The Nasdaq pullback that we forecasted in January has commenced as the Federal Reserve further tapers its asset-purchase program.» Read More
The United States is bickering about the debt ceiling once again but the market is bored with the debate and that boredom is reflected in the charts.
The solution to the debt ceiling debate is always the same – give us more free money from the Federal Reserve and increase the limit on the national credit card. This is not a crisis; it's a long-running mini-series with a predictable ending. The market has seen this show before; market boredom with the debate is evident in the U.S. dollar Index chart.
The U.S. dollar index measures the value of the U.S. dollar relative to a basket of currencies. The basket is composed of the euro, Japanese yen, British pound, Canadian dollar, Swiss franc and Swedish krona. It is used as a measure of strength or weakness in the U.S. dollar.
To taper or not to taper? That is the fork in the path but maybe the divergence in outcomes is smaller than expected – a pothole rather than a cliff. The S&P 500 is a more accurate measure of the U.S. market after three components of the Dow index changed this week. The weekly chart of the S&P 500 index shows a particularly strong and established trend with a number of important features.
First we look at trend strength. This is shown with the Guppy Multiple Moving Average (GMMA) indicator on the weekly chart. The long-term GMMA group of averages (shown in red) is well separated, which shows that investors are confident. When the index retreats investors enter the market as active buyers.
The short-term GMMA group of averages (shown in blue) is also well separated. When the S&P index moves to touch the wooer edge of the short-term GMMA it has been a buying opportunity to enter the market at a point of temporary weakness.
Parabolic trends define fast moving momentum trades, and are of particular interest when they collapse as this signal short trading opportunities.
The Indonesian rupiah, which has fallen drastically over the past few months, prompting the Indonesian central bank to take aggressive action to halt the currency's fall, has developed a parabolic trend.
The parabolic trend - best described using an arc or a parabolic curve – is found most frequently in bull markets, or markets showing volatile rebounds. It starts off slowly then accelerates very rapidly until the activity on the price chart is almost vertical.
(Read more: Summers out, canemerging currencies now catch a break? )
Parabolic trends end very quickly, often with substantial price pullbacks that gap well below the previous close. The pullback, which is typically 50 percent of the parabolic rise but could be as much 100 percent of the parabolic rise, becomes an ideal short trading opportunity.
While parabolic trends are most frequently seen in fast moving stocks, they are also present in fast moving index areas, or markets. With a parabolic trend the trend cannot be adequately described by straight edge trend lines, rather the price action uses a parabolic curve as a support level.
It's important to treat this pattern with a little more caution in currency charts because currency trading is driven by factors others than psychology. Patterns which are not based on psychology are not as effective, but they still provide guidance. In this spirit we apply the parabolic analysis to the rupiah chart.
Forget the Hindenburg Omen as a precursor of disaster; it's an unreliable pattern. The head and shoulder pattern is much more reliable and this has developed in the dollar-yen chart.
Where is the gold price going? It's a simple matter of following the S. That's S for silver, not Syria. COMEX silver has led the gold price since 2011, with silver reaching a price peak in April 2011 before Gold peaked in September 2011. The collapse following these price peaks showed the same behavior for both silver and gold. Traders who followed silver had clear warning of how gold would behave once the peak was established.
In 2012 the silver price leadership advantage was reduced. The retreat in silver after it reached a 2012 price peak in September was mirrored by gold in October 2012. While silver still provided a leading indication of gold price behavior, the lead time was reduced.
(Read more: Is silver back in the bull market?)
In 2013 the sliver price lead has narrowed to days from weeks or months. There is now a closer relationship between the price behavior in silver and gold. However, a lead of several days is still enough to give gold traders an advantage. They can monitor developments in the sliver price and watch for a confirmation of the behavior in gold.
The collapse of the Indian rupee is rapid and the danger lies in the potential to act as trigger for a new regional currency crisis in emerging markets.
From a chartist perspective, the collapse is so rapid that it may be difficult to apply accurate technical analysis. The reasons are that patterns applied to long-term currency charts are less robust because the foreign exchange markets, more than other asset classes, is subject to direct political interference, be it central bank policy, QE3 or tapering. This means that longer term application of technical analysis patterns must be applied with caution.
(Read more: Why the rupee may not be headed to 70)
Having said that, here are the some broad implications of how the recent rupee moves suggest about direction going forward.
The events in Egypt have pushed oil towards new highs but this remains a rally rather than a new uptrend. Nymex crude has been unable to breakout above the upper level of long term resistance near $109.
The fear in oil markets is that the current price activity is part of a new long-term uptrend that may see oil reach highs of $120 or $130. The chart suggests these fears are unfounded because oil trades in well-defined trading bands. The breakout above resistance near $98 had a target projection near $109. Despite the ongoing unrest in Egypt, oil has been unable to breakout above the $109 resistance level.
(Read more: Egypt risk premium built-in, limiting oil's gain)
The weekly Nymex chart shows four levels of support and resistance.
The Governor of the Reserve Bank of Australia has done a hatchet job on talking down the Australian dollar towards a preferred target of $0.87.
Glenn Stevens signaled last week that the currency had more room to fall by flagging dovish view of RBA's monetary policy, citing Australia's weak economic growth and subdued inflation.
The comments exaggerated a sell-off in the currency which has fallen around 14 percent against the dollar this year, alongside a broad sell-off in commodities and on fears of a slowdown in China, Australia's biggest trading partner.
(Read more: Australia cuts rates to record low of 2.5%)
The Australian dollar may have rebounded slightly on Tuesday to trade near a 3-year low of $0.89, after the RBA offered no clear hints on further easing after a quarter point rate cut, but according to technical analysis, there is simply no reason to hold the currency.
The Aussie-U.S. dollar pair is simply, a carry trade that has collapsed.
The new market bogeyman in the oil markets is the flash crash. When we are short of catastrophe, we tend to summon up the potential for such a scenario and this has been applied to trading in Nymex oil.
A flash crash is when algorithms go bad. In previous times, it was often called a fat finger error where a much lower sell order was placed by accident and the market plummeted to meet the sell before rapidly returning to the previous trading level.
We developed 'snatch and grab' trading strategies around these so-called "kangaroo tails." Whilst it's comforting to think that algorithms do not make mistakes, it's useful to remember that programmers do make mistakes.
(Read more: Prince warns US shale could hurt Saudi economy)
In our July 7 column, we flagged a Stop and Reverse (SAR) trade opportunity with oil. It was predicated on the divergence in behavior between the Egyptian Stock Exchange and the developing Egyptian crisis. The "frightened" money flees, and the "confident" money stays. In Egypt it was staying, but foreigners were driving up the price of oil, a slow moving flash crash in reverse.
The trading strategy was to apply an SAR, or stop-and-reverse trade. This is a rally trade. It's not a trend trade. We expect this to be a short-term momentum pop, followed by a retreat back to under $100. It starts with trading from the long side with upward momentum.
Contrary to popular perception, the important number for dollar-yen is 102, and not 100, according to technical analysis. This is the most powerful support and resistance level on the long term-chart. It has acted as a support level in 1994, 2000, 2005; and as a resistance level in 2009. And as the currency pair flirts with the 100-level, the 102 mark is once again a decisive level for the dollar-yen.