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The double bottom breakout pattern in the Shanghai Index is developing strongly.
The breakout closed above the value of the resistance level near 3,130. This is bullish. The breakout rally has also tested the upper edge of the long term group of moving averages in the Guppy Multiple Moving average Indicator. This rally is the beginning of a change in the direction of the trend from a downtrend to a new uptrend.
The pattern is also sometimes called a W pattern. The key indication of pattern success is when the second rally – the right side of the W – moved above the middle high of the W. This has developed with a move above 3,110 to a high of 3,143 on May 31.
The retreat from 3,143 was temporary and the rally has tested the 3,143 level again with a strong rally on June 7.
The upside target for the W pattern is near 3,200.
In January commentators were already telling us the Dow rise was unsustainable and that a significant crash was inevitable. This mantra has continued for the past five months. In January we set an upside target for the Dow at 21,000 using chart projection methods. The target was achieved in March and has been retested several times.
The 21,000 level is a significant resistance level, but its not the end of the Dow uptrend. In the short term the upside target is 21,600. In the longer term, the Dow has target near 23,700. These targets are calculated using chart pattern analysis.
The DOW and other major stock indexes like the S&P 500 have one feature that ensures that they will continually rise and break new records: They are built on survivor bias.
We had high hopes for the dollar and we were wrong. We expected support near $0.99 to hold. Instead it has failed so our next task is to use the Dollar Index chart to set the potential downside targets.
The most significant feature on the euro/yen chart is the breakout above resistance near 123.5. This signals an important sustained change in the trend. The euro/yen retreated from resistance near 123.5 in 2017 January.
The euro/yen found support near 114.5 which was the short-side trade target we set in February. The rebound rally from 114.5 creates a variation of the double-bottom pattern and this pattern is used to set new long-term upside targets for the euro/yen near 131.
The defining features of the euro/yen chart was the down sloping trading channel that starts in mid 2015 and the support level trading band between 113 and 114.5. A channel is defined by parallel trend lines. A trading band is defined by parallel horizontal support and resistance levels.
How safe is the euro? Well, that's tied to another question: Who will win the French presidential election? There are two methods to arriving at answers.
One method of polling remains exceptionally accurate. It's taken almost every day and the participants back their opinions with cold, hard cash. These are the major market indexes and they show that the French market was not particularly worried about the outcome of the first round of French election. Nor are they worried about the outcome of the next round and this suggests a Macron victory — although, like many recent elections, the margin may be very narrow.
It was clear several weeks ago that the markets did not expect any significant change and that a presidential runoff between Marine Le Pen and Emmanuel Macron had already been baked into the cake — factored into market activity. The index behavior of the CAC suggested the markets were comfortable with this outcomes. The current index behavior confirms the market is comfortable with either candidate, although there are other factors which suggest the market anticipates a Macron victory.
The French CAC chart shows a strong well-supported trend with good Guppy Multiple Moving Averages (GMMA) indicator behavior. Investors are not worried, according to the long-term group of averages. The wide separation shows strong trend support.
The traders — as shown by the short term group of averages — are also very confident it will be business as usual after the elections. The short-term group of averages is also widely separated, showing strong confidence in a non-disruptive election outcome.
The breakout above resistance near 5,250 is very bullish and does not indicate a euro exit. This breakout is a relief reaction, so there is a good probability the market will retreat and use 5250 as a support and consolidation level prior to a continuation of the uptrend.
Although Le Pen talks of leaving the euro, the French market suggests this is unlikely to happen. The French public also apparently believes this is a low probability. If they thought otherwise, then we would already see a run on the banks as people took their money out before it was threatened with devaluation by a euro exit.
Investors would not wait until the calling of a referendum on leaving the currency. Once it became clear that Le Pen was the next president, there would be a run on the French financial system. The French banks would be essentially insolvent the next morning.
None of this has happened, and this suggests that Macron will be the next president of France. The euro is not dead but the euro short trade is.
The CAC chart signals strategic trading opportunities that can be exploited using the ANTSSYS method to trade the consolidation behavior.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe. He is a special consultant to AxiCorp.
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