One approach to this difficult issue is to look to price charts for guidance on how serious the sell off is. Are we just involved in something that looks like a correction of the recent rally or have we begun a major selloff?

Some of the major index charts may provide a useful guide

Let me say from the outset that I am not making the case that charts can predict what will happen in Greece.  What they can help with though, is providing some insight into how the market is assessing things.

The first chart below is a Monthly of the US SPX 500. This is perhaps the main benchmark for traded indexes around the world.

One of the useful features of Elliot wave analysis is that major moves often take the form of 5 swings.  At the end of the 5th swing we often get a major correction of the whole 5 swings.

I’ve labelled the whole advance since March 2009 as potential 5 swing move. One very controversial aspect of this labelling is that the swing down from 4 moved below the peak at “1″. This does not accord with standard Elliot analysis but as regular readers are aware, I consider allowing some tolerance in this rule to be effective as long as the low at 4 holds a zone of support below 1.

So the question now becomes has the final 5th swing higher ended? If so we may be in for a major move lower.

The clue to this may be if price overlaps through or moves under the peak at “3″.  This would be a potential sign of weakness suggesting a major move lower.

I’ve drawn two potential support lines under 3. One is at around 1290. The other more conservative one is at around 1260.

Using this analysis, a move below 1260 could be a clue that the market is taking a seriously negative approach to the European situation and swing a long term trader’s stance around to selling rallies rather than buying dips.

US SPX 500 – Monthly. Source: CMC Tracker

Until we overlap conclusively below “3″ there is still a prospect that the current decline is a short term correction and that  the 5th swing higher has not yet finished.

Looking at the daily chart below, we may actually be in the process of completing an ABC correction of the recent swing up from “2″ to “3″.  As shown on the chart we have arrived at the first of a number of Fibonacci clusters that may prove to be a Gartley or ABC buy set up looking for the end of the current correction.

Interestingly both the German 30 and UK 100 index CFDs have similar potential set ups.

US SPX – Daily. Source CMC Tracker

In all cases, the momentum of the higher time frame weekly charts as indicated by the fast stochastic make the first of these clusters a bit uncertain. However, they bear watching. If we did happen to get a strong rally tonight (Australian time), there could be buy set ups tomorow morning using this strategy.

If this happens I’ll post an outline of the set ups tomorrow.

Cheers

Ric

The charts below outline one approach to profit objectives and an initial stop loss level

Australia 200 Index CFD – Source: CMC Tracker

Assuming an entry trigger around 0.5% below the 200 day moving average (green line) an entry strategy would have been to sell to open at about 4190. A more conservative approach would be to wait and sell on the first close below the moving average.

The stop is placed behind the dashed resistance line.  This provides some scope for a retest rally but assumes a move above the dashed line indicates likely failure of the downtrend.

The first target is placed at the blue support line which is the bottom of the trend channel that has been in place since last October. One approach is to buy half the position to take a partial profit at that level. Depending on when price was to hit that support, this target would be at about 3980.

The weekly chart below shows a zoomed out view. The 2nd target is based on a Fibonacci cluster at around 3580. This cluster consists of a 78.6% retracement of the move up from the GFC low. It also projects that the move down from the top of the blue channel will be 127% of the height of the channel.

Australia 200 CFD Weekly – Source: CMC Tracker

If a downtrend does develop from here there may be opportunities to move the stop loss down behind new failure points in the trend

Cheers

Ric

Optimism around a European solution no doubt accounts for some of the rally. European bond market moves also suggest that some investors have sold out of southern nations like Italy, Portugal and Spain and re-invested in the “strong man” of Europe – the German 10 year bond is trading near record lows at 1.45%. The persistent strength of the Euro (up until last week) also suggests that few investors deserted Europe altogether.

If Greece leaves the Euro, Germany cannot escape the effects.  Investors who rotated out of southern Europe into northern Europe may sell out of Europe altogether. Even the possibility of Greece failing has investors considering their positions.

Although the German 30 index (which tracks the DAX) fell 820 points (11.4%) over the last 7 weeks, this chart from the CMC Tracker platform illustrates the potential for further, massive falls:

German 30, Daily 

The breach of key support and resistance around 6,434 coincides with a deteriorating investment market outlook. I’m also seeing weakness in other key indicators – notably copper and the US SP500 (you can read about it here http://blog.cmcmarkets.com.au/2012/05/16/copper-tells-the-tale/ )

At these levels, the German 30 dividend yield is around 3.5% – quite supportive in an interest rate environment anchored at 1%. However, the Price/Earnings multiple is 14 x – a big ask in an economy where annual growth is running at 1.7% (GDP yesterday, annual to end of March) and could contract over the next 12 months.

Followers of Ric Spooner’s work were alerted to this possibility, based on an Elliot Wave pattern formation, on April 24 – http://blog.cmcmarkets.com.au/2012/04/24/european-asian-and-australian-indices-comparisons-and-set-ups/

So how far could the German 30 fall? Here are the Fibonacci retracement levels:

German 30 - Retracement Levels

The 61.8% retracement level at 5,809 is in line with the support levels from October, November and December last year. This makes it my target. While I’m happy to be short here, some traders may wait for a breach of the 38.2% retracement level at 6,332.

Because this a large potential move, I’m treating this as a “swing trade”, giving it plenty of room to swing lower. I’m looking at the following trade:

SELL German 30 Index at market open anywhere below 6,434.

Target 5,850, stop loss at 6,475.

Most readers of this blog know that copper is a key industrial input. The price of copper is often a good reflection of sentiment around industrial production. Despite supply disruptions due to weather events and industrial action in South America, copper has tumbled. The direction of copper from current levels is likely to remain a key lead indicator – and the price is approaching a support level – illustrated here:

Copper Weekly

The action as copper approaches $3.44 an ounce could act as a lead for all risk assets – currencies like the AUD, NZD and CAD, share markets, and industrial commodities like oil. If copper bounces, the positive moves will likely be reflected in all markets.

If, however, copper plunges through this level, it could be pointing to further falls in markets. Given the recent history of the European crisis, and the political shifts underway, this is a real possibility. A break of $3.44 may signal moves towards $3.21, and possibly $3.00 – 15% below current levels.

This scenario is also supported by the US SP500 chart:

 The break back below the multiple support/resistance levels between 1345 and 1375 is suggesting falls to come. If the US share markets are falling, despite good economic data, global markets will be under pressure.

I’ll be watching copper very closely over the next few sessions. The evidence so far makes me think that continuing trading risk currencies and shares from the short side is the best strategy for the near term.

I have included the 200 day moving average on this chart for a sense of scale primarily but interestingly as it sits at the moment the average is quite a neat illustration of the profit target. The standard method of measuring the target for this type of pattern is to simply measure its height and then extrapolate that out from the breakout point.

By my measure I would suggest the height of the pattern is roughly 610 points which makes for an initial profit target of 12,100. As I mentioned, the 200 day MA is in this region too so you will want to be aware of it as a potential support level if price gets that far. In line with my post on Friday I think that a stop level of about 13,080 is appropriate.

As the trade progresses I will update you with any changes to the strategy.

DL.

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The daily chart managed to bounce off the bottom of an established trend channel on Wednesday. However, the longer term chart and the positioning of the US 30 (see Dave Land’s Friday post) favour a sell set up in this chart.

One typical approach to strategy would be to sell if price breaks below the channel support on the daily chart.

Shorter term charts may also give a set up for an earlier entry depending on how things pan out at the beginning of the week.

I’ve begun this post with a look at the weekly chart. A gently sloping uptrend channel has formed since the October low. This is leaning against the direction of the sharp decline from April 2011 which creates a bias in favour of this uptrend being a corrective rally.

The other interesting feature of this chart is the fast stochastic in the box below the chart. This is heading sharply lower after having broken out of the overbought zone above 80.

The strong downward momentum in the weekly stochastic creates a bias in favour of taking sell set ups in the shorter time frame charts and being cautious about buying at this stage.

Turning attention to the daily chart below,  you can see that Wednesday’s low represented a rejection of the now well established support line from the November lows (dashed black line)

The significance of this line is increased by the 200 day moving average (green line) at about the same level.

Given the momentum of the weekly chart, one thing to watch for may be a failure of the rally off last Wednesday’s low followed by a break below the trend line support and the 200 day moving average. This would set up for a decline to test the larger trend channel support (blue line) and potentially beyond.

It’s not hard to imagine this sort of set up coinciding with a break out of the rectangle formation on the US 30 that Dave Land discussed on Friday.

Australia 200 – Daily. Source CMC Tracker

The shorter term charts (60 and 30 minute) can also provide set ups for early entry in this type of situation. Here traders with the daily chart on their watch list as a potential trend break may identify a set up for a failure of the rally off Wednesday’s low in the shorter term chart. In the right circumstances this can be used to enter early in anticipation of a break below the major support.

Cheers

Ric

As you can see from the chart there is a clear resistance level at around 13,330 and a support level at around 12,720. These levels are key for the trader.

The typical way in which the trader will deal with this position is to wait for a confirmed breakout in either direction and trade long or short accordingly. I have to say that the biased to the short side due to the rectangle also including a ‘double-top’ formation which is bearish in its nature – though depending on how you trade them this is yet to be confirmed.

The first profit target is taken by measuring the height of the pattern (610 points) and then extrapolating that out from the breakout point. If the target is reached then the position can be closed or left open with a trailing stop loss – typically set based on new lower peaks forming in the price. In this case if it turns into a short trade I think an initial stop loss of about 13,080 points would be appropriate.

I have included the 200 day MA only for a sense of scale and to give you an idea as to where the market is trading relative to a long-term average.

The strategy involved selling when price rejected the triangle resistance line. This would have seen a sell entry around 1.3158.

The Euro has now broken below the triangle support which provides an opportunity to move the stop loss and take some risk off the table.

EUR: USD – Daily. Source CMC Tracker

After a breakout, price often re tests with a corrective rally.  This correction can move above the actual triangle support line back into a zone of resistance above that line. However a move right back up past this resistance would be an indication of a “head fake” or false break.

Applying this logic, this strategy now moves the stop loss down above the dashed resistance line. This has the added advantage of reducing the risk of holding the position but still looking for a significant pay off if the first and second profit objectives are achieved.

Cheers

Ric

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