Charting The Week Ahead: Triple Divergence In EURUSD, Fib Support Holds In S&P, And More

John Noyce is back with his bag of charty goodness in his latest "Charts that matter." While the whole presentation is provided for our readers' perusal, the three charts of note are those of the EURUSD (where we  observe a potentially bearish Triple Divergence), the DAX, which is an important leading indicator of risk, the USDJPY where following last week's fireworks, things appear to have stabilized somewhat, and naturally the S&P, where an important Fib support held, and with the 55 DMA resistance now turning to support. Of course, none of these charts actually matter - the only thing the world cares about is whether all engines are go for Bernanke to spread his Wealth EffectTM some more.

First, the EURUSD:

Per Noyce:

A good place to start seems to be EURUSD, which at the time of writing stands within approximately 1% of an incredibly important pivot region which is centred on 1.4283-1.4371

The importance of this particular pivot point has been highlighted and discussed in a number of updates over recent weeks, but as a reminder it’s formed by the converged interim high from November ’10, the downtrend from the July ‘08 high and the 76.4 retrace of the drop from the November ‘09 high to the June ‘10 low. It’s no exaggeration to say that it’s the most important pivot EURUSD has needed to deal with in many months.

What makes the 76.4 retrace of the November ‘09/June ‘10 drop at 1.4371 all the more important is that EURUSD peaked very slightly below a similar 76.4 retrace at the highs in November ‘09 (the 76.4 retrace of the drop from the July ‘08 high to the October ‘08 low came in at 1.5164 and the market peaked at 1.5145).

It’s difficult to construct a strong cross asset view on EURUSD at this point, but one way or the other, how price action develops around this point will be very important. The other notable point from the weekly chart is that oscillators (slow stochastics) are at the highest levels seen since the market peaked in November ‘11.

The cross asset story isn’t strong enough to actually establish Bearish-EURUSD as a Favourite Tactical Theme, but at first glace, in simple technical terms, it’s likely to be very difficult for the market to break this pivot on first test and at least a decent period of consolidation/correction below it would seem likely.

More on this important chart, which appears limited at least for now by the November 10 1.4283 high, and where we could be seeing a Triple Divergence.

Nothing concrete as yet, but triple negative daily divergence is attempting to form against the recent marginal new highs

Negative divergence develops where the spot market posts a series of marginally higher highs for the trend, but each of those extremes is accompanied by a lower high on the same tenor of oscillator.

Triple divergence is “by definition” quite difficult to form and as a result relatively uncommon. When it does develop it’s therefore taken as a significant warning that the trend in a certain market has reached a point of exhaustion and has become more susceptible to correction.

Interestingly in the case of EURUSD, although it wasn’t perfectly formed, the near equivalent bullish divergence formed against the 10th January low at 1.2860.

Overall, with the market sat just below such a major pivot (as discussed on slide 1) and this type of divergence attempting to develop we should definitely be very aware of the risks of a larger downside correction developing.

A quick look across the ocean, where the DAX is probably the best leading indicator of US risk appetite.

Lead asset markets such as the Dax have stabilised - Last week’s low at 6,484 was only 34 points above the 55-wma which stood at 6,450

Given the Dax was one of the first markets to give clear warning signs that the risks of a sizeable downside correction were increasing 3/4 weeks ago, the hold of this significant pivot/target/support region (the interim highs of the consolidation from April to August ‘10 were converged just below the 55-wma; 6,387-6,330) seems quite significant.

In Europe, where central market planning is not as rampant as in the US, key support lines seem to have a more pronounced impact.

As a reminder the 55-wma has been an important pivot for many years - This seems to increase the significance of the market’s stabilisation just above this pivot

The other point on a broader note which seems to increase the importance of the Dax as an indicator is that it’s not been at the centre of recent market moves and is viewed as being tightly linked to the broader global economy. Simply put it could therefore be viewed as “removing some of the noise” and being a cleaner representation of the underlying global backdrop.

Next, and probably least important of all, is the chart of the policy instrument known as the S&P.

The equity bounce has been correlated to growth currency stabilisation - The “old world” positive correlation between EURAUD and the VIX has also returned over recent weeks

Following the spike from earlier this month which coincided with a rise in implied volatility EURAUD has corrected nearly as sharply lower.

Now for the first time since the correction began the market is approaching a decent support point with the 200-dma and interim high from 28th January being converged on 1.3896-1.3878.

This is therefore a good time to watch for any signs of the market basing. However, given that the positive correlation to implied vol. has resumed and that equity markets may well have materially stabilised, watching for any signs of stabilisation rather than jumping back into bullish-EURAUD themes seems the best way forward at this stage.

Naturally, a glance at the USDJPY following last week's fireworks is in order.

You can make an argument that downside targets have been hit

Late in last Wednesday’s session USDJPY dropped through the historic low from April ‘95 at 79.78. The exact low traded is difficult to confirm, but according to the Reuters/EBS data on our system it was set at 76.25.

As detailed in the update sent around the time of the move last week entitled Quick JPY Charts, you could argue that the spike took the market as far as it needed to go as two targets could be calculated within at 77.75-77.56 range:

–77.75 – The drop from the August ‘98 high to the November ‘99 low was 46.39 big figures. If you extrapolate out a similar size drop from the June ‘07 high at 124.14 you arrive at a target of 77.75.

-77.56 – If you calculate the classic extension target of the triangle like consolidation (shown on the following slide) which began forming from the 1st November ‘10 low it came in at 77.56

Although the market did move beyond this target region to an intraday low of 76.25, you could argue that the final part of the move was under extreme conditions with exceptionally poor liquidity given the time of day at which it took place.

Therefore given the market has, at least for now, stabilised back above that point it’s certainly an important time to begin watching for signs of a base developing

This region was where the prior all time low from April ’95 and the interim low from November ‘10 were converged

In classic technical terms the breakdown point (i.e. the old support level) becomes resistance once the market moves below it, hence it seems quite significant that the market has been able to immediately push back above this point on a close basis.

Overall, while we need to see more evidence to confirm this, initial signs are that we could have quite a significant low in place on USDJPY.

In summary, Noyce believes it is an "ok story for risk assets" - we would therefore be cautious.

Complete deck

Noyce 3.26