Wojciech Smolenski's  Instablog

With the recent rally in Copper prices an interesting technical situation is forming on the longer term charts. In case of failure to break through January highs the futures market will be poised for a sharp correction. The consolidation pattern can be interpreted as a flag formation or perhaps a rectangle / triple top. A probable is scenario is an attempt to break higher followed by a retreat. This retreat might be just a shallow correction where the market would resume the rally. Considering the uptrend is still dominant this has to be treated as a base scenario. There is however considerable risk of a breakout failure pattern occurring. If you are looking for comparisons see how the market behaved in September (shallow correction followed by a rally) and in November (break out and then sharp retreat). This should be helpful in planning the trades. Final note: the wave count suggests a possible important intermediate top forming.




Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Similarly to some other crosses the Aussie has been consolidating under par to the US Dollar. The end of the year rally ultimately failed to take out the previous high. The subsequent sell off stalled at the 61,8% fibonacci retracement. The chart pattern suggests a substantial move is coming very soon. A break below 0,9810 would increase the risk of an extension toward 0,96-0,9620 (1:1 extension) level and perhaps even lower toward 0,9340 (1,618 extension). Recent sell off in metals, crude oil and gold is aussie negative and favors a break downwards. If you want to play this break using options I suggest buying 2 week 0,9735 puts for 35 pips.

The market is clearly over extended and overbought, which could mean a short term sharp correction similar to the one in November is due. However in medium term the resistance I am looking for is about 60 points above 1300. There are three important geometries clustered in that spot. First one is the 1:1 extension of the up wave that started in late August 2010 and ended in early November. Second geometry is the 2,618 extension of wave I that started in July 2010. Finally the third geometry is the 76,4% Fibonacci retracement of the bear market. They are all gathered around the 1360 level which is still almost 5% from current levels. Too early to short this market, except for some very short term plays perhaps if it fails to break the 1300 level again. Be on the lookout cause the volume is light, yields are much higher than in November and market is not pulling back at all. Correction will be sharp and aggressive.