Chart patterns suggest that dollar/yen has a high probability of retesting the lower edge of the trading channel near 95. » Read More
We normally focus on commodity, foreign exchange and Asia/US index charts but there are some chart patterns that are so compelling that they cannot be ignored. In many ways, this is an extension of last week's observations around the pattern seen in the oil chart. An opportunity can be found in every market, not just in the markets your look at regularly.
Germany's DAX shows two key charting features.The first is the long-term downtrend line. This starts with the peak near 12,390 in April 2015. The downtrend line is anchored with the highs in December 2015. The positioning of the line is confirmed with the peak and retreats in June 2016. It's a validly placed and effective trend line that defines the DAX downtrend.
It was broken in July 2016 with a clear move and close above the value of the downtrend line. The rally from this point has continued over the past four weeks. That in itself is a buy signal and bullish opportunity.
It is the second chart pattern that provides added interest and confirmation support for the breakout. This is the inverted head and shoulder pattern. The shoulders are shown as points A and C. The head is shown as point B. The neckline of the pattern is a segment of the downtrend line.
In June we were bullish on oil, setting an upside target near $58 based on the breakout above $48. The upsides target was not achieved. The trend breakout failed to develop and the oil price fell. Despite this short-term behavior, the long-term outlook for oil is bullish with medium term targets at $58.
There are three sets of features that confirm and define this bullish outlook. They are the Guppy Multiple Moving Average (GMMA) relationships; the emerging chart pattern; and the history of support and resistance trading bands.
The first feature is the GMMA relationships. The GMMA pattern of trend breakout consists of three parts. The first part is a rally that tests the value of the lower edge of the long-term GMMA. This happened in June 2015. The second part is a breakout above the upper edge of the long-term GMMA. This developed in June 2016. The third part is a retest of the support levels followed by a rebound.
The Dow breakout above 18,300 is significant, but it is also weak. This is confirmed both with chart analysis and with some fundamental analysis. The Dow chart has two significant chart patterns and they combine to limit the Dow rally in the short-term.
The first feature is the well-established trading band. The lower edge of the trading band is near 15,600. The upper edge is near 18,300. The width of the trading band is measured and then projected upwards. This gives a target near 21,000 for the Dow. This is a long-term target. The Dow is making new highs but there are technical chart features which limit the way the Dow moves to achieve the 21,000 target.
The second feature on the Dow chart is a long-term uptrend line. This uptrend line started in October 2011. To understand the significance of this trend line, we need to understand the way trend lines change polarity or function. Between October 2011 and August 2015, the uptrend line acted as a support level. The Dow would pull back to this level and then rebound and continue the uptrend.
In August 2015, the Dow moved below the uptrend line. Many people believe that when this happens it means a new downtrend starts. This is not correct. It means the nature of the trend has changed and with the Dow, it means the trend line changed polarity and now acts as a resistance line. When the Dow rallied in November 2015, the trend line acted as a resistance level. The trend line is projected into the future and it will continue to act as a resistance level.
The Nikkei has developed two powerful breakout patterns. The first pattern is the double bottom pattern. This is created by the low near 14,865 reached in February and again in June. This is a very bullish chart pattern and it is used to set a projected upside target.
The double bottom pattern is also sometimes called a W pattern. The distance between the base of the pattern at 14,865 and the peak of the pattern near 17,613 is measured. This value is then projected upwards above the W peak to give the long-term upside target. This target is near 20,347.
The breakout develops in two stages. The first target is a rebound from support near 14,865. The first target is 17,613. Traders expect to see some consolidation round this level before the market again breaks out in a new rally and moves towards the long-term target near 20,347.
The second pattern feature on the Nikkei chart is the down-sloping trend line. This line is calculated from the high in December 2016 near 20,012. The placement of the line is confirmed with the high in April and again in June. The close at 16,497 is above the value of the downtrend line and is the first signal that the downtrend has ended. This is confirmed with the recent close at 16,627 on the weekly chart. This is a bullish feature.
Into the valley of death rode the six hundred and the Light Brigade emerged tattered but victorious, according to Tennyson.
The same story can be applied to the Australian dollar which at the beginning of 2016 looked to be heading towards $0.635 after a fall below the primary support level near $0.715. We suggested it was poised on the ledge of the valley of death. There were good short trades but in the longer-term, the Aussie has battled higher and retested $0.775.
The long and steady decline in the Australian dollar from $0.93 to $0.69 has paused and developed a significant reversal pattern. This is a classic Guppy Multiple Moving Average (GMMA) trend reversal. This has seen a test of the downtrend, a retest and breakthrough and then a retest and rebound. All these features are found in the GMMA display on the Australian dollar.
The test of the lower edge of the long-term GMMA developed in December 2015. The test and breakout above the upper edge of the long-term GMMA developed in April 2016. The retreat dropped below the lower edge of the long-term GMMA and this indicates a degree of trend breakout weakness. However, the Aussie is currently moving above the upper edge of the long-term GMMA and this is bullish.
Gold prices are up 25 percent in 2016 while the surge in silver has seen prices rally 46 percent this year. Early in 2016, the silver price behavior stopped leading the gold price behavior. Silver reverted to its previous behavior of following the gold behavior but it has remained a very profitable trade.
Silver has an upside target of $26.00. That's 30 percent higher from the current price near $20.00. Gold has an upside target near $1580, which gives a 16 percent gain from the current price near $1360.
Silver is slower to move but it has more room for an upside and this delivers better profits. In March we suggested the smart trade was to look at gold, and then execute the trade in the silver market. It has been a good trade with silver replicating the strong breakout in gold prices.
The silver chart has 3 fan trend lines compared with the 5 fan trend lines on the gold chart. The fan pattern in silver is not as strong but the breakout gathers extra strength because it follows the gold price. (Note the silver price is shown in cents)
Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.