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Thursday 28 September 2023

Hitting Rising Support on SPX

I didn't really have time to fall much in love with the possible bull flag channel on SPX yesterday as it broke hard and SPX went directly to the main support level I was expecting to see tested later after a bounce. That level is rising support from the 2022 low in October which I mentioned yesterday morning as being in the 4240 area. The low yesterday was at 4238.63 and that was a solid test and reversal there. The low also established a possible alternate bull flag falling megaphone support trendline from the July high at 4606.097. So where does that leave SPX?

There is a clear choice here. Assuming we don't get yet another leg down now to break that rising support trendline, the bull scenario is that SPX has just made a swing low, heads up to break flag resistance in the 4495 area, then invalidates the H&S with a break over the right shoulder high at 4541.45, at which point the next obvious target would be main trendline resistance currently in the 4750 area, but rising steadily towards a level where a retest of the all time high at 4818.62 could be done within the channel. Channel resistance will be over the all time high by the end of November.

My main bear scenario is that we see a strong bounce here, with the obvious resistance for that bounce at a test of the weekly middle band, currently at 4397 and which needs to hold as resistance on a weekly close basis. The rally might go as high as a backtest of the daily middle band, currently at 4431 but falling fairly quickly, so by the time the weekly middle band is tested these two resistance levels may in effect be the same target in the 4400 area. After a fail at that resistance SPX breaks the channel support that held yesterday, and heads down to the H&S target and 50% retracement target both in the 4050 area.

There is a mountain of 15min, hourly and now daily positive RSI 14 divergence supporting the rally here, and most or all of that would be played out by a rally on SPX here back into the 4400 area.

SPX 60min chart:

On the SPX daily chart below you can see the clear positive divergence (and weak RSI 5 buy signal brewing) on the SPX chart. You can also see the new bull flag pattern option and the daily middle band now at 4430.83.

SPX daily BBs chart:

On the SPX weekly chart below you can see weekly middle band resistance now at 4397.28 (and still rising gently), and I would also point out the weekly 3sd lower band, currently at 4078.54 and close to the H&S target in the 4050 area. That may well be a match with that 4050 target if that is hit, and a hit of the weekly 3sd lower band at minimum tends to signal a strong rally, though in a crash situation like 2020 it can break hard and stay below for a couple of weeks before that rally.

I would also draw your attention to the larger pattern setup here. The move down from the late 2021 high to the October 2022 low was an almost perfect 50% retracement of the move up from the 2020 low to that late 2021 high. These retracements happen a lot in most tradeable markets. That retracement formed a clear bull flag falling wedge which has broken up with a target at a retest of the all time high at 4818.62. If yesterday's support at the rising support from the 2022 low holds then that retest target at the retest of the all time high can now be hit within the rising channel from the 2022 low.  If the channel breaks and SPX reaches the 4050 H&S target then that too would be an almost perfect 50% retracement of the move up from the 2022 low at 3491.58 to the July 2023 high at 4607.07, and that is again a very natural area to find support. We'd have to see then whether there was still a viable bull flag setup from the 4607.07 high, but that 50% retracement, if held,  would have natural next targets at either a retest of the 4607.07 high, or continuation to that flag target at the retest of the all time high. We'll see.

SPX weekly chart:

The flag channel on SPX broke yesterday, and the one on Dow too, and when channels break they can evolve into alternate patterns as the one on SPX has, but the channel, once broken, stays broken.  No high quality alternate established on Dow as yet.

The survivor though was the channel on IWM, which made it through the day just fine.

IWM 60min chart:

There is also a decent bull flag option on NDX that didn't look quite cooked yesterday morning, but it looks good today. That's a high quality falling wedge flag that underthrew slightly at the low yesterday.

NDX 60min chart:

I'm showing a rare sixth chart today, and that's to show what developed on SPX in the short term yesterday. On the (possibly mistaken) assumption that yesterday's low will hold for now and the expected rally back up into the 4400 area has finally started, there is a high quality setup for another leg up today that formed on SPX yesterday. If that breaks up this morning the IHS target would be in the 4345 area, (about 4390 on ES).

SPX 1min chart:

The short term low is probably in and we should have started the rally back up into the 4400 area as the next inflection point. On the bull scenario we would then see a break back up over the SPX daily and weekly middle bands, and then an obvious path back up that I'd expect to deliver a return to the retest of the all time high. I'm assigning this a probability of 35% to 40%. On the bear scenario the rally would fail in the 4400 area and SPX would return to break the main rising support that held yesterday and head to the H&S target in the 4050 area. I'm assigning that option a probability of 60% to 65%. If that 4050 target is reached there would be another big inflection point there.

I may well be starting another model trade at the high of this rally, but I only generally do those when the setup is really nice. I'll be planning a short there regardless, depending on how this rally develops and the patterns that form and we'll see how this plays out over the next few days and weeks.

TNX broke over channel resistance yesterday and the long on bonds doesn't look cooked yet. I'm thinking that may well change over the next few weeks as SPX heads to the 4050 target, and I'll be watching it carefully. If that sets up right I'd be planning a model trade there too for what should be an impressive rally on bonds.

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Wednesday 27 September 2023

Love And Marriage

I always try and keep an open mind, as too strong a directional view on any trading instrument can result in tunnel vision, where the analyst sees mainly or only the evidence that supports that view. That is an obstacle to good analysis, and for an analyst who trades, can get very expensive. In trading terms it doesn't matter whether any market goes up or down, as long as the trader is on the right side of the market. Nothing else matters. I can therefore love a market or trading scenario, but no good analyst should ever marry one.

I was talking last week about my preferred scenario on SPX with the H&S looking for the 4050 area, delivering a 50% retracement of the move up from the 2022 low, and potentially setting up another larger move up into a retest of the all time highs on SPX (and NDX). That is not the only scenario in play here however, and the odds of my main alternate scenario happening instead rose significantly yesterday at the swing low that I think was likely made at the low yesterday afternoon, barring retests and marginal lower lows as part of the bottoming process.

I was expecting to see a rally before SPX made it this far down, but one of the patterns marked on my SPX 15min & 60min charts last week was a falling channel from the late July high at 4607.07. This channel is a possible bull flag channel and the low on SPX yesterday afternoon was a test of that channel support. If that level is this swing low, and barring retests, I think it probably was, then that improves the odds for this bull flag scenario, in which a significant low is being made here on SPX, which would then deliver a move back up to retest the 4607.07 high, potentially setting up a further move to then retest the all time high at 4818.62, where I already have a fixed target from another, larger, bull flag that formed and has broken up from that high.

In the short term I would also note that there is positive divergence almost everywhere on the US indices, which 15min RSI 14 buy signals fixed on all of SPX, NDX, IWM and Dow, and hourly RSI 14 buy signals fixed on SPX and IWM, and brewing on NDX and Dow. It is rare for this level of positive divergence to fail to produce a decent rally.

SPX 60min chart:

This move down has been so strong that it has even produced positive divergence on daily charts, with daily weak RSI 5 buy signals now brewing on the SPX, NDX and IWM charts. If we see a decent rally and then a low retest, that may evolve into full size daily RSI 5 buy signal divergence on all of the US indices, ideally making that second low within weeks at the main rising channel support trendline from the 2022 low low, currently in the 4240 area, but rising of course.

SPX daily chart:

Are there corresponding bull flag candidates on the other US indices? Yes, this one on IWM is another possible bull flag channel, and also hit that channel support at the lows yesterday afternoon.

IWM 60min chart:

There is a further possible bull flag channel on Dow, with once more that channel support being tested at the lows yesterday afternoon. As a group these three matching bull flag channel setups make a compelling case both for a strong rally short term, and that significant lows may be being made here.

There is also a bull flag candidate on NDX, though that one would be a bull flag falling wedge. Did we hit the support trendline on that yesterday? Well the trendlines there aren't as clear, as a falling channel has parallel trendlines and wedges do not, but yes, a high quality candidate flag support trendline was hit there on NDX too. That chart not shown today as I try to keep these posts to a maximum of five charts where possible.

Now all these support trendlines may break later of course, and as channels do not under or overthrow to signal a break in the other direction that would damage the bull flag scenario here very badly, but the odds of a swing low here are nonetheless high, and given all these ideal trendline hits, the overall bull flag scenario here became a lot more likely at the lows yesterday.

INDU 60min chart:

Is there anything else here that would support this bull flag scenario on indices? Yes. Bonds and equities have been moving down together given the current economic situation, and I really like the setup for at least a decent rally on bonds, and possibly a very significant low. I'll just show you the shorter term term setup on the TNX hourly chart but you can see that the high yesterday was at channel resistance on strong hourly RSI 14 negative divergence. TNX (10yr bond yields) is inverse to bonds of course, but this short term high setup on TNX is in effect a short term low setup on bonds.

I have been talking for weeks at theartofchart.net about a possible very significant low forming here on bonds and the setup for that here is very nice. If that is starting now then that too would support this bull flag scenario on US equity indices.

TNX 60min chart:

What's the takeaway here? Until the bull flag channel setups here break down I am now seeing the overall bull flag setup here as equally probable to the downside scenario I laid out last week. I'm looking for a strong rally here of at least 100 handles on SPX that may deliver 170 handles or so if a significant low is being made here. The odds or a retest of this low after this rally are decent and, if seen, that may make the second low of a large double bottom that could start a bullish move to take SPX back to the retest of the all time highs.

If seen this scenario wouldn't be as fun or profitable (for futures traders) as the more bearish H&S scenario that I laid out last week, but would still be both and interesting to trade. As with any futures trader I prefer the Vix high for the big moves that delivers, but any extended trending move has decent short term trades. They're just smaller in a bull move. We'll see how it goes but either way it should be interesting. :-)

I may be starting another model trade for this scenario, but that would probably be at the retest of this low after the rally that is likely starting here.

If you are enjoying my analysis and would like to see it every day (including a daily premarket video) at theartofchart.net, which I co-founded in 2015, you can register for a 30 day free trial here. It is included in the Daily Video Service, which in turn is included in the Triple Play Service.