the last 18 months.

USD has the characteristic of alternating long consolidations and equally long trending periods. I believe we are on the verge of a new strong uptrend in the currency.

 Conclusion

A monthly close above 85 would trigger a very strong buy signal. First target 90 and if this is broken then we have a confirmed trend that can go up to 105 and 120  in the coming years. The economic/financial implications will be very important.

 

Analysis

The long term chart (chart1) shows an alternation of consolidations and trending periods. The MACD indicator is flirting with the upper boundary of a triangle. A break above the line tends to give excellent warning signal of an incoming break of price above its resistance

 

Chart1

  

 

Zooming in, we can appreciate how the index has found support for the 3^rd time, confirming the validity of the red trendline. This month price action has created an hammer, a reversal pattern.

The rectangle which has offered support and resistance levels has a measured target of just above 90, at the same level where we have the larger consolidation boundaries and the downsloping trendline that has contained the USD moves since early 80’s.

A close above 85 would point for a minimum retest of the 90 level and if that doesn’t stop it then we can move to 105 (larger rectangle measured move)

 

Chart2

  

Moving on the weekly chart we can appreciate how recent price action has created a diamond (chart3, gold rectangle). Deciding when/if diamond patterns have been broken is a tricky thing because of the diagonal boundaries but a break of the macd on the upside should give us a good warning sign that the move has finally started.

 

Chart3

 

 

 

US 10Y

Yields have peaked at 2.93, just shy of the 3% target I’ve mentioned before. My central scenario is one of yields moving sideways between 2.4% and 3% in the coming months.

A break of the 3% level would point to a continuation to 4%.

 

 

 

Analysis

 

 

1)      Yields are tracing a potential evening star (see red rectangle), with the central candle being a shooting star.

2)      On top of this we are very close to the upper boundary of the channel that has contained the move since 2009

3)      We are bps from the 100%projection of the head and shoulder bottom

S&P500

Quick update on the S&P500:

I showed that:

-          Equities are the only asset class left (with cash) to see positive performance on both a relative and absolute basis. So the investment universe as a whole is narrower

-          Every major equity market (Nikkei, FTSE, EU50, S&P) is showing signs of internal deterioration, ie equity markets themselves are becoming narrower

-          Within equities the S&P is the strongest market and shows clear sign of over leverage, crowding and deterioration

 

-          Projections taken from long, medium and short term patterns are forming a very significant cluster in the area between 1720 and 1830 (Chart 1 , golden rectangle)

-          Elliott wave short, medium and long term patterns will be perfectly traced if we move just a bit higher than yesterday (see chart 2 for a better detail)

-          We have a MACD divergence signal

-          One of the sector that has shown strength since the 2011 bottom is now very close to its own targets (Chart 3, Financials). Divergences (not shown) are also forming on both daily and weekly levels, and patterns would be concluded by a small move higher

-          If we look at the least loved sector (Materials) , we have a classic reversal formation: a rising wedge with a clear MACD divergence (chart4)

 

Conclusion

 

A break of the 26^th July low at 1670 (on the future contract) would be a warning (break of previous high and short term support) that the S&P500 may be turning south. 

A confirmation of this possibility would come from a  break of previous support at around 1600:

-          This is the level of previous tops in 2000 and 2007: a move below this level means that the move up from april and the new highs are just  a “bull trap”

-          A break of 1600 would also coincide with a  break of the trendline that has supported the move from the bottom in 2011

-          A move below this level would as a minimum signal that a correction of the same order of magnitude of the one we had in 2012 has a very high possibility of happening

 

 

 

 

Chart1 – Weekly                                                                                                                                                                                                                             

 

 

 

Chart2 – Daily

 

 

 

 

 

Chart3 – Financials

 

 

Chart4 – Materials

 

 

 

LQD and HYG (USD inv grade and HY)

-          Investment Grade (chart2) looks much more advanced in the sell off, I would expect this move to continue to 109-110 before finding support. This is 2 or 3% lower from here. A failure to hold the level would point to 103-105 (so 7-9% lower)

-          HY has held much better but now  is catching up (chart1). My central scenario implies a continuation in the sell off to continue to the first golden rectangle (84-87), which 6% lower. If this level doesn’t hold a move to the strong support area at 80-82.5(8/10% lower ) is totally possible in the medium term.

Chart1

Chart2