DOW JONES INDUSTRIAL AVERAGE

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New year started with  strong equity market performance especially for the U.S. indices. Gap openings in most of the indices were followed by consolidations. Gaps were filled in the past one week and the indices tested their support levels. It is clear from the charts that last one week’s contracting ranges accumulated some energy that will be released in the next few days. I’m not sure how long would the sideways movement continue but it will be explosive in the direction of the breakout. On the Dow Jones Industrial Average we might be forming a flag or pennant formation that could be followed by an upside breakout. This needs to be confirmed by market action.

Hourly chart of the Dow Jones Industrial Average shows the consolidation in detail. We should expect a breakout!

MSCI ACWI & MSCI EM (WORLD & EMERGING MARKETS)

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It is always easier to call for a market action after it takes place. This is called hindsight bias. Technical analysts look at several charts per day/week, go through different markets, time frames and analyze vast amount of data. While looking back at a chart pattern it can appear so predictable that we often ask ourselves how we missed that move. However, the toughest application of technical analysis comes into play when dealing with these patterns in real-time and actively managing your risk as the patterns unfold.

I have been following the two major MSCI indices, MSCI All Countries World Index and MSCI Emerging Markets Index for some time. In my previous post in November I analyzed these two charts with the same template and since then the markets have moved sideways and there has been no change in the technical outlook.

(http://techcharts.wordpress.com/2011/11/07/msci-acwi-msci-em-2/)

2012 started with volatile price movements in most of the markets. Two indices above might be forming 2 year-long H&S top formations and in these H&S tops we might be in the process of completing the right shoulders. This would be extremely bearish for the equity markets. Confirmation of this bearish scenario would need a major breakdown below 850 levels on the MSCI EM and 265 levels on the MSCI ACWI.

When a H&S pattern fails it is usually followed by a major counter trend. H&S pattern fails when the price exceeds the highest level of the right shoulder. In this case 200 day moving averages will play a major role in deciding if 2012 will be a good or bad year for the world equity markets. We all know that both indices are below their 200 day moving averages and this has been the case since August 2011. If we were to reverse this trend by breaking above the 200 day moving averages this would also fail the 2 year-long H&S top formations and would be a bullish signal for 2012.

Then it boils down to 2 critical technical levels which are not far from today’s closes; 200 day moving averages as major resistance (310-320 area for MSCI ACWI) and (1000-1050 area for MSCI EM), necklines of the H&S patterns as major support (265 for MSCI ACWI) and (850 for MSCI EM)

 

U.S. DOLLAR INDEX

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Strength in U.S. dollar continued this week with the dollar index moving away from 80 levels, an important technical support level. Bullish outlook remains intact with the index possibly breaking out of a 2 year-long inverted H&S pattern (neckline: 80 levels). In the past, bullish/bearish crossovers of the long-term moving averages worked well and to support the recent bullish outlook it is worth mentioning the 100-200 day moving average crossover that occurred in September 2011. This signal hasn’t been reversed since then and it suggests further strengthening of the U.S. dollar against major currencies.

Price will now challenge the minor resistance at 81.60 levels. Unless the dollar index falls below 80 levels in the following months we will continue to follow the greenback with a clear bullish bias.

US 10 YEAR T-NOTE & EURO BUND

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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.

INTEL & MICROSOFT

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If someone wants to start learning technical analysis, the first chapter should be chart patterns and the first chart pattern should be symmetrical triangles. Just seeing how the price bounces from one trend line to another would be enough to be amazed by the strength of this discipline. Imagine two converging trend lines and price consistently remains between the boundaries until a thrust occurs.

In this post I’m sharing an update on INTEL and MICROSOFT which I have analyzed in November(http://techcharts.wordpress.com/2011/11/10/intel-microsoft/).

Perfect symmetrical triangles are close to completion or already completed. Intel broke out of the triangle in October and Microsoft might be breaking out from its 2 year-long consolidation this week. Both stocks are giving bullish signals with Intel having a price target of 38 and Microsoft; 35.

EURO STOXX 50

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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.

GOLDMAN SACHS COMMODITY INDEX

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If price is above the 200 day moving average and the RSI is above 50, then it is better to have a bullish bias while analyzing a chart. 200 day moving average is the industry standard. Which ever method you use to calculate, simple, weighted or exponential it is a road map for me. With the help of the energy sector GSCI pushed back above its 200 day moving average. After its resilience around its long-term moving average I have adjusted my 3 year-long trend channel’s lower boundary and found out that October and December lows actually found support at the lower boundary of the trend channel. And with the price pushing back above the 200 day moving average all i can say for now is that the 3 year-long uptrend is still intact.

In the short-term we have resistance at 680 levels. A break above 680 levels will be the first “higher high” since April 2011 (on the weekly scale). So this should be regarded as a bullish signal. Lower boundary of the trend channel is strong support at 630 levels. Knowing that the lower boundary worked as a strong support in October and December, a violation of this technical level will change the positive technical outlook and will be an important negative signal.

 

LIGHT CRUDE OIL

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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.

DAX INDEX

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Though it hasn’t been a great year for equities and especially for European equities can 2012 start with a positive performance for Europe? In the past two months DAX formed a consolidation range (symmetrical triangle) below its 200-day moving average. We are likely to see  a breakout from the short/intermediate term consolidation range in the beginning of 2012. A breakout on the upside should be positive for DAX and would possibly challenge the 200 day moving average at 6,220 levels. Upper boundary of the consolidation range is at 6,000 and the lower boundary is at 5,750. Breakout in both direction should result in multi-month trend period for the index.

USD/CAD

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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.