Charts I’m Watching: Feb 20, 2013

As expected, equities have sold off since tagging the 1.618 Fib of the July 7 – Oct 4, 2011 sell off — dropping as low as 1522.19 this morning.  While it’s gratifying to see a reversal at a major Fib like this, it won’t mean much until SPX can make some new lows.  I’d be thrilled just to see the purple channel midline broken. I remain full short from 1530.50.

There’s great interest in the Fed minutes due out at 2 EST.  Will the new FOMC composition affect the language re QE?  How did they take last quarter’s GDP decline?

Housing starts and permits were released this morning.  Overall, starts fell 8.5% since December.  But, it was multifamily residential that was really responsible — declining 27% from Dec 2012 nationwide, an alarming 41% in the Northeast and 62% in the Midwest (versus 16% and 30% in last year’s Dec/Jan comparison.) The South and West regions rose modestly, as did permits.

The EURUSD has found support at the .886 (yellow pattern) of the Feb – July 2012 selloff.  The rally fizzled several weeks ago at 1.3710 — just above the Feb highs — after initially reversing at the .786, hinting at a Butterfly Pattern objective of 1.3877.  This is also the 2.618 of the white pattern and the .618 (1.3832) of the purple pattern (May 2011 to July 2012 decline.)

If the pair manages to hold the .886, it augers well for a move up to that target level.  The next white channel level to intersect 1.3832 is the midline around March 18-20.  The bottom of the white channel is currently around 1.3250.

The dollar, in the meantime, has retraced the losses sustained the past two days.  In the process, it reached the midline of the white channel since Feb – so, we’ll be on the lookout for resistance.

Remember, DX RSI broke out of a daily channel (red, below) on Monday and back-tested it yesterday. It also successfully back-tested the midline of the rising purple channel and is poking up above the yellow 75% line — so, the upside case is clear.

What, then, would a dollar break-out mean for stocks?

Quick aside: just read the FOMC minutes from stem to stern (available here) and there’s nothing of any importance that I can tell.  This is really no surprise, given that the last statement was virtually identical to the previous one.  Here’s the discussion of the statement:

The media is reporting “increased concern” about the level of QE and inflation, but there is very little change in the outlook and the hawks are still vastly outnumbered by the doves.  I suspect that as long as inflation stays under control, and the dollar remains in a trading range — meaning no new pressures or relief for importers/exporters — the FOMC will leave things pretty much as they are.

Getting back to the dollar and equities… It’s always interesting to compare the DX and SPX.

Stocks are a mirror image of the dollar through from 2010 through October 2011. At that point, however, they generally move in tandem — except that, as DX forms a pretty docile channel, SPX leaps out and forms a rather extended rising wedge.

DX has been locked in a trading range between the .382 and .618 of its decline into May 2011, while SPX has obviously blown through its May 2011 highs.

Since last September, the comparison is especially interesting. DX spent about 6 months bouncing between the .382 and .500 Fibs, while SPX retraced 127.2% of its 1474 to 1343 losses (actually more, but it looks like it’ll probably back test to the 1.272 today.)

Now, if DX starts to make a move, how will SPX react?  Will it react?  The dollar will need a serious push to get through current levels, since today’s equities weakness/dollar strength produced a Bat Pattern completion at the .886 — just as DX RSI also reached the next higher channel line.

While, SPX has broken channel support…

…even though prices reached a potentially important channel midline.

In the end, I suspect it all spells a breather for SPX’s downturn and DX’s strength – at least until the RSI’s are reset and each can take yet another stab at a real breakout/breakdown.

I’m holding with yesterday’s short-term forecast/scenario [the 2:45 update], but am open to revision if SPX can push strongly through the channel midline.  I should get a chance to post again tomorrow morning.




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