Chinese stocks stormed higher in recent months, but charts indicate they may face a period of consolidation.» Read More
A trend change is at hand for the euro-dollar after the European Central Bank exceeded the market's easing expectations last week by imposing a negative interest rate on banks for their deposits and cutting its main interest rate from 0.25 percent to 0.15 percent.
Chart patterns are not infallible – they're used to identify the balance of probability of one possible result compared with another. In late May, the euro-dollar chart showed a steady uptrend with a well-defined uptrend line. However, this uptrend line was broken as the market anticipated ECB policy easing.
The bullish analysis we compiled in May was not confirmed by market activity. The break below the uptrend line was the critical signal and we adjusted our analysis accordingly. This week we update the chart analysis.
There are two significant features on the weekly chart: trend line A and historical support near $1.34.
Narendra Modi's landslide victory in India's elections spurred hopes that Asia's third-largest economy would soon see growth-supportive policies. Stocks rose sharply in the run-up to the elections and while post-election sentiment may see stocks rise further charts indicate that a quick retracement is possible.
In March 2014 the NIFTY 50 broke decisively above 6350, which had been a major resistance level since January 2008. It was previously tested in November 2010, and more recently acted as a strong resistance level from November 2013 to January 2014.
The NIFTY had formed a very wide trading band with support located near 4650. Support was tested in December 2009, February 2010 and again in December 2011. The width of the trading band is measured and this measurement is projected upwards to give a breakout target near 8000.
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The key concern is the nature of the breakout. The NIFTY has developed a parabolic trend. These trends are found most frequently in bull markets, or markets showing volatile rebounds. While parabolic trends are usually seen in fast-moving stocks, they are also present in fast-moving index areas or markets.
Parabolic trends are best described using an arc, or a segment of an ellipse. They start slowly then accelerate very rapidly until activity on the price chart is almost vertical. They cannot be adequately described by straight edge trend lines; instead the price action uses a parabolic curve as a support level.
A weaker yen and positive economic indicators have pushed Japan's Nikkei to one-month highs but with the index well below its 2013 peak charts indicate the market is poised to fall.
The Nikkei has developed a downtrend – trend line A which developed near the 16,232 high in December 2013 – and is testing support near 14,000.
This is a long-term trend reversal pattern that uses uptrend line B as resistance. Uptrend line B defined the uptrend starting in April 2013 and acted as support until January 2014. The Nikkei's fall below this trend line signaled a change in the uptrend, thus uptrend line B acted as resistance after January 2014, capping the index's rebound rise near 15,500.
The rebound and retreat pattern confirmed the location of downtrend line A. A breakout above downtrend line A would be bullish; however this appears to be a low probability event. Any breakout has resistance near 14,800.
Following a series of closing highs last week and the index's first intraday breach of the 1,900 level one is inclined to ask: how much longer can the S&P 500 can sustain its uptrend? If charts are anything to go by the underlying trend is here to stay.
The S&P 500 weekly chart shows a strong trend with each upthrust target defined by the width of the trading bands. The market has broken through the consolidation around 1850 and the trading band calculation provides a target near 2000. Chicken Little is frightened of heights and terrified the S&P 500 will fall. Do the charts support this fear?
Individual stocks can and do collapse suddenly and without warning; it's in the nature of company risk. However, indexes rarely collapse without warning because they aggregate the company risk of all index constituents. Even the growth of Exchange Traded Fund activity has not altered this fundamental relationship.
For those who do not understand charting it may appear that an index, and by extension a market, can collapse quickly. There are very rapid market collapses, as in 2008, but these are generally preceded by clear chart signals with broad-based index chart patterns.
The Dow and S&P 500's collapses in early 2008 were preceded by early warning chart pattern behavior. Our CNBC column notes and commentary on Squawk Box Asia in late 2007 and early 2008 identified these patterns and set, what were at the time, almost unbelievably low downside targets.
With expectations that the European Central Bank (ECB) will undertake easing measures in June largely factored in by the market, any policy moves could provide the basis for a potentially strong upward eur/usd rise according to charts.
ECB president Mario Draghi said in Brussels last week that "the [ECB's] governing council is comfortable with acting next time [June policy meeting]," boosting speculation that the central bank could take action to shore up growth and keep inflation from falling too low. The eur/usd chart shows the market is moving towards consensus agreement on this announcement and is now ready for a potentially strong upward move.
Many traders are cautious about trading around the release of policy statements and statistical reports as the FX market often moves very rapidly on such announcements. Traders who are long when the market moves down following an announcement find it difficult to exit positions. Usually the risk component of the risk-reward equation increases in news-event trading.
The eur/usd weekly chart suggests the risk around possible easing action at next month's ECB policy meeting is lower than usual. A few chart features support this conclusion.
The Dow Jones Industrial Average touched a fresh all-time closing high last week, boosted by earnings results and the Federal Reserve's decision to further taper its monthly stimulus program. According to charts, this may be just the beginning.
The index is in a zombie market, but in the best possible way: the uptrend is simply unstoppable. Despite some faltering steps, nothing seems capable of ending its rising trend. While there's currently a pause around resistance near 16,500 this is consistent with the long-term trend behavior.
We start the analysis from the negative perspective by looking for technical indicators which suggest an end to the trend. It's no good pointing to the oscillator-style indicators, all of which show over bought conditions. Simplistic technical analysis suggests that prolonged overbought signals precede a market fall and highlight the potential for a trend change. Unfortunately, in a strongly trending market, oscillator-based indicators will consistently give misleading over-sold signals. Depending on the time period for the oscillator it may take 30 days or more for the strong trend readings to wash out of the calculation and normalize readings from the over bought condition.
The Dow does not show any chart patterns which signal the trend is ending. These patterns include a head-and-shoulder pattern, rounding tops and blow-off tops, or steeples made on high volume. None of these patterns are seen in the Dow and nor is there any evidence they are developing. The only blot on the horizon is the recent resistance near 16,500. This is a feature on the daily chart but is not a confirmed resistance level on the weekly chart.
So let's proceed to the positive perspective. There are two defining trend features on the DOW chart.
This week will see an important event for the U.S. dollar: the Federal Reserve's policy meeting. While investors seek to gauge the future direction of monetary policy whether or not the Fed tapers this week is unlikely to be a major factor for the U.S. dollar index.
Concerns about Fed tapering weighed on global markets throughout much of 2013 after the U.S. central bank first raised the possibility of reducing its $85-billion-a-month bond-purchase program in May. The central bank finally began tapering in December 2013, reducing its bond monthly purchases by $10 billion. It followed suit in January and March of 2014, bringing monthly purchases down to $55 billion.
Investors are keen to see whether or not the central bank continues down this path at this week's Federal Open Market Committee meeting. So, what's the story with the Federal Reserve's tapering of its monthly bond-purchase program and the U.S. dollar index?
Gold prices fell to a near-three-week low on Monday amid sharp exchange traded fund outflows, continuing to erode mild gains posted in the first quarter of 2014. For those with an eye on silver the erosion of gold's recent gains should come as no surprise.
Comex silver has led gold prices since 2011 and it's not about to give up that leadership role. The lag between silver and gold prices has been reduced but silver continues to lead price developments. Looking at silver gives traders a leading advantage when it comes to anticipating the behavior of gold.
I offer no explanation as to why this relationship exists. What is more important is the trading advantage conferred by the relationship.
The peak price in Silver in April 2011 appeared before the peak in Gold in September 2011. The collapse following these price peaks showed the same behavior for silver and gold. Traders who followed silver had clear warning of how gold would behave once the peak price was established.
As worries about a potential slowdown in Chinese economic growth wan, the Shanghai Composite Index has shaken the downtrend that started in December 2013. But a successful breakout pattern and new uptrend are yet to emerge – recent chart activity indicates three possible patterns lie ahead for mainland shares.
The Shanghai Composite has a strong support level near 1980, which has provided the foundation for a double bottom pattern. The first test near this support level was at point A on the chart, with the second test at point B.
While it's too early to tell how the index's future activity may develop there are three possible development patterns.
Gold prices have fallen about 7 percent since its 2014 high last month, but brace for further losses as the downtrend remains intact, according to technical analysis.
The Comex gold chart developed a strong rebound from support near $1180 in late December, but that was not a double bottom rebound so there was a low probability of an imminent uptrend.
The fact is, that the support level rebound pattern (see chart) is a temporary rally within the downtrend environment. It shows a weakening of the downtrend, but not a trend change.
Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.