channels and patterns

Inflection Point

2012-02-10T06:10:00.000-08:00

As I mentioned yesterday the negative divergences have been building over the last few days and it appears that at the time of writing, equities are likely to gap down heavily on reports that the Greek deal is falling apart. I'm surprised by the Greek news I have to say, I was expecting it to last at least a week or two after being finalised, though against that, the deal is so obviously against the best interests of Greece, and has so much resistance to it there, that perhaps this is not such a surprising development after all.

Quite a few interesting charts this morning and I'll lead with a chart showing the daily bollinger bands on SPX, NDX and RUT. You can see how these indices have been walking the upper bollinger band upwards during this amazingly strong move, and if we are to see a retracement here, which seems likely, the obvious targets are the middle bollinger band in the 1320-5 area on SPX, with some strong support in the 1333 area, and rising channel support (marked) on NDX and RUT:

On the SPX 60min we are seeing a failure at the resistance trendline I was talking about yesterday and obvious trendline support is in the 1333 area (again) and the 1300 area, which looks like a long shot but is worth noting, as in the event that we have just finished a third wave up from the October low, wave 4 cannot cross below the top of wave 1 at 1292.66 SPX:

Across various markets I am seeing bearish signals here. On EURUSD the rising channel broke a few days ago, but EURUSD recovered back over it and held that briefly. After that broke again overnight EURUSD then tested breakout support at 1.3234 and that has now also broken. The obvious downside target is now strong support and the possible H&S neckline at 1.303:

On gold, which has been moving up with equities of late, the rising channel has broken, and it has now made a lower high, and at the time of writing is testing the last low. On a break below 1700 the obvious target is strong support in the 1650 area:

Copper futures look more ambiguous here. On the bull side copper finally closed over strong resistance at 390 yesterday and tested weaker resistance at 400. On the bear side copper is down this morning and if that holds today, that will be a marginally higher high on strongly negative daily RSI divergence. I have copper in a steep rising channel and if it breaks below that I would see strong support in the 376.5 area, and if that doesn't hold, a technical double-top will trigger with a target in the 353 area. I say a technical double-top as, while this qualifies as one, I like to see the two tops closer together than this for a better quality pattern in my view:

Two last charts to show today, and the first is Vix, where the big falling wedge broke up yesterday as Vix touched the middle bollinger band on the daily chart. If we see a move above that at the open today, and that obviously looks likely at the moment, I'd be looking for a touch of the upper bollinger band in the 21.5 area. Obviously the technical target for this falling wedge is 46.88 but I'd need to see considerably more evidence before taking that seriously. Vix isn't a tradeable instrument and both rising and falling wedges have a poor track record in my experience of meeting the full technical target:

The last chart today is the TLT chart. I've been posting the potential H&S forming on ZB and that finished forming yesterday, but I'd like to look at how that looks on TLT. The first thing to note is that there is also an H&S on TLT (not marked, target 107), and rising support for the summer move up has broken, and there is also potential double top in play that would retrace all of that move up. In the short term a shallow declining channel has formed from the last high.

The other thing to note about this chart though which is worth thinking about, is that you can see that while equities have recovered all of the losses from last year and most of the losses from the highs last year, bonds have not yet retraced much of the flight to safety trade gains made while equities were falling. Potentially that may mean that bonds will now give equities a strong bullish push by falling from here but there is another possibility worth considering.

Conventional wisdom holds that equities and bonds are like two sides of a cushion, and that while one falls the other will rise, and vice-versa. That hasn't been the case over the last few months however and there is another possibility to consider in the event of a greek default. Sovereign bonds used to be considered a risk-free return, but nowadays they are better described as a return-free risk, in that real terms yields are often negative (US, UK & others), and there is a significant risk of losing capital from default risk, or inflationary policies, and/or simply from a decline in bonds for these historically very high valuations. If the risk perception changes, and sovereign bonds particularly start being seen as a risk asset, then bond values might drop very hard, and equity valuations might trade sideways or even drop while that happened. Equities and bonds have not always been inversely correlated in the past, and as sovereign debt burdens grow ever higher, those sovereign debts become ever more risky. Thought for the day:

I'm expecting to see more weakness today, and my support levels to watch on SPX are double support in the 1333 area, the middle bollinger band in the 1320-5 area, and if that should fail, a possible test of the 1300 area, which shoud be extremely strong support if it is reached. Short term we might see a low established today with a bounce from there, and continuation down on Monday if Greece isn't 'saved' again over the weekend.

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Some Divergence Here

2012-02-09T05:04:00.000-08:00

Obviously calling tops has been a hopeless task during this big bull move, and on the bigger picture I'm not seeing much to suggest that we might see a really big reversal here. We don't have anything in the way of large bear patterns here really, on equities anyway, and the lack of decent big support trendlines on the major indices makes it particularly hard to tell when a big reversal might happen. There is also currently very little in the way of topping patterns, and we are between big resistance levels on SPX.

That said, though it might be hard to point to a recent example, nothing goes up in a straight line, and even in a big bull move you will see some substantial dips. It might be another mirage of course but we are once again in an area where we might see such a dip. Let's consider the evidence.

I posted the Transports index chart yesterday and observed that the rising support trendline from the October low was being tested, and that a break below it would be a sign of weakness. Well it has broken, and that is most definitely a sign of weakness:

I posted the NYMO chart on Tuesday showing negative divergence there on the daily chart. That divergence doesn't always deliver a reversal, and the last one failed to, but while it's there it is a significant signal for a potential reversal of whatever degree:

On SPX I've been complaining a lot about the lack of a powerful support trendline, and we'll need a decent retracement at some stage to establish one. What we do have however is a powerful resistance trendline and we've just hit that. Supporting a reversal at that trendline is negative divergence on the 60min RSI. This negative diverence is an excellent reversal signal in a weakly trending market, and often gets steamrollered in a strongly trending one, just as the last one in January was. For what that's worth though, we're showing 60min negative RSI divergence here:

What also looks interesting here is the huge falling wedge on Vix, and I've mentioned before that this pattern is running out of road. What I mean by that is that the support and trendlines will cross within three or four weeks, and in the longer term the trendlines are declining steeply. I would estimate roughly that the declining resistance trendline will hit zero in about ten weeks, and the support trendline will hit zero in slightly over five months. These are therefore not destined to be long term trendlines. In the short term Vix hit wedge resistance yesterday, and should now either break up or fall back towards the support trendline in the 15.5 area. If it breaks up then that would be a strong signal that we might see a decent retracement on equities here, and if we see that then the upper Vix daily bollinger band is just under 22 and that would be a reasonable target:

In the very short term I'm watching a rough rising channel on the ES 15min chart from Wednesday's low. Support is in the 1342.75 area now and a break below would suggest a move back into the 1330s, very possibly to test the support trendline marked in the 1335 area. If channel support holds then I have both shorter and longer term trendline resistance on ES in the 1355 area, and I'd be watching that level very carefully:

I've mentioned a couple of times that I think the longer term technical bull setup for USD in 2012 looks pretty good, after some more short term weakness, and I'm putting together a dedicated post to look at that. I'll try to get that out over the weekend. In the meantime I haven't posted any AUDUSD or CADUSD charts in a while, so I'll post those today to show the potential bear setups there. On CADUSD a very large potential H&S is forming, and I'd like to see CAD remain under 102 to avoid weakening that pattern. At the moment CAD is stalled below the 2011 double-top base and that is a strong natural resistance area:

On AUDUSD I'll show the 20 year monthly chart, as the current resistance trendline comes off the 2004 high. After the strong recovery there since October a double-top may well be forming. if AUDUSD makes a new high then long term resistance is not far above and a reversal there would still leave a valid double-top, subject obviously to a return to, and then break below, the 2011 low:

For today the main thing to watch in my view is that ES 15min chart. Since I capped the chart the support trendline has been touched again and is now a strong four touch support trendline. A break below should deliver a move back into the 1330s and I'd be watching the 1335 level then for a bounce. On a break to a new high that 1355 area is the level I'll be looking for the next short term reversal.

Bearskin Rugs

2012-02-08T04:57:00.000-08:00

I was joking on twitter yesterday morning that the short-term bearish setup I was looking at looked very tempting, even if people were having to climb over piles of bearskin rugs to get to the screens to see it. Needless to say there was a report early in the day that the Greek are very close to finalising their no-default default, and both EURUSD and ES broke up hard to trash that bearish setup. This market remains in a strong uptrend and JBTFD is still the order of the day.

It still looks early to think about a top on EURUSD and GBPUSD at the moment. I've been posting my big picture USD chart and the obvious target is a hit above 76.72 in mid to late February. I can't see any reason to doubt at the moment that we will see that level hit, and at that point we will see if that rising channel on USD can hold:

On GBPUSD, which broke to new short term highs with EURUSD yesterday, there is a potential double-bottom setup that looks bullish. GBPUSD is entering a strong resistance zone between 1.588 and 1.613 and we'll see whether it can break through that to test the October high. A higher high above that level would trigger a double-bottom setup with a target in the 1.71 area, and would seriously weaken the big H&S that is currently still in play:

I've been looking at a broad spectrum of charts this morning, and have updated my EEM chart where there is still a large potential H&S in play. The right shoulder might have some more time to form, but a move much higher will weaken the symmetry of this potential pattern. A move above 46 would weaken that considerably and a move above 48 would cause me to write this off. I'll be watching how this develops:

I was also looking at my long term TYX chart, which is also at an interesting and potentially very (equity) bearish stage here. The next obvious move within this amazing twenty seven year declining channel on 30yr Treasury yields is to channel support under 20 (2%), and the action in recent months looks like a mid-move bear flag. The negative divergence against SPX since early 2010 is very striking, and increasing still:

I've read in a couple of places that the Transports index is starting to break down here and I am seeing negative divergence to the extent that it is hitting rising support from the October low here. Until that trendline breaks however the uptrend there is still intact, and the conservative target for the ascending triangle that broke up in December is still a good 5% above the current level:

Oil spiked up yesterday and I'm starting to doubt whether it can reach the possible double-top neckline in the 92.9 area. There is a well defined declining resistance trendline just over 100 and if it breaks up through that I'll be inclined to write off the lower target. Short term the H&S target has been made on the downside and the double-bottom target from the recent lows is in the 100.6 area, very close to that declining resistance trendline which I am therefore expecting to be hit:

Short term the trendline setup from the ES low last week looks confused, though I would add to that the observations that short term resistance looks well defined, with more significant resistance in the 1353-5 area that you can see on the second chart in yesterday's post. In the event that we see some weakness today I'd be wondering about a hit of rising support from that low in the 1330 area, which would deliver a better defined rising support trendline for the current move up:

In summary I'll echo Trader1 who would rightly say that the current uptrend is both strong and intact, and that any dips should be bought until that changes. Shorting this runaway bull train still looks very dangerous, and as we saw yesterday, even very nice short term bear setups are still being quickly steamrollered here. This strong uptrend on equities is now being supported by a strong downtrend on USD and as I showed above, there's little reason to think that downtrend on USD will stop at the current level.

One thing we have been seeing a lot so far this year is lows made in the first hour of the trading day followed by a strong uptrend for the remainder of the day. Until that ends any candidate lows in the first hour will look like a buying opportunity.

Trendline Festival

2012-02-07T04:47:00.000-08:00

The longer term trendlines from October and November are looking a little thin here, as I've mentioned before, but in the shorter term there is no shortage whatever of decent trendlines, and looking at those this morning I think everyone is likely to get a surprise, as there seems to be a powerful consensus that we are going to see new highs today, and my charts are suggesting a move down instead. You be the judge, but I'll show you what I'm looking at.

Short term the move up since last week's low on ES has formed a very nice looking rising wedge cum channel, which I posted yesterday. I suggested yesterday morning that this looked likely to retest the high in the 1342 area before hitting the support trendline and I was very pleased to see that play out exactly as I predicted, albeit in slow motion. The next upside target is in the 1353.50 area at the moment, but I have marked in the potential double-top that is now in play if rising support breaks here:

If we widen the view on ES to a three month view, then you can also see that short term trendline resistance on ES intersects today with resistance for the channel starting just after the Dec 19th low. That is therefore a very powerful resistance level and I'd be seeing that level as a very attractive shorting opportunity if we reach it today. Worth noting on the way however is a resistance trendline coming off the November high and that is in the 1345.50 area:

So far, so bullish, with the caveat that ES and NQ have formed potential short term double-tops on negative 60min RSI divergence. Looking at the EURUSD and GBPUSD situation however, the situation starts to look considerably more bearish.

I noted yesterday that both EURUSD and GBPUSD had topped out short term and had broken their respective rising channels. Yesterday there was a strong bounce on both, and that bounce topped out at perfect kiss goodbye retests on their respective broken rising channels. That looks bearish, though since then they have both traded sideways, in what might be a prelude to breaking up instead. here's how that looks on EURUSD:

Here's how that looks on GBPUSD:

Now that is a pretty decent bull setup on ES, and a very decent short setup on EUR and GBP. Only one would be likely to play out, as while the greater trends on equities vs USD can diverge widely, there still tends to be a significant inverse correlation on an intraday basis, that is a positive correlation between EURUSD and ES in particular. I would expect one of these setups to fail, and it ES that has broken rising support since I capped that chart, which is an interesting and unexpected development.

This is particularly interesting as ES appears to be in the final subwave of this move up from the December low, so this might actually be a significant interim top. Short term the double-top neckline is at 1330.25 ES and the double-top target on a break below 1330 is in the 1318 ES area. It's worth noting that I have six week rising channel support now in the 1314 area and that trendline would be the likely target.

What do we have to suggest that we might be making a significant top here? Well I capped two charts yesterday that look interesting in this respect. The first is the Vix chart, where the support trendline of the huge falling wedge from October was hit again on Friday. I mentioned yesterday morning that ES and Vix often moved up together after a support hit and that's what we saw yesterday. I capped the chart however as there are two other points worth making about the chart.

The first point is that the falling wedge is running out of road, and even a fairly modest bounce will break the wedge. The second point is that when the last Vix Sell (equities) signal triggered two weeks ago, I mentioned that I had seen these trigger in the past just before before a last move up, and that something similar had happened last April. Have a look at the chart below, as that makes an interesting comparison with today:

The second chart I capped yesterday night was the NYMO chart, and there is clear negative divergence there. That doesn't always mark a top, and the last time this happened in early January, was negated shortly afterwards. More often than not however, divergence like this tends to mark significant highs or lows as you can see from the chart:

I'm expecting to see more downside on ES (and EURUSD/GBPUSD) today. First support is in the 1330 area and if broken, the next target is the 1318 area and the channel trendline slightly below at 1314. Looking at the charts above, there is at least a possibility that we are seeing a major interim top being made here. I'm not calling that top, but it is a possibility to bear in mind, and I am saying that we may be in the topping process for a significant interim top now. If we see a move on ES under 1330 with any confidence then it will then be very likely in my view that we are into the topping process.

The rest of the week might get very interesting :-)

Bullish Break

2012-02-06T05:53:00.000-08:00

SPX broke decisively above declining resistance on Friday, which has eliminated one of the last bearish options on the table from the low in October. There are two main options remaining. The first is that SPX makes a double-top at the 2011 high. That is a very strong resistance level as it was also the base for the 2007 double-top. The second, which would fit with a retest of broken rising support from March 2009, would be a higher high as the end of wave 5 from that 2009 low. As wave 3 cannot be the shortest wave, that would have to finish below 1434.44. Above 1434.44 the path is clear to a retest of the 2007 highs.

Obviously there may well be no bearish resolution here, and given how far this current wave up has come since the December 19th low, any reversal in the near future may just be a retracement of this current move before new highs. With NDX at 11 year highs, and Dow beating the 2011 high on Friday, this is certainly looking pretty bullish at the moment:

As the retracements on ES and SPX never hit my rising support trendlines last week I don't have any decent three touch trendlines from the October, November or December lows. FWIW that also looks bullish to my eye. Short term however is a different story as a decent rising wedge cum channel has formed from last week's lows on ES. There is a good chance that this will last throughout the current move up, and obviously it will make trading this move much easier if that's the case. I have channel resistance in the 1347-50 area today, and support in the 1330-3 area. The obvious next move is a touch of support but there's also a possible very short term IHS forming at the moment which is causing me to wonder about a test of Friday's highs before we see that:

On ZB we saw the big move down that I was wondering about on Friday morning, and that move doesn't look finished yet. On the bigger picture the large potential H&S I showed then is still very much in play and if that were to complete and play out, that would look very bullish for equities while that was happening:

The situation on EURUSD looks interesting and we have definitely seen a short term top with a lower high and lower low. As I was showing on Friday's USD chart though, there is a very decent technical case for more downside on USD and I am provisionally treating this as a retracement before a second and final move up. I've drawn in a potential bull flag channel that may well confine this if it is a B wave retracement:

The short term high on EURUSD has been confirmed by GBPUSD breaking the tight rising channel there from the lows. Again I have a working assumption that this will be a retracement before another move up and I have a potential larger rising channel that might be established on a retracement to the 1.56 to 1.565 area over the next few days:

The unexpected possible H&S on copper that I was looking at on Friday failed with a spike back into 390 area resistance. Copper isn't out of the woods short term though, as that has set up a possible short term double-top, If we see a move below 375 I'd be looking for a test of rising support in the 358-60 area. That would look attractive as an area to go long:

Gold is finally retracing towards rising channel support after making repeated new highs on negative RSI divergence last week. I would very much like to see that support trendline hit and confirmed, to set up a move to rising channel resistance in the 1780-1800 area:

Overall I'm leaning long here, though at some point fairly soon I'm expecting this move up from November to top out, and would expect to see a decent retracement (at least) at that point. On the bigger picture I think we've now reached the stage where a new bull market is more likely than not, though there are still some very bearish divergences that mean that this has been a strange start to a new cyclical bull market. Next major overhead resistance from my perspective is at the 2011 high in the 1370 SPX area, though I know that many are expecting to see an interim top in the 1350-60 SPX area for other reasons. Either way those targets are now close. The more bearish upside targets may be right, as Vix hit falling wedge support on Friday, and a short term high might therefore be close, though SPX and Vix often rise together for a day or two after Vix hits support and bounces there.

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US Dollar Weakness Examined

2012-02-03T06:10:00.000-08:00

I haven't much to add to my ES & SPX charts from yesterday here so I'm going to concentrate on other things today. Support is still at Monday's low and resistance is still at last Thursday's high so a break of either with any confidence should deliver the next significant move. I was asked yesterday whether in effect I was saying that a break higher should be followed by more upside, and that a break lower should be followed by more downside, and that is exactly what I'm saying here, and is a good description of any setup confined between strong support and resistance levels. Obviously we are a lot closer to resistance than support here at the moment.

I've been looking hard at related markets for directional clues this morning and the first of those is USD. I posted a chart on USD a couple of weeks ago showing a possible IHS right shoulder retracement. That chart looks very compelling this morning, and my target in the 77 area is supported by rising channel support there as well. Looking at this (ultimately bullish) chart more short term downside on USD seems likely:

Is that supported by the EURUSD chart? Well at the moment definitely. Looking at EURUSD the rising channel that broke down the other day has developed into a larger rising channel, with a bull flag and triangle setup within that channel. A break to a new high should deliver a move to the next resistance area around 1.35. On the downside I'm watching for a break of triangle support and channel support just below that:

I've posted the GBPUSD chart a few times over the last few days. That should be a decent barometer of when to take a possible bounce on USD seriously. I've had a careful look at that and have that as a rising channel with a strong internal support trendline:

ZB is looking weak this morning, and has broken below my rising support trendline from the last low. This is looking lower and while I was considering why the last low was a little higher than I expected I came up with a neckline for a very impressive possible H&S pattern.This is something to bear in mind on any strong move down:

Obviously I'm bearish on oil as I've posted yesterday and beforehand, but I have an interesting a jarringly divergent setup on copper that looks interesting. That setup is an H&S that indicates back to rising support in the 357-60 area. Not tremendously bearish unless that rising support breaks, but an odd looking bearish divergence short term. It will be interesting to see whether this plays out:

Overall the USD and bond pictures here look bearish for the moment, which would fit with a continuation upwards on equities. As I've been writing the jobs figure has come out and propelled ES to a new high. As long as that holds into the open then that will be a gap up on SPX over declining resistance from the 2007 high. That is bullish and I'm expecting to see some follow-through. That brings me to my last chart today, which is of the Dow. SPX is still some way below the 2011 highs, but NDX has already beaten those and on a strong move up today, the Dow may beat the 2011 highs as well:

On the EW count I showed last week, this would be wave 5 of 3 up from the October low, and the next major resistance level above on SPX is at the 2011 highs. We could well see a test of that level in the next few days.

LATE NOTES - After the jobs news GBPUSD and EURUSD are breaking down so a decent bounce on USD here now looks more likely. ZB has broken down very hard and I'm watching that huge H&S neckline. Copper has broken the declining channel so that looks much more bullish now. Apologies for the late post today but I'm not feeling well as my household disease vectors (children) have been busy this week.

Teasingly Ambiguous

2012-02-02T05:27:00.000-08:00

It's often tempting to anthropomorphise the markets, whether describing the movements of the markets, or referring to the dark forces that some feel are manipulating the markets behind the scenes. I don't subscribe to the latter view, as I think that the force manipulating the markets is doing so quite openly, and that force is the Fed, helped by other central banks, keeping interest rates negative and flooding the world with new money in the expectation that rising asset prices will boost the real economy. I do sometimes anthropomorphise the market however, and this week the market is being a tease.

I mentioned yesterday morning that a break above my SPX declining channel would open the way to a test of the highs and that was what we got, to within three points. In terms of direction that resolved absolutely nothing, as the failure at the afternoon high on SPX was a lower high, a potential double-top, and a second test of declining resistance from the 2007 high. Here's the updated big picture SPX daily 6yr chart:

Short term some weakness this morning looks likely however, as we have a broadening wedge in play on ES from the lows this week. I posted the chart below on twitter yesterday afternoon, suggesting double-resistance (actually triple resistance with declining resistance from the 2007 high) in the 1325 area, which was a couple of points short of the high:

With a slight modification of the upper wedge trendline I posted this on twitter this morning and you can see that we have a small double top indicating to the 1309.5 ES area. The wedge support trendline is in the 1309.25 area at the time of writing so that looks a high probability target for this morning:

On the short-term bull scenario, most likely we would bounce at that trendline, and confirm a new move up by breaking last week's high with confidence. Hard to say where that might end, but my next big resistance level would be at the high for last year. If that trendline breaks however, a much more bearish scenario opens up, though we'd need to see a break below the low this week for it to become likely. I'll switch to SPX for that scenario, and it would be a double top with a target at 1267.51 SPX. As the EWers have a major bull/bear line in the sand just below at 1267.08 SPX and a retest of the 200 DMA would be in the 1260-5 area (depending on when it was reached) that is an interesting possibility. I think we'd really need to see at least a low below Tuesday's low before I would start to consider that target seriously however:

On other markets the EURUSD chart still has a bearish cast to it, but the break above declining resistance to a marginally higher high yesterday weakened the bearish setup, and reached the level (above the right shoulder) where I write off any H&S pattern. EUR is pulling back this morning and I'm looking for a lower low to confirm that the immediate outlook is still bearish:

ZB broke the rising support trendline from 142 that I highlighted yesterday morning, and is testing the main support trendline from the last lows that I mentioned then as secondary support on a break of the first trendline. We'll see whether that holds today. I've shown the ZB chart today as a big ten week range with only limited breaks above and below it during that time. On this range view, potential upside looks limited without a big break up on bonds, which seems unlikely without a big break down on equities:

I've been showing the bearish setups on the CL chart for weeks and most recently showed the rough falling wedge on CL. CL hit support on that yesterday, and has broken below it overnight. The obvious target is the potential double-top base in the 92.9 area, and on a break below that the double-top target would be 81.80. CL has been an island of bearish looking technicals in a sea of bullish charts in recent weeks, and it will be very interesting to see whether this plays out:

I think the highest probability path this morning for ES is a move to the 1310 area. At that level a bounce would look bullish and a break below bearish. A lower low on ES/SPX below Tuesday's low would then look more bearish, and a break below Monday's low would look very bearish, putting the double-top target at 1267 SPX in play. The bears have a lot to prove before we get below Monday's low however, if there are in fact any bears left after the last few relentlessly bullish weeks. A break above last week's high would look bullish, and a break above that with confidence should confirm that we are in a new wave up with the obvious upside target, to my eye at least, in the 1370 SPX area.

Looks Corrective

2012-02-01T05:21:00.000-08:00

SPX has closed down for four days running now without actually moving down much. That might be a topping process of course, but this looks like a corrective move before a new wave up, which supports the contention of many EWers that this is a wave 4 retracement. That being the likely case, has this retracement already ended? Well we made a higher low yesterday, and on ES we've seen a (short term) higher high overnight, but looking at bonds and EURUSD I'm still leaning short, and SPX has not yet hit the obvious target at rising support from November, though it might not get there of course.

Short term on SPX I'm watching a new declining channel. Resistance is in the 1317.5 area so ES is going to have to drop somewhat from the current area near the overnight lows to stay below it. As long as SPX opens below there the current downtrend is intact. If that channel breaks then the path is open to a test of the highs and perhaps much higher. If the channel holds then the blue trendline within the rising channel is rising support from Monday's low, and on a break of that trendline a possible move to channel support in the 1290 SPX area opens up:

There was much talk about the golden cross of the 50 & 200 DMAs on SPX yesterday, so I've been looking at that this morning. This indicator has a solid performance history on bull crosses and is definitely worth noting. How much this indicator means in an economy with debt at over 100% of GDP, interest rates held firmly negative, and flooded with newly printed dollars is hard to say, as there are no directly comparable periods for that, but I wouldn't dismiss this signal altogether:

In terms of other indicators the Vix has retraced to hit the middle bollinger band, which is obvious short term resistance and that might be as far as this goes for the moment. Obviously the huge falling wedge looks extremely bearish but it hasn't broken up through that as yet:

The uptrend on ZB looks solid at the moment, with my target at 145'10 hit yesterday and a marginal new high. As long as my rising support trendline from the 142 area holds this uptrend looks solid, and now that ZB has made a marginal new high without any negative RSI divergence, I'm looking for a test of the December high at 146'11 next. As long as this uptrend on bonds lasts equities should be under some pressure. If my short term rising support trendline breaks I'll be looking for a test of main rising support in the 144 area:

EURUSD made a marginal new low yesterday on positive RSI divergence and has bounced strongly from there overnight. At the time I capped the chart below it was testing broken channel support but in the last few minutes it has broken up and is now close to making a higher high. That would look bullish short term and if we see that then a new high is on the cards. Until then the setup still looks bearish overall:

There is a secondary indicator that I'm watching here, and that is the strong support trendline from the lows on the GBPUSD chart. The setup for a bounce on USD should be confirmed when we see an hourly close below that and there was an encouraging pinocchio through that trendline overnight. The big spike to new highs that I'm watching now looks less encouraging however and it may be that the USD bounce setup here is about to fail:

Gold is making marginal new highs on increasing negative RSI divergence. I've marked in a short term support trendline that needs to break before gold can make a run to test channel support:

The overnight action has been very strong on ES and will need to reverse sharply into the open to preserve the declining channel on SPX from last week's high. As long as that channel holds I'm leaning short and the gap fill today looks doable. If that channel breaks up then this retracement may well have ended, and I'd advise caution on the short side. I've been expecting the retracement to last a couple more days but I might be mistaken.

I've added a banner to Amazon.com on my blog today and if you'd like to thank me for my posts, and are thinking of buying anything from Amazon in the US, I'd invite you to go to Amazon through that Amazon banner. I'll be setting up more Amazon stuff on the blog over the next few months including book reviews with links and possibly an affiliate shop but it's going to take a while to set that up.

Retracement, Interrupted?

2012-01-31T05:46:00.000-08:00

A very annoying feature of this move up since the December 19th low is that the retracements have been shallow and, mainly in consequence, no strong support trendlines have formed. This was looking very good to be the first decent retracement this year, with a clear target trendline in the 1275-85 SPX area (depending when it was reached) combined with a pullback on EURUSD that also looks overdue.

I posted an ES chart on twitter last night that showed the ideal setup there and that was on the 15min chart below:

This scenario started to fray more or less as soon as I posted it however, as ES then broke over the neckline and has traded as high as 1317.50 overnight. That is worrying, as the setup is also clear on the SPY 60min chart, with neckline resistance yesterday backed up by declining resistance from the high. That strengthens the short setup but that cuts both ways of course, as if both break up then resistance is all the more broken. For the ideal bear scenario today the overnight potential gap up on SPY needs to close by the open of real time trading hours, and then SPY needs to stay below declining resistance from the high. If that gap is not closed by the open then shorting this becomes much more risky:

I still think that we should see a decent retracement soon, but if ES holds on to the overnight gains into the open we may well first see at least a test of the highs last week. I've added a double-top scenario onto my SPX 60min chart:

The key for the main scenario I was outlining yesterday is EURUSD and bonds. On EURUSD we saw a bounce two ticks below my neckline target at 1.308 yesterday, and while it has gone over my ideal right shoulder target at 1.318 overnight, it hasn't made a new high and negative RSI divergence suggests that it won't be making one before some pullback. If this H&S is going to play out it needs to happen quickly as the right shoulder is already looking extended. Regardless of the H&S a break below rising channel support should signal that a retracement has started on EURUSD, and that is the key level to watch today:

On 30yr Treasury Futures (ZB), my target at 145'10 wasn't quite made yesterday, but I'm treating this move as possibly complete. The uptrend is intact as long as the rising channel holds, and short term support is at 144:

A couple of nice charts to end the post with today. The first is the gold futures hourly chart, with a very nice rising channel and negative divergence on the 60min RSI after the last channel resistance. Gold looks likely to retrace here and that retracement might well reach the 1680-1700 area. That would be a dip worth buying in my view:

The second chart is something that a trading buddy mentioned to me yesterday, and that is the long term crosses of the SPX daily 200 and 360 SMAs. I've charted this up on the 20 year chart and it is a very nice bull/bear market indicator that interestingly enough has not crossed bearishly since 2008. These are apparently also very useful looked at over shorter timeframes, to gauge trend in combination with the daily bollinger bands, so I'll be having a good look at that:

For today the short term setup on EURUSD and, to a lesser extent, ES argues for initial weakness on SPX. I'd expect that to last 30 to 60 minutes into the trading day and then the trend for the day will start to become clear. If the potential overnight gap up on SPY is closed before the open then I'd give the bears a 50/50 chance of extending this retracement further. If SPY gaps up then I'd still expect some weakness in the first hour but overall I'll be leaning long. Declining resistance from the high on SPX/SPY really needs to hold. A break above it won't mean that we'll see a test of the highs, but it will mean that we might well see that test.

Cautiously Bearish

2012-01-30T05:12:00.000-08:00

This retracement on equities isn't breaking any speed records so far, and probably won't. However it looks encouraging and I thinks there's a decent chance that it will reach rising support from the November low, which would be in the 1275 SPX area today. On the SPX 60min chart that would confirm the lower trendline of a rising wedge and deliver an upside target range after the bounce at wedge resistance, which would be very nice to have:

You can see exactly the same rising wedge on ES, which strengthes the setup. One thing i've added on ES that's worth noting for today is that it has bounced at a potential H&S neckline overnight. The ideal right shoulder high would be in the 1318.5 area, and I'll be watching for that if we see ES trade back over the very short term resistance levels that I have at 1306 and 1307.5:

30yr Treasury futures are looking encouraging for further retracement on equities. The resistance level at 143 that I was watching on Thursday and Friday broke up and the obvious next move for ZB is a test of the last highs in the 145'10 area. ZB has formed a rising channel from the lows and a break downwards from that would be a strong signal that this bounce on ZB has finished early:

Copper futures are also looking encouraging here for short term equity bears. I showed a chart with HG breaking over 390 area resistance on Friday morning. It had reversed back under 390 by the end of the day. Support levels are in the 376.5 area, the 360-5 area and rising support from the lows in the 340-5 area. If that lower target can be reached that would be a very nice long entry with an easy stop below the rising support trendline:

EURUSD is at an interesting level here. Obviously the immediate uptrend is intact as long as the rising channel from the lows holds, but there's some reason to think that it might now break. There's increasing negative divergence on the 60min RSI, and an H&S may well be forming with the neckline at 1.308 support. EURUSD is at 1.3107 at the time of writing and I'll be watching for a bounce there.If the rising channel does break down, then it's also worth noting that an IHS may be forming at the 1.32 neckline. The ideal right shoulder low would be in the 1.286 area, and if an H&S forms at the 1.308 neckline, the target would be in the 1.293 area which is a support area:

Oil futures have been kicking round in a narrowish range for a few days, and that has taken the form of a rough falling wedge. I'm leaning short overall, but if the falling wedge breaks up I'd be looking for a test of the last highs with another test of broken support from the October lows. On a break down the obvious target is in the 92.9 area:

I'm leaning bearish into Wednesday but there is a distinct possibility of a strong bounce on ES for part or all of today. A break below 1300 would eliminate the H&S scenario I've suggested on ES, and a move over 1307.5 would strengthen it. I'm watching EURUSD carefully as a retracement here would really help a retracement on equities along, though if an H&S is forming on EURUSD we might well see a bounce there as well into the 1.318 area to make the right shoulder.

I've made a few changes to the blog in recent days. I've added advertisements and also taken the domain name www.channelsandpatterns.com. This is a precautionary move really, as I remember when Xtrends tried to buy the Xtrends domain, someone had beaten them to it, so they were reduced to buying the relatively unnappealing Xtrenders domain instead, as an alternative to paying a large sum to the cybersquatter sitting on the domain they should have registered earlier. I've no idea whether advertisements will bring in enough money to be worth collecting but they might, and it will be interesting to find out.

Short Term High Made I Think

2012-01-27T05:38:00.000-08:00

I sent the following tweet out shortly after the highs yesterday morning:

If we are going to see a reversal on SPX soon, odds favor the high this morning. Hit the top SPX rising wedge. Hit support Vix falling wedge.

After the retracement yesterday I think the odds are excellent that a short term high is in, and my retracement targets on SPX would be a test of support in the 1305-10 area, though that would be disappointingly shallow, then a test of rising support from November in the 1270-80, and if that was broken then main support from the October low in the 1250-60 areas. Those last two targets have ten point ranges because they are moving targets, and the exact target would depend on when those trendlines were reached. The lowest risk long entry IMO would be at the test of rising support from the November lows, with a stop below the rising support trendline from the October lows:

Much depends on the GDP figure this morning of course and if that figure is good then we might discover very shortly that the short term high is not in. I'm expecting an indifferent figure at best though, as if the figure was going to exceed expectations, I think the Fed would have been less doveish on Wednesday.

Subject to that the setup for a retracement here looks very nice. Obviously the rising wedge shown above is breaking down but on the spike down yesterday the lower trendline of a potential huge falling wedge on Vix was hit and confirmed. The open gap just above that was also filled and the overall setup on Vix now looks extremely bearish. Short term, falling wedge resistance gives us an upside target slightly under 22 for any bounce here, and if that wedge resistance trendline breaks, that will be a strong signal to get out of equities:

Is this (probable) interim top a major top? I'm thinking not on balance though it's possible. I'll show the MSWorld (ex USA) 10yr chart here as it expresses very well the ambiguous overall setup here. In essence one could view the 2011 lows as a retest of broken resistance from the 2007 high (bullish view) or as the completion of the head on a monster H&S pattern (bearish view). On either view there would be reason to think that this move up from the October lows will run further. There's a lot of interesting information on this chart so take a closer look if you'd like to see that:

I showed the two key resistance levels on copper futures a couple of weeks ago in the 375 and 390 areas. 375 was broken last week and 390 has broken overnight. That looks encouraging for equities and I've marked the next resistance levels on the chart:

30yr Treasury futures have been looking a bit confused and lost since the spike up on Wednesday's Fed announcement. The options look clear enough though and the current trading range is between 141'24 and 143. An hourly close above would invite a retest of the last highs in the 145'10 area. An hourly close below would invite a retest of the last lows in the 140'20 area, and on a move below that to significant support in the 139'25 area. For obvious reasons I'm leaning bullish on ZB:

EURUSD retested broken resistance at 130.8 overnight and that is now clearly immediate support. Immediate resistance and a possible larger IHS neckline is in the 132 area, and I'm expecting more consolidation until the lower trendline of the rising channel is hit. The outlook on EURUSD looks bullish unless that rising channel breaks:

Last chart of the day is the updated gold chart where gold has now broken back above the support trendline from early 2011. The last week's action on gold looks very bullish and gold is back on buy the dip as far as I'm concerned:

As I'm writing I see that we are only three minutes from the GDP figure so we'll see how that goes. As I mentioned yesterday the stats for yesterday were bearish and the stats for today are bullish. We may well consolidate today.

After a few requests I finally got round to adding to advertisements to my blog two days ago. That's raised about nine bucks since then which is more than I expected. If this increases considerably I might even find myself making minimum wage for these morning writeups, which is an exciting prospect. :-)

Fed Expects Stagnation - BUY!

2012-01-26T05:45:00.000-08:00

Well that was a wild Fed day yesterday and the news was that the Fed is so confident that current policies won't work that it will leave real interest rates negative until the end of 2014. Equities surged on what passes for good news nowadays. Bernanke was surprisingly candid in the questions afterwards, and admitted that current interest rate policies were in effect a massive redistribution from savers to borrowers. No getting anything past that guy it seems. In a country so resistant to tax rises it seems remarkable that this (in effect) massive redistributive tax on savers, worth a conservative $300m per year to the government alone, attracts so little attention. Funny old world.

Overall yesterday had a big impact in a number of areas. On SPX we saw a surge to a high at 1328.30, not far under the resistance in the 1330 area I mentioned in the morning. Looking at the rising wedge on SPX that could go a little higher this morning and if the wedge overthrows a bit we might see 1335. Any break of wedge resistance with confidence would look very bullish and suggest an extension into the 1350s to my eye, but I'd still be surprised to see that:

In terms of the bigger trendline picture SPX has now convincingly broken declining resistance from the 2011 highs and is testing declining resistance from the 2007 highs. A break above would leave the next major resistance at the 2011 high, and seeing that test in the next couple of months now seems more likely than not. Short term this is a big resistance level however. Something that's interesting on this chart is the steady decline in volumes since the October low. The only equivalent to this that I can see in recent years was the reversal in 2010, which was obviously a corrective move. Interesting, though not necessarily significant:

NQ was strangely passive yesterday, and has not yet followed ES over the Tuesday night AAPL earnings high. A short term triple top might be forming there but overall the move from the Dec 19th lows looks like a decent rising channel:

The really interesting moves were elsewhere however. First on gold, which broke up through double resistance at declining resistance from the 2011 high and also the very important 150 DMA. That is provisionally bullish, but it still needs to break back up through broken support from early 2011. Once that is broken a test of the 2011 highs would be the next obvious target:

Bonds responded very positively to the news that interest rates would be held down for the next three years and briefly spiked over both the 142'28 target I gave yesterday and the 143 resistance level I mentioned just above that. There is no ideal pattern here but this could be read as either an IHS or a cup with handle with resistance at 143. If we see an hourly close over 143 the obvious next move would be a retest of the last highs in the 145'10 area:

EURUSD didn't make my short term double-top target yesterday and reversed up to break the IHS neckline earlier than I expected. The right shoulder is a little small, but the pattern is valid enough and the target is in the 1.35 area. In the shorter term EURUSD is reversing at the upper trendline of a rising channel from the low and I'm wondering about a retest of the IHS neckline and channel support in the 1.306 - 1.306 area today:

Does this bounce on EURUSD have legs? Well I've been watching the declining channel on GBPUSD, with the view that a break up through channel resistance would confirm the bounce on EURUSD, and it broke up yesterday, so I think that 1.35 target on EURUSD looks credible. There is some resistance in the 1.35 area and I'll be looking to see if there is any possible trendline resistance there too. Here's the broken channel on GBPUSD:

The stats for today are bearish and the stats for tomorrow are bullish, based on Fed days in the past with big moves up. There is strong support on ES at 1316.5, and a move much below that would look bearish. From the SPX chart I'm expecting big resistance on ES in the 1325-30 area and that is a very possible interim top area for anyone still keen to short this interminable grind upwards. If we see weakness in the first hour today it's worth noting that the pattern for January so far has been initial weakness with a low in the first hour followed by a grind up for the remainder of the day.

Wild Card Fed Day

2012-01-25T05:32:00.000-08:00

Some are born great, some achieve greatness, and some have greatness thrust upon them.

I'm a Shakespeare buff so you'll to put up with the odd quote. This one is from Malvolio in Twelfth Night and the relevance today is that the same sort of gradation could be applied to trendlines, which might then go:

Some trendlines are clear early, some become clear later, and some arrive so late that you've stopped looking for them.

In this case the low yesterday on SPY and SPX was at rising support from the December 19th low. I've been complaining for weeks that the there was no decent support trendline from there, and I wasn't even looking for it yesterday. Nonetheless, it is now established and it is now therefore also clear that we are looking at a rising wedge from that Dec 19th low. We might yet see a new high within that rising wedge, but it should be marginal. Wedge resistance is under 1330 SPX and I'd be extremely surprised to see the wedge break up with confidence here. Here's the updated setup on the SPX 30min chart with the wave count:

Rising wedges are a classical EW setup and are called ending diagonals there. It's worth mentioning that these tend to be final (5th) wave patterns though it's hard to see how that could be the case here. Something to bear in mind though. If we are near a major top, the first signal would be a break of rising support on SPX from the November low marked on both the chart above and the chart below. The second and much more serious break would be a break, not far below that, of rising support from the October low. If that breaks I would expect that a major top should most likely be in. I have sketched in the highest probability paths from here as I see them over the next few weeks and if you look closely at the chart below you'll see that I have left open the possibility that we see a very short term slightly higher high on SPX before breaking wedge support:

Vix closed up yesterday and the Vix Sell (equities) Signal that triggered at Monday's close is now confirmed. That doesn't necessarily mean that an interim top is in, but historically, with occasional exceptions, it means that a significant interim top should be close. I've marked the last two confirmed buy signals on the chart below and would draw your attention to the declining resistance trendline from the October Vix highs. A break above that in the near future would be a warning signal for equity bulls:

I was outlining the possible reversal setup on ZB yesterday, and the falling wedge evolved into a declining channel which has now also broken up. This now looks like a double or W bottom and a break above 141'25 would indicate to 142'28, just below some resistance at 143. That move on ZB would look bearish for equities:

The setup on EURUSD looks really very interesting this morning. The possible high I was looking at yesterday has held and a double-top has now set up with a target at 1.2845. Now I mentioned yesterday morning that the 1.285 area would be the ideal low for the large IHS that may be forming on EUR, but 1.285 is also a potential H&S neckline that would indicate back to the lows. I'm expecting a move to the 1.285 area shortly, and most likely we will see a bounce there. Somewhere in the (ideally) 1.295 to 1.30 range we would then see a break which should lead to one or the other playing out. I've marked both options on the chart with the short term double-top and the two highest probability paths from here as I see them:

Could the stricken Euro really rally to 1.35? I posted the supportive looking setup on USD yesterday, but my line in the sand is on GBPUSD, which is a better inverse indicator of likely USD direction as it isn't currently suffering from serious solvency issues. The dividing line is clear on GBPUSD, with the black support trendline being the neckline on a monster H&S I've been posting for the last few months as it has formed. Shorter term however I'm watching the declining channel and a break above channel resistance should signal that USD will retrace further and allow EURUSD to bounce to the 1.35 IHS target:

So what are going to see today? The Fed announcement today is a huge wild card that may send markets up or trigger confirmation of the correction that may have already started. Many are expecting QE3 to be announced but with improving economic figures, SPX back over 1300, NDX at ten year highs, and earnings looking generally decent, why would the Fed announce QE3 now unless the intent is nakedly to devalue USD, which might trigger a competitive devaluation currency war that has so far been avoided since the 2008 crash? QE3 enthusiasts seem likely to be disappointed today.

In the very short term support is just above yesterday's SPX low in real trading hours. ZB & EURUSD are both pushing equities south but positive divergence on the ES 5 & 15min RSIs is suggesting a decent bounce before any major support break, supported by a nice looking W bottom on the ES 1min at the moment (at 1307 ES as I write). We'll see. We could see a marginal new high today but the rising wedge should cap any move under 1330 SPX and that should just deliver a better short entry. I'm leaning long on balance for today as long as yesterday's lows hold. If they break or SPX breaks over Monday's high I'll switch to leaning strongly short.

Looks Promising

2012-01-24T04:26:00.000-08:00

The rising support trendline for the current move up on SPX broke and retested yesterday, and the setup for a retracement here looks very promising. That retracement should stay above 1267 SPX unless we see a major bearish break. The rising wedge target is 1277 SPX and an IHS may be forming with a target in the 1296 SPX area. ES has broken strong support at 1305 overnight which is also encouraging:

I have a nice looking rising channel on NDX as well with channel support in the 2400 area. That's worth keeping an eye on as the next obvious trendline support is a long way below:

The moment of truth for gold is here, with it starting to test the double resistance at declining resistance and the broken 150 DMA yesterday. A break above would look very bullish but a failure here obviously just the opposite. Until that resistance breaks this is a short entry level of course:

Given the geopolitical situation on oil, I should be seeing some bull setups on CL (March) here, but I'm not. There is double resistance overhead at broken support and declining resistance, and this chart would at least look less bearish if that is broken. Until that happens however I'm seeing an H&S target at 92.5 and if CL gets below the double-top neckline at 92.9, the double-top target is 81.8. Both targets look ambitious given the current situation with Iran, but unless we see a break up through double resistance not far above, CL has a very nice topping setup here with targets a long way below current levels. From a technical perspective the decent risk/reward swing setup is still short:

EURUSD has so far fallen 18 pips short of the 1.308 target I gave yesterday, but has reversed at a possible alternate sloping neckline for the IHS that I think maybe forming here. Ideally it would now retrace into the 1.285 area to form the right shoulder, and if it were to play out then the IHS target would be in the 1.35 area. Negative divergence on the 60min RSI looks promising for retracement here:

On the bigger picture for USD, a significant bounce for EURUSD should set up the right shoulder on a possible much larger IHS on USD that would target the 90.5 area. There is a question in my mind as to whether the battered Euro can manage a strong bounce here, but a retrace on USD into rising support in the 77 area would set up a very nice USD long play. As ever time will tell:

ZB hasn't made my downside target at 139'25 or declining support in the 140'10 area, but is nonetheless showing signs that it may be making a short term low here. I'm watching the steep declining resistance trendline for a break up. RSI also looks promising:

I'm leaning short today, but we might yet see a bounce from the overnight lows and the gap fill looks possible unless SPX gaps below 1309, in which case it will seem less likely. Retracements have been disappointingly shallow lately, but I'm ideally looking for the SPX rising wedge target at 1277 as my downside target in a retracement that should last two to four days. After that I'll be looking for a move up to higher highs unless we see a breach of 1267 SPX, which would cast my current view on SPX into doubt.

I'd love to call a major interim top here but I'm not seeing that as likely yet. There are a couple of charts that would support that though, and I'll certainly be watching my line in the sand at 1267 SPX in case of a break below. The first bearish chart that I haven't posted today is my 6yr SPX chart that shows a perfect test of declining resistance from the 2007 top at the high yesterday. The second chart is the Vix chart, which triggered a Vix Sell (equities) Signal with the close back within the daily BBs yesterday. A higher Vix close today would confirm that signal and that would promising for a high here, though the track record of these signals is somewhat mixed. We shall see.

Monday Thoughts

2012-01-23T05:47:00.000-08:00

My post will be a bit different today. As I have mentioned frequently, the current move up from the December low on SPX hasn't delivered much in the way of decent overall trendlines, so I'm going to present the consensus view from the EWers, who have had an impressively good handle on the current move up. You'll have to excuse my amateurish EW labelling and chart, but while I always keep an eye on the EW view, it isn't my thing really, and I rarely mark up an EW count on a chart.

I know that elliot wave counts are anathema to a lot of my readers, but like any form of analysis you get the best results from the best practitioners and I have a lot of confidence is the ones I follow. The shallow retracements on trendline breaks that we have seen on the current move up from the mid December low are also strongly characteristic of wave 3 moves I've seen in the past, so the overall thesis is reasonable, though I don't much care for the idea that SPX is going to rise much higher, as that seriously weakens the case that we are still in a bear market:

Broadly speaking the move up from the October low was a five wave move up for wave 1 or A, and the move down into the November low was an ABC correction. We are currently in wave 3 or C, and at the end of this move up, the key dividing line for whether this is a new bull market or a bear market continuation is whether the major wave that follows breaches the October high, as a wave 4 should never cross back into wave 1 of the same degree. In the current wave 3 or C up, the consensus view seems to be that we are now in wave v up, and as I've shown on the 30min SPX chart below, that is supported by the short term support trendlines that I have also marked on the chart. Where will subwave v of 3 end? The 1320 area is a popular choice though obviously it might go higher. I've also marked in the obvious target for the wave 4 that should start soon, and that is at rising support from the November low:

The next chart has no count on it, but shows the support trendline for the current wave v of 3 move up on the SPX 15min chart. I've mentioned that the support trendline from the November low is in the 1260 area and rising at about 14 points per week. One this to add to that is that the wave 1 high for the current wave 3 was at 1267 SPX, so that should hold any retracement unless this count is wrong. If the count is right then after the wave 4 that should be coming soon, we would start a wave 5 up that should exceed the wave 3 highs:

In terms of the bigger picture the Vix closed below the daily bollinger bands on Friday, which is a strong signal that we are in the process of making a significant interim top. How close might that be? A look at the last Vix close below the daily BBs in April is instructive, as it was followed by a last move up, with the Vix making a higher low. From a trendline perspective Vix is now close to the support trendline of a possible falling wedge and if it hits it, that would also fill an open gap from July. Open gaps on Vix have a tendency to fill so I'm expecting this one to fill shortly:

EURUSD broke the short term support trendline from the low, but then broke back up. I've marked in a four touch resistance trendline that I thought might hold but that has now broken too. The obvious target for this move was and still is the strong resistance level and possible IHS neckline in the 1.308 area:

ZB failed to reverse on Friday, and has broken support in the 142 area. The obvious next target is the November and December lows in the139'25 area, and that level is a possible H&S neckline, which is a concern for equity bears here. I'm pressed for space today so I won't show that chart and I'll show the CL chart instead. I suggested on Wednesday morning that the obvious next move on CL was a test of broken support in the 102.10 area, followed by a return to the 98 area to complete a potential H&S. CL peaked shortly after my post at 102.06 and has now completed that H&S. If it breaks downwards the target would be a test of the December low in the 92.70 area. A lot of H&S patterns fail at the neckline though so we'll see:

I've been having a look at gold and silver over the weekend after the very impressive break up by silver on Friday. Looking at the gold chart first there is a test coming very shortly of double resistance, which is at declining resistance from the 2011 high, and a test of the broken 150 DMA, which was support from early 2009. Until those break I'm leaning short on gold from that test. If gold breaks up then a major swing low may well be in on gold, and the next resistance would be a test of broken support from early 2011 slightly over 1700. A break there would suggest a test of the 2011 highs:

The silver chart has to be read in the context of the gold chart, as broadly speaking they tend to trend together. Short term the next resistance is a test of the 100 DMA in the 33.2 area, and on a break above I'd be seeing further resistance at 35.70, and a possible test of declining (channel) resistance from the 2011 highs in the 38 area:

I'm leaning bullish today unless the short term support trendline on my SPX 15min chart is breached. That support is currently in the 1312 SPX area. If it is breached then I'll be expecting a short term high to be in, and would be looking for a retracement towards rising support from the November low in the 1270-80 area. On a break below 1269 SPX a major interim top might well be in.

Trendline Voids

2012-01-20T05:41:00.000-08:00

I've called the last few significant interim tops and bottoms on SPX well, but those all had something in common that we're missing here, in that they all had clear trendline and/or pattern setups. As I have been grumbling almost daily for weeks in my morning posts, that is not something I'm seeing here as yet. We don't always get decent trendline setups of course, but often when I haven't been able to see them in the past that has been because they have not yet been established, as the trend has a lot further to go. That is something that is very much on my mind here.

Short term my SPX target at declining resistance from the 2011 highs has been hit, and this is a good place to expect at least a short term reversal. Immediate support is at the pre-market low at 1299.5 ES and that is a possible neckline for what could develop into a larger reversal:

Vix hit the lower bollinger band on the daily chart yesterday and that supports the idea that a short term reversal at the least is close. Against that I have to add that two of the last four touches of the lower bollinger band were followed by the Vix then rising with SPX for a couple of days and that's something to watch for here:

I was looking at the broken ascending triangle on TRAN again this morning, and that's not supporting the idea that a major swing high is close. The larger pattern on TRAN is a rising wedge and the more modest ascending triangle target would suggest a hit of the rising wedge upper trendline in the 5600 in two or three weeks. On a break above that I have an alternate higher target in the 6180 area, but that would only be in play if the rising wedge breaks up:

If equities are going higher from here, then the overall bear scenario starts to weaken rapidly. The 13/34 EMAs have now made a bullish cross on the SPX weekly chart, something that never happened until after the end of the last two bear markets, and a cross with confidence on these EMAs almost always signals that a major trend change has occurred. We're not quite there yet but equities will have to reverse solidly within two or three weeks to prevent that:

EURUSD went higher yesterday as I was expecting and might now be topping out short term. If so I'll be looking for a higher low to be established to confirm that EURUSD has made a swing low. I've liitle to add to that on the short term chart so I thought that I'd post my long term monthly EURUSD chart to explain what I see on the big picture for EURUSD. On this chart you'll note that there are two big channels. The larger perfect rising channel from 2001 has support slightly under the 1.25 level and that is my key line in the sand for a major breakdown on EURUSD. The smaller and slightly less perfect declining channel has resistance currently slightly over 1.46, and support in the 1.135 area, falling at 0.005 per month. The next obvious move within the declining channel is to channel support, so a break of 1.25 would be a very strong signal that the trend down on EURUSD has much further to go, and on a break of 1.25 that would be the next major target in my view. I've also marked in a possible H&S forming that would target the 0.77 area on a break of the declining channel. That seems apocalyptic but is actually only 5 cents below the lifetime low in 2000, at a time when the Euro area wasn't struggling with major solvency issues, so while it's an ambitious target, it's definitely worth bearing in mind:

Last chart of the day is the ZB 60min chart. Obviously the double-top scenario I outlined yesterday played out, and the move was strong enough to beat both targets that I gave then. I have the next major (hourly close) support at 142 and there's an excellent chance of a bounce there if it can get that far. It might not as we now have a marginal lower low on strongly positive 60min RSI divergence. A short term low may well now be in. The marginal lower low has been made since I capped the chart below:

Yesterday I commented that the short term bull scenario on EURUSD and bear scenario on ZB might well drag equities up. That situation has reversed today, with ZB looking close or at a short term low, and EURUSD retracing, though rising support from the EURUSD low at 1.287 has not been tested yet. If EURUSD breaks 1.287 and ZB holds 142 on an hourly close basis that would strongly support a reversal from yesterday's high, and I'll then be leaning strongly short today. It's opex Friday which is worth bearing in mind, and a close on SPX over 1310 SPX would break the current record for the week after Martin Luther King Day since the holiday started in 1998. I'm seeing potential H&S neckline support areas on ES at the 1300, 1286 and 1273 levels.

Bear Sentiment at 6 Year Low

2012-01-19T05:30:00.000-08:00

I'm going to be posting a lot of bullish charts today, so I'll balance that by leading with a bearish big picture chart. That chart is of the NYA Composite, which is a very broad based index including all stocks listed on NYSE, with the exception of some ETFs etc. On this chart you can see the huge H&S building that I have posted before, and it's also worth noting that NYA has not yet reached the October high, which is very strong resistance as it was also the H&S neckline for the topping H&S last year. A lot of analysts are changing to a bias that a new bull market is in progress but I'm not one of them yet, though I am most definitely weighing the evidence that it might be:

On NDX we saw a touch of the upper channel trendline yesterday and this is an obvious place to look for reversal, particularly as on the bigger picture NDX is in the middle of a strong resistance zone that includes the all time NDX high, and was hit four times last year, followed in each case by a correction of at least 9%. This rising channel on NDX is rough, so I wouldn't be surprised to see some overshoot before reversal:

On SPX the high yesterday was very close to declining resistance from the 2011 high in the 1315 area, and if that breaks obviously there is also declining resistance from the 2007 high to consider, and that should be in the 1320-5 area:

The rest of the charts today are supporting the bull case here and I'll lead with a thought-provoking SPY chart. I've mentioned a few times that I am not happy with the support trendline situation on equities from the last low, but I know from experience that sometimes in a strong move you have to wait a while for the situation to clarify. With that in mind I have identified two possible very bullish looking rising channels on SPY, from the November and December lows, and I'm throwing these out as possibilities to consider in the event that my declining resistance trendlines on SPX are broken:

My declining resistance trendline on Vix was hit yesterday, and that's excellent news from a trendline perspective as it now gives us a strong resistance trendline there. A break up through it would be a correspondingly strong bearish signal. Short term however it means that the next obvious move on Vix is down, possibly to confirm the lower trendline of a falling wedge in the 18 area. That is potentially very bullish for equities, at least in the short term, though longer term a falling wedge on Vix would be bearish:

Next up is the 30yr treasury futures chart (ZB). I mentioned yesterday that ZB was finding strong resistance at the 145'08 level and a double-top has now developed with a target just above a support level at 142'25. Short term rising support has been broken and retested from underneath, so I'm leaning short on bonds. A drop like that on ZB would be bullish for equities:

Copper has made a higher high and is moving towards very significant resistance in the 390 area on the futures chart. I won't post that chart here today however as I'm running out of time and space. I mentioned yesterday that EURUSD was showing a possible swing low on the daily chart. Since then EURUSD has made a higher high and that has strengthened that setup. I have marked four possible targets for this swing up on the chart and EURUSD is testing the first of those at the moment. If we see a break above 1.293, then resistance in the 1.305 area would become my primary short term target. It's harder than it used to be to say whether a swing low on EURUSD would be bullish for equities, but given the history I would assume that it would be until demonstrated otherwise:

Yesterday was a trend day and statistically the following day tends to be flat or see some retracement. I'm expecting a flat or red close today but not as confidently as I would be usually, because the setups on ZB and EURUSD particularly may boost equities. I'm therefore leaning short today but not with a lot of conviction. My WAG is that we might see an early boost to hit declining resistance on SPX followed by weakness for the rest of the day. I like the odds for a gap fill if we gap up, which seems likely at the time of writing.

Last comment of the day is that bearish sentiment is reaching historic lows, with a Bloomberg article on Tuesday noting that bearish sentiment was at a six year low and that short interest was at a nine month low. The last time short interest was this low was last March, and SPX peaked the following month. This is generally a contrarian indicator and it's worth noting that bullish sentiment hit a big low in Septemer shortly before the early October low on equities. Just sayin'. You can see that Bloomberg article here. At the very least this means that there cannot be much in the way of short-covering rallies left to propel indices higher, and I dare say that short interest and bearish sentiment are both even lower today. The dumb money is all long here, and historically that has been a big warning signal.

Dead Cat Bouncing?

2012-01-18T05:42:00.000-08:00

We've been having a lot of days where the low has been made about 10.30 and equities then rose for the rest of the day. Yesterday broke that with a bounce that petered out and then drifted downwards until the close. That doesn't mean that we've seen a top, but it is a change in the character of the market. On ES we have broken down from last week's rising channel into a shallower one. A break below channel support in the 1280 area would look immediately bearish. Channel resistance is in the 1308 area:

On NDX the rough channel I posted yesterday on NQ is mirrored almost exactly. A break below channel support would look bearish:

I've been talking about my declining resistance targets on SPX quite a bit over the last two weeks. Here's a weekly chart to show exactly what I mean, with declining resistance from the 2011 highs in the 1315 area, and declining resistance from the 2007 high slightly higher in the 1325 area. These two resistance trendlines are key, and a break over the higher one at 1325 would invite a test of the 2011 highs. I have marked in the possible H&S neckline for the very large H&S that may be forming here:

It's been a while since I posted the EEM chart but that's obviously one of the instruments that should be leading if this were to be a new bull market, and it's lagging badly. The upward sloping H&S that may be forming on SPX is mirrored by a downward sloping equivalent there:

The dead cat in the post title is EURUSD, which has fallen far and seems likely to fall further. However there are signs that EURUSD might be making a low here. Declining resistance from the last big high has been broken, though that was a weak trendline and may well not be significant. What is more impressive is the positive divergence on the daily RSI, and EURUSD's failure so far to break the August 2010 low. The last short term high was just above 1.287 and that is a potential IHS neckline so I'll be watching to see whether EURUSD can make it that high. The effect of a significant swing low on EURUSD is hard to call here but it might well help equities rise so I'll be having a closer look at the intraday relationship between EURUSD and SPX over the next couple of days:

30yr Treasuries are stalled at the late December high in the 145'08 area and have not yet made the falling wedge target in the 146'10 area. I'm leaning towards a break upwards to make that target but it might go the other way:

I mentioned the other day that CL might form a large H&S at the 98.50 support level and it overshot somewhat. On an hourly close basis though, a horizontal neckline at 98.3 is still in play and if so, then we are nearing the likely top of the right shoulder. Ideally that would be at the intersection of declining resistance and broken rising support in the 102.10 area and that would seem a very attractive short entry. Oil is obviously subject to big geopolitical swings, but I listed four bear patterns on it last Friday and this potentially is a fifth. A move down seems much more likely than a move up from here:

I'm leaning slightly towards the long side today but without any real conviction. I'll leave you with a couple of links from free blogs which I check every morning and would recommend. The first is Serge Farra's ETF Corner where he has posted an interesting SPY chart with a predicted high near my SPX target at 1315. You can see that here. The second is Trading The Odds, where the author has posted an excellent statistical review of the week following Martin Luther King day since the holiday was started in 1998. Of fourteen of these to date, ten have closed the week down, and the only rise of the four green weeks that beat 1% closed up only 1.54%, which is worth bearing in mind. You can see that post here.

Approaching Key Resistance Areas

2012-01-17T06:01:00.000-08:00

The short term rising channel on SPX and ES broke down with conviction on Friday morning but after the early low we saw the usual reversal and grind up for the rest of the day. Overnight ES has made a new high so the short term topping setup has been negated. I've been mentioning every couple of days that declining resistance from the 2011 high is in the 1315-20 area, and that for me is the obvious upside target here. I've marked the key resistance and support trendlines on the SPX 60min chart. A break above declining resistance from the 2011 high would need to be confirmed with a break above declining resistance from the 2007 high through the 2011 high, and that's a few points higher. If we see that then I'll be using a new bull market as my primary scenario. A break below rising support from the October low, currently in the 1235-40 area, would most likely confirm that we are still in a bear market:

There are a number of key bear market indicators that I watch and post, and the last really big one is worth having a look at today. That indicator is the crosses of the 13 & 34 weekly EMAs on SPX. It's worth noting that during the last two bear markets the two EMAs did not touch again until the bear market had ended, so it's cautiously bullish that they are now crossing again. If we see a cross with conviction then it will be likely that we are looking at a new bull market and I wouldn't expect another cross with conviction until after the start of the next bear market:

Does this mean that I think we are in a new bull market? No, but it is a possibility that is growing stronger as SPX trends higher despite the negative divergences from what would normally be leading that bull market. Oner of those is copper and while it is still strongly negatively divergent against SPX it has broken up from the triangle of the last few weeks. It is testing the triangle top now (October high), the next resistance above is at the 2011 double-top base in the 390 area and I make the triangle target in the 425 area:

Looking at the Vix the first resistance at the middle bollinger bands on the daily chart was hit on Friday. That's an obvious area from which to see another swing down:

We are reaching a key resistance area on NDX as well and I've marked that up on the daily chart. The 2403-38 area has had four hits in the last year and each marked a swing high followed by a reversal at least 9%. This is the obvious area to look for a big reversal on NDX this time as well. It's worth noting that NDX has not yet reached the October high, and so has been lagging both SPX and RUT since then:

On NQ I posted a possible channel that might form a few days ago and Friday's low confirmed the lower trendline. This is a key channel to watch now, though it is a little rough. Unlike on SPX or ES however it gives us a valid support trendline from the last low, which is a stronger trendline setup:

We are coming into both a decent time area for a big reversal and natural resistance areas for a swing high. It's natural to feel that the trend will continue after any significant move but it's worth remembering that we are still in an area where which is consistent with an ongoing bear market. Just to illustrate that point I'll include here an email I sent on 25th November, near the 1158 low then, saying that I was expecting a reversal up that might last in fits and starts until mid to late January. We're in that time area now and there has not yet been a break of declining resistance from the 2011 highs. We've had some positive economic data since then but the scenario that I was outlining afterwards for 2012 is still perfectly valid. This is not an area to fall in love with the bull side as yet:

Short term I'm expecting a partial gap fill towards rising support from Friday's low, and that's in the 1295 area. Any lower and the gap from Friday's close may fill.

Hammer Time

2012-01-13T03:29:00.000-08:00

Multiple daily hammer candlesticks on the indices yesterday, a sign of weakness and hesitation. The support trendlines on SPX and ES now also showing signs of wear and I think the topping process has started for the current wave up. That doesn't preclude new highs, but the writing is now on the wall for this move up in my view. On ES there was a definite break of channel support at the low yesterday and as I've said before, it is often the second break that is the decisive one. ES channel support is at 1286.5 this morning:

On SPX the support trendline break was marginal, but still looks significant. Cobra has pointed out the possible rectangle forming there and that might deliver a last push up into the 1307 SPX target area. If rising support breaks in the 1290 SPX area today however I'd be surprised to see that target made:

I've been posting the falling wedge on 30yr treasury futures every day and that is now breaking up. The target is a test of the last highs in the 146'10 area and I think there is an excellent chance that target area will be made. I'd expect that to happen during a correction on equities, which as I've said, looks close now:

I posted a new support trendline on CL yesterday and commented that it might be an H&S neckline. Actually the picture is more complex than that, as it also works as the support trendline on a broadening ascending wedge. Either way the downside target for those patterns is 96.5. CL has bounced overnight and that has opened up the possibility that a larger H&S will form at the 98.5 horizontal neckline. That would indicate to 93.5, and the arguable double top with the same neckline would support that target as well. All four of these actual and potential patterns are bearish and I'm expecting more downside on CL. If a right shoulder forms at the 98.5 neckline then the ideal target area for the right shoulder high would be in the 101.5 to 102 area and that would look very attractive as a short entry level for a likely move down:

As an aside, the big fall on CL yesterday followed the announcement that the EU oil embargo on Iran wouldn't start for at least six months. Obviously these oil embargoes on Iran from the US and EU are intended to send a message about the Iranian nuclear program, but what message is it sending? If Iran can still sell all the oil it wants, but the price they receive rises sharply, then the message might be 'enrich more uranium and we will reward you with large amounts of money from western consumers' or alternatively 'we are idiots'. Isn't this just rewarding Iran for bad behaviour? Even by the the normally low standards of our political leaders this looks dimwitted.

I'm watching for more definite support breaks on ES and SPX today and a swing high looks close. The obvious target for a retracement is rising support from the October lows in the 1245 SPX area. If that breaks then we've most likely seen a rally high and the case that we are still in a bear market will be greatly strengthened. Cobra is still offering a $10 per month deal for anyone subscribing to his site until Sunday 15th January and the price is going to rise considerably afterwards for new subscribers after that date. Anyone thinking of subscribing to his site should therefore do so today or tomorrow. Cobra is an excellent analyst and I read his writeups every day. The link to his site is here.

I posted a chart on German Bunds the other day (FGB) with a nice topping setup there. I was doubtful about whether these would move with bonds or equities, but since then it has become clear that these are moving with bonds. Given the setup on bonds these now look likely to break up rather than down so these no longer look an attractive short in the short term, though the trendline setup still isn't great and I'd prefer to go long ZB as a bonds play here.

The Bull Case

2012-01-12T04:47:00.000-08:00

I'm going to take a little time today to put the case for the new bull market from the October low. Negative divergences against equities here are very numerous, and for that reason bear market continuation looks more likely to me, but it would be a mistake to think that the bulls have no case here, and I'll be outlining what I see are the main planks of that case from a technical perspective.

In the short term support on the ES rising channel is clearly still holding, and until that breaks there's not much to see on the bear side here. The upper trendline of the channel is in the 1312 area, and ES has moved up an impressive nine points in the hour since I capped this chart to beat the last high. There might be more coming. Channel support is at 1282.5 this morning:

If the move up overnight can be sustained, then the next upside target after the potential double-top area that has been tested in the last two days is declining resistance from the 2011 high in the 1315-18 area, with a nod to the top of the weekly Ichimoku cloud in the 1303 area on the way there. You should note that this resistance area would correspond well with ES channel resistance if that should be reached today or tomorrow. The ES rising channel is rising at about four points per day so ideally any hit would be today. Worth noting also on this chart is double-trendline support in the 1245 area on SPX. That would be the key target on any retracement down from here and for the bear market continuation case, that would need to be broken:

What is there to support a move on SPX into resistance here? Well I posted the 30yr treasury futures chart yesterday, noting that the next obvious move was into declining resistance to establish a falling wedge. I gave falling wedge resistance in the 144'10 area, and the peak yesterday was 144'06. Close enough, and the falling wedge is now established. That falling wedge is a 69% bullish pattern, and could break up at any time towards a retest of the last highs in the 146'10 area, but short term the next obvious target is now falling wedge support in the 140'30 area. If we see that, it would be a big move and would support a short term move up on equities:

Copper has been forming a triangle since the October low, and has now broken both the triangle resistance trendline and (on the futures overnight) the important 200 DMA. Copper is still heavily negatively divergent from equities here, but a run to the triangle top at the October highs is the obvious next move for copper, and that would help equities along too:

There is also some potential short term support from EURUSD, which made a marginal new low yesterday on 60min positive RSI divergence. A short term double-bottom may be forming with a bounce target in the 1.295 area. If that plays out then that would also give equities a boost here. I have drawn a falling wedge type pattern on EURUSD here but it isn't a falling wedge as the upper trendline is too much of a mess.:

While we're on the subject of forex it's also worth noting that GBPUSD has broken down yesterday through the neckline of the very large H&S indicating to long term support in the 1.40 area. There are signs that the positive divergence on the daily RSI may be breaking down and this is a very nice technical pattern that may well play out. GBPUSD is also in a perfect declining channel from the last highs, and only on a break about the upper trendline on that declining channel, currently at 1.573, would I write off this H&S. In the very short term GBPUSD is likely to follow any bounce on EURUSD of course:

On to the bull case here. The bear case is clear enough of course. Serious problems in the Euro zone, with sovereign debt generally compromising the solvency of the world financial system, and a sluggish world economy groaning beneath the burden of ever increasing debt. Technically in a new bull market we'd expect to see positive divergence from copper and emerging markets, which are showing sharp negative divergence here, and we'd also expect to see negative divergence from bonds and USD, which are both showing sharp positive divergence here. You don't need all of these to support equities, but to have none looks very bearish.

The bull case should not be dismissed however. The October low formed a decent quality rising channel from the 2009 low, and that needs to be taken seriously. There are still two major resistance levels above, but if SPX can clear the declining resistance trendline from the 2007 through the 2011 highs in the 1315-18 area that would look pretty bullish, especially as SPX has already recovered above the important bull/bear dividing line at the 200 DMA and held it for a couple of weeks. If SPX breaks up through declining resistance from 2007 and 2011, the next major resistance would be at the 2011 high, which was almost precisely at the double-top neckline for the 2007 high and is therefore very strong resistance. A failure there would set up a double-top on SPX indicating to the 780 area. A break above the 2011 high with confidence would set up a run to 1440 and over that rising channel resistance is currently in the 1490 area:

One thing I have heard regularly is that any new bull market is dead in the water without support from financials. However I posted the XLF chart on Monday showing the very significant looking break over declining resistance from the 2007 high. XLF is now testing the important 200 DMA and over that would need to take out the last high at 14.08. If XLF does that however, the setup would then look very bullish and a lot of the individual financial sector names have very bullish looking bottoming setups:

There something else to consider as well and that is SPX earnings. There is obviously a serious question mark over whether current SPX earnings levels can be maintained, and in the case of the financial sector, under current accounting rules, whether current earnings exist at all. That aside however, let's consider earnings performance against the performance of the SPX in the last two calendar years. In 2010 earnings increased by 30% and the SPX rose 15%. In 2011 earnings increased by 15% and the SPX was flat. I have a close for 2009 in the 1115 area, and if earnings and the SPX had increased at the same rate since then, SPX would now be in the 1666 area. Thought for the day.

As I write ES is now in the 1296 area and the RSI is in overbought territory on all of the 60min, 15min and 5min timeframes. There is a significant chance that we will see some retracement early in the session and a gap fill might be possible though it is starting to look ambitious. As I've mentioned earlier, we may have a perfect bull setup today, with equities supported by rising copper and EURUSD on one hand, and falling bonds on the other. A trend day up may therefore be on the cards and a very strong push could see us testing ES channel resistance in the 1312-14 area, which would also be at declining resistance from the 2007 through 2011 highs. That would be a likely area for at least an interim top and very possibly a rally high. There is a lot of detail on the charts today that hasn't been covered in this write-up, so if you want to see that just click on the charts to expand them.

Potential Topping Area

2012-01-11T04:26:00.000-08:00

We've reached a potential topping area on SPX for both the current move up and potentially for the wave C top if this move from the October lows has in fact been a bear market rally. If SPX was to top here or close to here then that would deliver a double top from the October low, with the November low as the pattern neckline, and if SPX peaked yesterday that would deliver a target range for the next move down in the 1020-5 area. If SPX goes a few points higher that target would drop a few points as well. Here's how that looks on the SPX daily chart:

We don't have a support trendline from the last low on SPX or ES, but we do have the next best thing, which is a rising channel from the IHS right shoulder low a bit higher than that. A break below channel support on ES should deliver the signal that the topping process has begun, and I have that support at 1277.50 currently:

SPX also has a decent support trendline from the same low and rising support there is now at 1282, effectively the same level as on ES:

I mentioned yesterday morning that NQ might find decent resistance at last week's rising wedge upper trendline and it did. I've had a closer look at that and reinterpreted it as the upper trendline of a slightly rough rising channel:

30yr Treasuries didn't make my upside target last week but that target is still in play. A move towards it would most likely involve a move down on equities so that's worth bearing in mind:

Last chart of the day is on german bund futures. I posted a chart of these a few weeks ago suggesting that the obvious next move was up towards resistance in the 139 - 139.5 area. That has been hit and delivered a nice looking short setup from a top that works both as a triple top and as a part-completed H&S. The next obvious move is down towards neckline support for both at 133, and if that breaks the pattern target for both would be in the 126.5 area. German bunds have evolved since April from being a risk-off asset inversely correlated with equities to being a risk-on asset directly correlated with equities so a moved down here would probably imply a move down on equities as well. Regardless of that this is a nice looking short setup:

I'm watching the support trendlines on SPX and ES here. In the event that these break then that would be a strong signal that the topping process has begun, and that the swing high may already have been made.

As an aside I've been reading a lot in recent months of how it would be extremely hard for the Euro to break up because any weak countries leaving the Euro, with their sovereign debt obviously priced in Euros, would be forced into default by the depreciation of their new currencies against the Euro. That's fair enough, but it's strange that I haven't read anywhere the obvious solution inherent in this problem, which is that the solvent countries in the Euro zone could leave the Euro instead. That would leave the Euro to depreciate rapidly as increasingly the currency for the embattled PIIGS, and that when only poor quality members remained in the Euro, the remainder could then exit the Euro at a reduced exchange rate, avoiding the risk of being forced into default by depreciation against what would be then be a high risk currency sold down to low levels. An easy dissolution for a common currency that was fatally flawed from the beginning. Why has no-one suggested this? Thought for the day.

Breaking Up

2012-01-10T04:59:00.000-08:00

The NQ rising wedge I posted yesterday morning was a model example until after the close. The wedge broke down early in the day, retested near the close and then what should have happened is that NQ fell away from the retest. Obviously both NQ and ES broke up overnight and while NQ has not yet broken over the rising wedge resistance trendline, I'm inclined to write the wedge off:

My EW buds Pug and Alphahorn have both been expecting a wave 5 move up to complete the current move and I assume that's what we're seeing now. Energy has been building as SPX has been trading sideways over the last few days, and a sort of triangle has developed on SPX, though I'm inclined to interpret it as a resistance trendline within the current uptrend. Unless we see a big move back down before the open SPX will gap up over that trendline. Here it is on the 15min chart:

In terms of the likely target of any move up here I'll repost the SPX weekly Ichimoku chart that I posted last week showing the top of the cloud just over 1300 and declining resistance from 2007 through the 2011 high just under 1325. I think that range is the obvious target on SPX and should fit well with the 2400-2450 resistance zone on NDX:

Looking at the ES the low yesterday has established a reasonable quality rising channel and rising resistance there is currently in the 1302 area:

I do have some resistance lower on NDX. Looking at that this morning a reasonable quality rising channel has formed from the late December low and resistance there would be in the 2375-80 area today:

Two other charts today. The first is on CL, which bounced strongly at 100 yesterday and is now testing the broken support trendline. A move back above it would look bullish. What's also worth noting on the chart is that the low yesterday established a new support trendline which could be a sloping H&S neckline, but is worth watching as the new support trendline regardless:

The last chart is a very thought-provoking XLF chart. I've been posting this six year XLF chart periodically over the last few months to show that the key resistance trendline on XLF is declining resistance from the 2007 high. I last posted it just after the trendline was tested in late October I think. Interestingly XLF has just broken up through that resistance trendline and while it may retrace back underneath it soon, this is a strong sign that financials may now have bottomed out. That is obviously very interesting and has big implications. Going through some individual financial stocks has also thrown up some strong reversal charts. The W or double-bottom on the JPM chart as an example is well worth a look and I'll be watching that as it approaches the double-bottom neckline:

Equities are in the dying stages of a big move up, and when this move ends we should at least see a decent retracement. What happens after that will be interesting. Obviously the usual indicators for a new bull market are mainly showing strong negative divergence relative to equities, those being copper, the Euro, bonds etc. Could we see a new bull market in US equities regardless? Possibly, we'll see what earnings season brings.

Short term this break up looks significant and I'm expecting to see more upside before we put in a significant interim top that should be in the 1300 - 1325 range on SPX. We may well see some early weakness today. The pattern in recent days has been weakness in the morning and strength in the afternoon. We'll see whether that holds now that SPX is gapping up over resistance. If so we might well see a retest of that broken resistance near yesterday's close.

NQ and GBPUSD Patterns

2012-01-09T05:32:00.000-08:00

There's still not much to see on SPX or ES in terms of trendlines and strong resistance on ES is obviously at 1280. While ES and TF were struggling last week however, NQ took leadership and kept pushing up while the others stalled. That has delivered an interesting setup on NQ, with a perfect rising wedge having formed since the end of the year. That would seem to limit upside unless the wedge breaks up and I have wedge resistance currently at 2366 and wedge support at 2347. Both of those are moving targets obviously:

On 30yr treasuries ZB has bounced from the last low, establishing a decent support trendline, and looks ready to bounce towards declining resistance in the 144'10 area. A small IHS may be forming to take it there. Overall the setup does not look bearish as this appears to be a falling wedge from the last high, though the upper trendline needs another touch to confirm that:

Oil has broken the rising wedge I posted on Friday and while it has found some support in the 101 area, I'm expecting more downside. The obvious target would be the intersection of rising support from the October low and a possible H&S neckline which should meet in the 98.3 area later this week:

I posted a rising wedge on DX on Friday that is interesting from a trading perspective as it cannot be seen on the current DX contract DXH2 (March). Dx is thinly traded compared to the equities or oil futures contracts and sometimes throws up some strange anomalies, especially for the data before the current contract becomes the main current contract, when trading on these is very thin indeed. The chart I showed on Friday and am showing today is on the continuous contract and you can see DX reversed perfectly at wedge resistance, so I'm treating this wedge as valid. Wedge support is currently slightly over 80 and we might see a push down to test that if DX doesn't just correct sideways:

What I'd really like to talk about today is the very interesting setup on GBPUSD though. I posted a GBPUSD chart on the 10th of October speculating about the possibility that GBPUSD might form the right shoulder for a large H&S indicating towards long term support in the 1.40 area. You can see that chart here. On that chart I speculated that if a right shoulder formed then the H&S might be complete at the start of January and as you can see from the updated chart below that is pretty much exactly what has happened:

Now there are a couple of caveats on this chart. A horizontal neckline like this is also a strong support level, and the positive divergence on the daily RSI is arguing for a bounce here, which we are seeing to some extent already. However there is also a perfect declining channel from the highs, with resistance in the 1.574 area, and unless we see a break of that channel resistance trendline, then this H&S is likely to play out, all the more so because the H&S target at 1.395 targets long term support for GDPUSD since 1985, which I have shown in the monthly chart below. This would also fit with further weakness on EURUSD, which seems likely, and strength on USD. GBPUSD is therefore one of the most interesting shorts that I'm looking at and easier to play than EURUSD as the trendline setup is much clearer:

Short term ES is either consolidating or topping here and it's hard to say which one that might be as there is no clear support trendline to break on either ES or SPX. Short term I'm looking at NQ for direction and if the rising wedge on NQ breaks up then I'd expect a strong push up on equities across the board. Rising wedges break down 70% of the time though so I'm leaning cautiously bearish here. That said, and given the overall setup, this rising wedge looks more likely to break up in my view than the pattern stats would suggest.

Big Resistance Areas

2012-01-06T05:40:00.000-08:00

ES held the 1260 area that I was seeing as major support yesterday morning, and is close to testing the 1280 high from the opening candle this week. If ES gets over there the real test is at the October high at 1283.50. We'll see whether that can be broken with conviction. If so that would look very bullish. A failure at or near the October high is potentially very bearish, as it sets up a double-top that would indicate to new bear market lows. I'm not wild about the trendline setup on ES at the moment, but there is a rising channel that I've marked on the chart;

I've marked up the trendlines on the 60min SPX chart as well. It's worth mentioning here that we currently have negative divergence on both the 60min RSI and the daily NYMO, which suggests a possible short term high in this area. The key SPX pivots here are the 1261 and 1292 pivots. the 1292 pivot is at the test of the October highs and is the next major resistance level. A break below 1261 SPX would strongly suggest that the short term high is in:

Looking at the NYA chart I've illustrated the importance of resistance at the October highs, which on NYA is also at declining resistance from the 2011 high. Declining resistance from the July high has broken and retested which is obviously bullish:

EURUSD broke strong support at 1.285 and the path is open to trendline support just over 1.26. There's a better trendline setup on the DX 60min chart however, as DX has formed a very nice rising wedge that I've posted before. DX is stalling at the last high at the moment but on a break up I have wedge resistance currently in the 81.8 area and wedge support in the 80.1 area:

There's another very nice rising wedge on CL from the last swing low. On the daily chart there is a potential double-top at 1the last highs that I'll be posting if CL breaks wedge support:

We're obviously at big resistance levels on SPX and oil as I've mentioned, but it's the setup on bonds that may be the key to what happens next. At the moment TLT has made what looks like a very nice double-top at 124 resistance and has since broken the rising support trendline from July. This is a very beearish setup unless TLT can break over 124 with conviction, and if bonds break down hard here, it's hard to see that happening outside the context of a big move up in equities. I'm leaning towards a continuation of the bear market here for many reasons, but this is a big warning sign that the bear market may be over. One to watch:

Obviously the key trigger for today is likely to be the employment numbers. On a break up over 1280, which I'm now watching as I write this, key resistance is in the 1292 SPX area at the October highs. There's big resistance there and I'll be watching that for any signs of an interim top.