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The euro/yen chart has multiple features which suggest a downside target near 107. We show two of these features on this chart extract.
The dominant feature on the chart is the down-sloping trend channel. From July 2015 until June 2016, the lower edge of this trend channel acted as a support level. The line changed its polarity after the break below the lower trend line in June 2016. The line then acted as a resistance level.
On current values, this creates a resistance level near 115 for any rally. This limits the bullish behavior of the euro/yen. The strength of this downtrend line is a bearish feature.
Since June 2016, the euro/yen has been oscillating around the historical resistance level near 113. This has acted as a support level, although it has been seriously breached on several occasions. This suggests this level is a relatively weak support level. This second feature adds to the bearish outlook for the currency pair.
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)
The British voters' decision to leave the EU has badly shaken markets– although the dollar remained relatively calm while investors rushed into the safety of gold. Gold prices reached the long-term resistance target projection level of $1,340 before retreating. This is a rally within the context of a longer-term uptrend breakout.
Technically, this breakout is strong and there is a strong probability gold will move above $1,340 and move towards resistance near $1,580. However, there are important changes in the structure of the gold market that make the move above $1,350 and towards $1,580 more hazardous and volatile.
U.S.-listed gold exchange traded funds (ETFs) now own massive amounts of physical gold. Only seven sovereign nations own more physical gold than the U.S. gold ETFs. Add to this the physical gold held by gold ETFs listed in the UK, Australia and Europe and we can see a significant shift in the way physical gold is held and traded.
This structural change in the market means gold demand is now also closely linked to brokerage account margin calls as ETFs are a derivative trading instrument. Such high exposure to margin calls is a great concern during periods of high market volatility. It means that the gold price may react much more quickly in either direction than the fundamentals might suggest. It means that price targets are reached more quickly, and that retreats are more sudden and severe.
The market has fully digested two events and learned to live with them.
The first event is Janet Yellen's history of indecision. It is inevitable that US interest rates will rise but the timing remains a subject of speculation. The only sure thing is that Yellen will continue to be indecisive and the muted market reaction on the dollar Index chart reflects this. Apart from some short-term and small gyrations there is no substantial impact from Yellen's statements. The real surprise will be when decisiveness overrides indecision but the dollar index chart suggests this is not a high probability in the near future.
The second event is Brexit. The damage has already been done no matter what the outcome. Markets have already factored in an exit so when the final result is announced there is unlikely to be a large and lasting impact. Again, the dollar index reflects this and has already baked the exit into the cake.
If Britain decides to stay with the EU it is most likely to be by a narrow margin. However, this in itself indicates a tenuous level of support and any recovery in the relationship will be slow and half-hearted. Britain as an unwilling partner is just as devastating as Britain leaving, so a stay result has a similar impact on the dollar index to an exit result.
Only a massive and overwhelming support for staying in the EU would be enough to shake currency markets in the long-term but this is a very low probability outcome.
The dollar index will continue to trade within a well-defined trading band. The first key feature on the chart are the support and resistance levels. The support level is near $0.93 and was tested multiple times in 2015 and most recently in May 2016. The dollar Index has dipped below this briefly, but usually rebounded quickly from this support level.
Janet Yellen used to be decisive but now she not so sure, and that's a gift to traders.
There are times when the market hands an opportunity to traders who use chart analysis. This is one of those times, when markets develop consistent patterns of behavior that can be used to set a profit target and a stop loss, creating a high-probability trading situation.
The common and dominant pattern in today's market is the trading band, created by a well-defined support level and a well-defined resistance level. Each of these levels requires at least three touch, or anchor points. Our preference is to use the close on a weekly chart for positioning these lines, which can often be verified by studying previous support and resistance activity at the level in previous years.
These support and resistance lines also allow for setting good stop loss points to protect trades.