On Friday 2nd and Monday 5th August, ESU3 hit successive life time highs at 1705 ( a tweezer top in candlestick terminology) which was also the peak of a small head & shoulders pattern that formed between mid July to mid August (neckline from 1670 to 1677 with the neckline break on 15th August occurring in heavy volume). The subsequent MOVE LOWER then stalled in the final 3 days of August with the market finding support in those 3 consecutive sessions around 1625, which led to a technical bounce back to 1664 last Fri, a level which is 50% retracement of the 1705 to 1625 sell off, and explained by a fundamental relief rally owing to the lack of consensus for an immediate strike on Syria.
PROGNOSIS:
El Bandito now believes the DOWNTREND is set to resume with the following fundamental factors in focus:
a) Despite the delay and uncertainty of military strikes on Syria, WTI October crude closed above 110 for the 1st time in 3 months and is forming a potential flag pattern targeting 120
b) Rising Bond yields are yet to impact the economy and while equity bulls are hoping there will be portfolio allocation into stocks as a result, note TICS data shows foreign investors are also liquidating
c) Beginning of the end of the Fed's QE programme is nigh with Sept 18th FOMC announcement and while market has had time to digest this, it should still cause indigestion
d) EM markets remain vulnerable despite some recent signs of stablisation
CONCLUSION and STRATEGY:
The recent low at 1625 which is the bottom of the consolidation range marks the point of vulnerability which opens the way for an eventual target of 1587 (1705 high to the upper end of consolidation range at 1667 = 38pts, is the targeted move again on a potential break at 1625 (minus 38pts) = 1587
Therefore, either on an outright basis:
1) SELL ESU3 at 1655, STOP at 1672 with initial target of 1625 and then 1587
or
2) BUY the ESU3 expiry (Fri 20th Sept so after the 18th Sept FOMC) Put Butterfly with strikes at 1625/1590/1555 for cost of 3.2 pts ($50 per point per contract) for risk reward of 10:1 with maximum profit earned of 35pts on an expiry at 1590
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