Forex and S&P 500 outlook
Last week I warned that USD/JPY would hit strong resistance at 113.20/30. I wrote: ‘This resistance is where the longer-term 61.8% Fibonacci meets the 200-week moving average in severely overbought conditions, both on the daily and weekly charts.’
The pair reversed from this resistance as expected and, if you managed to jump into a short position, you could be looking at up to 250 pips profit as I write with a low at 110.65. The four-hour chart below demonstrates why we have been holding at this support level.
The two-month trendline is doing its job and, although the outlook remains negative in my opinion, a short-term bounce is always positive. Therefore it is worth profit-taking on any remaining shorts and waiting for the next signal. Because the medium-term outlook is negative and we are not severely oversold, a long position here would be risky. If however, looking for a quick scalp on the day, you decide to try a long, you need stops below 110.50 (so at least the pip risk is small) with a profit target of 111.20/30. The risk/reward ratio certainly works on this trade, even if I am concerned about the direction.
A break below 110.50, however, should confirm the bears remain in control as I expect eventually. A break below the 500-day moving average at 110.40/35 signals a test of strong support at 109.95/85. This is likely to hold on the first test as short traders take some profit while bulls see if they can regroup to attempt to resume the short-term bull trend which started in late March.
US dollar weakness
One reason why the pair has collapsed over the past week is not only the yen strength but clear US dollar weakness. The daily chart below shows how the US Dollar Index recovered in the second and third weeks of June to re-test the July high at 95.50 and the more important green 500-day moving average at 95.55.
Note how we also met the underside of the upward-sloping three-month trendline at exactly the same area. All this resistance was too much for the bulls and they lost control, as we had expected.
When you look at the weekly chart below there are further strong reasons for the dollar to reverse course. I pointed out the negative candles recently posted on this chart in recent blogs, as we hit important moving average resistance. So you will already be aware that the index was expected to turn, and turn it did.
The outlook remains negative of course. This is likely to be the start of a significant move to the downside over the rest of the summer. I do feel it is likely the bear trend which started 18 months ago has resumed.
The bears now need a break below the one-month trendline and short-term 61.8% support at 94.15/05 in the index to trigger the next leg lower. This could come today.
The next downside targets start with the July low at 93.80/70. Obviously a break below here is an added sell signal. This targets 93.40/35 then strong support at 92.80/70 for profit-taking while we wait for the next signal.
Targets for the S&P 500
The E-mini S&P 500 has rocketed over 150 points in a month, or just under 6%. The daily chart below shows how we hit and held the three-month upper trendline of the bulls’ channel. There’s a good chance therefore that we see some profit-taking into the end of the week and probably into next week.
The first major target on the downside is support at 2814/12. We should hold here for at least a small bounce. However, a break lower then targets a better buying opportunity at 2792/90.
Technical Analyst & Trader
The content of this article is the personal opinion of the author and not Intertrader. You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.