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There is a rule of thumb that double tops and bottoms seldom hold and triple tops and bottoms almost never hold.
- Alan Bush | |
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Today's Featured Article
U.S Dollar Index - weekly
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We continue to see a pattern of chart sell signals following through on the sell side while chart buy signals have shown a tendency to fail. The double bottom pattern that was broken in February was accompanied with heavy volume, which confirmed the validity of the breakout. The price advance above recent highs in last week's trade was only a one day event with futures not being able to close above the breakout price on the day of the false buy signal. Any time chart buy signals fail and chart sell signals follow through, we can conclude that the main trend for the market is lower. Now that the buy stops have been taken out on the upside on the April 18th advance to 74.50, we can
now expect the downtrend to continue. Based on the measured move technique of calculating price objectives, a downside target of 70.275 can be projected. This is done by taking the price distance from point A to point B and subtracting it from point C. Nothing has changed from a technical point of view for this market. Expect lower prices.
U.S. Dollar Index - daily
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This daily chart of the U.S. Dollar Index shows in greater detail the false breakout to the upside that took place last week. It appears as though the breakout was mainly due to buy stops being hit, since the gains were short lived. In addition, to the dismay of the bulls, prices plummeted to new contract lows just two days after false buy signal. This short-term chart is giving the same bearish signals that are evident in the weekly chart. Expect lower prices.
Euro Currency - weekly
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For many months we have seen a tendency for chart sell signals to fail, while chart buy signals have followed through to the upside. Based on the measured move technique to calculate price objectives, a price target of 1.5972 can be projected. This point has been recently slightly exceeded before profit taking came into the market. When a major chart objective has been met, by no means should it be considered to be a sell signal. A chart objective that has been hit should only be used in conjunction with sell signals, which are not evident now. Even though this chart objective has been hit, it still appears as though that the main trend is higher, since there are no accompanying
sell signals. Volume continues to be heavier on the rallies than on the breaks and futures tend to over perform on the upside on bullish news while ignoring or not following through to the downside on bearish news. After a likely limited round of profit taking is out of the way, expect a new leg up to new contract highs. The likely buy stops, that are probably accumulating above the psychological level of 1.6000 will probably be hit. The main trend for the Euro is higher.
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British Pound - weekly
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In December of 2007, the long-term uptrend line was broken. Volume was heavy on this break, which confirmed the validity of the sell signal. There was a recovery in March of 2008, which attempted to retest the trend line at the 2.0400 level. This move failed and prices headed back down to near the bottom of the congestion. From a technical point of view, the British pound will likely be the weakest of the major currencies, especially against the Euro. The British pound has recently made new historical lows against the Euro and there is no reason to think that, from a technical point of view, this trend will change any time soon. Expect the British pound to trade sideways to lower
against the U.S. dollar and sharply lower against the Euro.
June Japanese Yen - daily
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There is a rule of thumb that double tops and bottoms seldom hold and triple tops and bottoms never hold. In this case, the triple bottom at the .9750 area in early April did not hold. Obvious areas of support and resistance often attract stops, which usually are taken out. In this instance, there were probably sell stops under the triple bottom formation, which would explain the heavy volume and the large trading range on the day of the downside breakout. Now that the sell stops are out of the way, we can expect a recovery to at least up to the recent congestion at 1.0033.
Japanese Yen - weekly
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This weekly yen chart is also giving signals that the recent move to the downside may be over done. The steep uptrend that was penetrated on the downside appears to have taken out most of the likely underlying sell stops. There appeared to be only limited volume on the move below the trend line with limited follow through. Futures have now moved back above this trend line, which suggests that this obvious sell signal has failed. Expect higher prices from current levels for the Japanese yen.
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Australian Dollar - weekly
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Recently there have been two instances of trend line breakouts to the downside, which proved to be false sell signals or "bear traps." Sell signals in this currency have shown a tendency to not work while buy signals have shown good results, with follow through gains. We have also noticed a tendency for futures to either ignore or not follow through to the downside on bearish news. Expect further gains for the Australian dollar including a new round of contract highs.
Treasury Bonds - weekly
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Treasury bond futures have been in a broad uptrend since June of last year. However, this weekly chart shows a break out to the downside which is now starting to appear to be a false signal. For one thing, there appeared to be relatively light volume on the break. In addition, there was limited follow through selling pressure. Proof of this being a false signal would be a move back above the trend line, especially if it were to be accompanied with heavy volume. If there is a move back into the congestion pattern, which I think will be the case, a test of the top of the range at 120.00 is likely.
S&P 500 - weekly
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All Charts from APEX
A major uptrend line was taken out in January of this year. In this case, there was substantial follow through weakness, along with heavy volume. There has been some recovery, but generally, on lighter volume. In addition the trend line that was penetrated on the downside has not been violated on the recent recovery. This "box" congestion pattern, that is developing, has all of the characteristic rules that congestion patterns usually exhibit. One rule of thumb is that prices usually move out of a congestion pattern in the same direction that they came into the pattern. Therefore, prices are likely to breakout of this congestion to the downside. This rule of thumb tends to hold true
approximately 60% to 65% of the time. In spite of the recent recovery gains, expect the next major move to be to the downside, including a move to below the 1253.00 double bottom level.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor
Services, Inc.
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About the Author
Alan Bush has been a commodity analyst since 1976 focusing on the fundamental and technical aspects of stock index, interest rate and foreign currency markets. He has authored several articles for Stocks Futures and Options magazine and produced the "Futures Tech Focus" program, which is a technically based market outlook.
Alan served on the faculty of Oakton College as instructor of a course entitled, "Principles of Technical Analysis." He has been interviewed on many national television programs, appearing on the Nightly Business Report, CNBC, CNN Moneyline, Reuters Television and Web FN. In addition, he has been frequently quoted in The Wall Street Journal, USA Today, The Bond Buyer and the Chicago Tribune and has been regularly interviewed on Chicago's WMAQ radio business reports.
Alan can be reached at (312) 242-7911, or via email at alan.bush@archerfinancials.com. | |
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