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Equity Market Update

Courtesy of Tyler Durden

Submitted by Nic Lenoir of ICAP

As always, we start with the Dax, a smaller market bt geometrically and technically a much better indicator or the market than the S&P. On the weekly chart we are still in a bearish scenario where we retraced 61.8% of the sell-off of 2008/2009, and we would now be entering anoher major bear move.



Breaking it down since the recent tops, after we reached the 5,389 target on the downside we had recommended trimming or cutting short in a rebound that we thought would take us to the 100-dma at 5,740/5,725. There we advised both tactically and medium term short positions again (See daily chart).



The question is now how to manage positions on the downside. We have reached the 61.8% retracement of the rally from 5,389 to 5,745 but divergence is relatively minimum in terms of momentum indicators. There are two possible alternate counts listed on the 180-minute chart (bearish) and 30-minute chart (bullish). The bearish case considers the rebound from 5,389 as a corrective motive (abc) rather than a bullish impulse, and since we failed breaking the 100-dma resistance which coincides with the 50% retracement of the sel-off since the highs the market should press on lower and go make new lows in short order. The bullish case pictures the rebound as an impulse and since we retraced 61.8% we should be on the cusp of another leg up taking us back to 5,740 (61.8%), or 5,890 (100% AND top of a what could be the second shoulder of a H&S on the tops, see weekly chart). Our medium term view is bearish, so we think that if you haven’t trimmed your shorts at 5,600 these levels could be a good point to do so, and move a trailing stop on a daily close above 5,670, which preserves a gain on the rest of the position. Should get back to 5,745 and 5,890 fresh short positions will be re-intiated there with great asymmetric risk profile.



Drawing on these conlusions, the S&P future has not broken the equivalent of 5,600 for the Dax which lies at 1,076. If you have shorts on from the target sell-zone at 1,100/1,107 we would recommend partial profit taking between 1,084 and 1,076, moving the trailing stop down to 1,095. We notice that we have a H&S pattern on the 180-minute chart on the recent lcal highs at 1,112, so that comforts a bit my overall bearish outlook. However recent experience for the 10Y treasury note futures and Bund futures where H&S patterns were brutally invalidated (also note the noise introduced by the roll) keeps us cautious.



Finally as side note, we had recommended selling AUDUSD at 0.9030 and the market rejected indeed the 50-dma. This trade is obviously in accordance with a bearish equity outlook. We now watch 0.8767 as the support that must be bypassed in order to confirm that further downside is on the way short-term.



Good luck trading,



Nic


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