In technical analysis, divergence is considered either positive or negative, both of which are signals of major shifts in the direction of the price. Negative divergence occurs when the price of the security makes a new high, but  the indicator fails to do the same and instead closes lower than the previous  high.

US 10 Year T-Notes and Euro Bund prices have generated negative divergences as they approached their previous high levels. Both government bond prices tested their intermediate term resistances with a negative divergence. For US govt bonds the critical level stands at 132 while for the German govt bond it is at 139 levels. Both prices could fall back to test their 200 day moving averages resulting in higher yields in both economies. Though determining a divergence doesn’t rule out the continuation of the uptrend and is not conclusive of a reversal in trend direction rather it is an early warning signal suggesting weakness (inability to break higher) at the strong resistance area. For the US 10 Year T-Notes the 200 day moving average stands at 127.8 levels and for the Euro Bund it is at 133 levels.

It is true that Europe has debt problem, it is true that most of the major economies in Europe still have very high yields and it is true that Euro has weakened against major currencies. From all aspects Europe is the weakest link.

The daily chart of Euro Stoxx 50 suggests positive technical action at least in the short-term. Stoxx 50 has possibly completed a cup with handle formation with a flat resistance at 2,380 levels. Strong resistance was breached yesterday and today so far price managed to stabilize above this level. Resistance becomes support. Now that the index is above its 200 day moving average (bullish) and breached above 2,380 levels, we will watch Stoxx 50 with a bullish bias and expect it to find support between 2,350 and 2,380 during any pullback. If the index has completed a cup with handle formation (confirmation should come with price moving upwards without falling below 2,350-2,380 area) then we should expect higher prices towards 2,500 levels in the next few weeks.

This could be a bullish breakout and help European equities to recover in the short-term.

While analyzing charts I try not to look for any reasoning behind the chart pattern and demand & supply relationship. I trust that the market knows what it is doing and the underlying reasoning so I follow the technical signals on the price chart. Light Crude Oil is another chart that I analyzed with the same discipline but closely in the past 5 years because of my presence in the middle east. Now I’m hoping that the bullish outlook for crude oil is due to global growth prospects and not any political tension. But again I’m leaving the reasoning aside and trying to understand what the chart is telling me. So far Light Crude Oil had perfect technical set-ups, first forming a double bottom reversal pattern between August and October then a “possible” inverted head and shoulder pattern. Inverted H&S pattern should be called complex head and shoulder because the head is actually a double bottom.

After all the technical jargon above let’s summarize this chart; 200 day moving average acted as a strong support at $93 levels in December. Any pullback should find support above $93 to continue the positive technical outlook. Strong support = $93. If this is an inverted H&S pattern, then we should expect a breakout above the neckline at $103.50 levels. A breakout above $103.50 will confirm the inverted H&S pattern and will target $115-$120 area. Strong resistance = $103.50. So far it has been a strong market for the energy sector and the bullish outlook remains intact.

U.S. dollar gained strength against major currencies in the last quarter of 2011. Will the strong performance of U.S. dollar continue in 2012? USD/CAD chart warns of a possible breakout in the beginning of 2012. 3 month-long symmetrical triangle shows consolidation of the currency pair but suggests a breakout is imminent. Given that the trend prior to the symmetrical triangle was upwards we can expect another strong trend on the upside. However, it is always better to wait for a confirmation. 1.04 levels is the strong resistance for the currency pair. If USD/CAD breaks above 1.04 level we should expect continued strength for the U.S. dollar. 1.003 level is the 200 day moving average and should act as strong intermediate/long-term support. A break below 1.003 level should reverse the bullish outlook for U.S. dollar and set the stage for further weakness in U.S. dollar.

While U.S. markets are showing relative strength versus Emerging Markets and Euro Zone, we are seeing different performances between the euro zone economies. Back door QE by the European Central Bank helped Spain and France but Portugal, Italy and Greece 10 Year Govt. yields are still at elevated levels. Germany having the best technical outlook is followed by France. With Spanish yields falling from 6.8 levels to 5.2 levels changed the its outlook to neutral but 5 level is an important support for Spain 10 year yields. Greece, Italy and Portugal are still showing weakness. Greece should move below 32, Italy below 6.5 and Portugal below 12 levels to reduce the pressure on the Euro Zone. Looks like so far ECB move had limited impact on the Euro Zone yields.