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Saturday 13 March 2010

Should bears beware the Ides of March?

Things seem to be lining up nicely for a significant interim top to be made early next week. $BPNYA looks to be one bullish day or so away from hitting the top of the declining channel. This has been a very good indicator of significant recent tops and bottoms in recent months:

Similarly USD is only a short distance now from the bottom of the rising channel, and if it hits it, we should expect to see a new wave up in USD that should have a strong dampening effect on equities exuberance. Here it is on the DXM0 60min chart:

We are now only a few points away from the next serious resistance on SPX in the 1160 area. Here's the three year daily SPX chart showing the year-old rising channel with the significant support and resistance levels marked:

So everything is lining up nicely for the significant interim top that I have been expecting.

There are many saying though that we are on the cusp of a major rise in equities that will see us continue this already fairly long in the tooth upswing. Could it be so? Obviously it could. We are only ever weighing probabilities with market analysis. Lower probability outcomes are only ever just lower probability. What could make this potential parabolic rise a reality?

Well, these same three charts above could tell a different story. All channels break sooner or later, and every time that we reach the upper or lower trendline of a channel there is a significant risk that it will break up or down respectively. Equally, rising channels tend to break downwards just as declining channels tend to break upwards. There is obviously a significant risk that both the $BPNYA and USD channels will break next week.

The three year SPX chart tells a story as well. If the strong resistance in the 1160 area is broken, the next really significant resistance level is in the 1200 area.

There is also a longstanding gently declining channel on the Vix. The lower trendline of that channel would be under 15 if we were to touch it in the near future, and a major push upwards in equities could make that happen. If so however, the very significant top at the end of that push upwards should be signalled by the Vix touching the bottom trendline of the channel, and we should at the least see a very significant retracement after that:

This parabolic rise to the next interim top could happen, but it isn't really any particular cause for alarm for traders. If this scenario were to play out we would know quickly as the 1160 resistance would be broken with confidence and most likely the USD and $BPNYA channels would be broken at the same time. Any rise would also still most likely be confined within the strong rising ES channel, which is sufficiently steep to be reasonably confident that when it breaks, it will break down rather than up:

There is another indicator I will be watching closely as well, which is the very longstanding rectangle pattern on the weekly chart of XLF, the Financial Sector SPDR. At the moment it has made a perfect touch of the top of the rectangle and is back on the way down to the bottom. That is very bearish for equities generally in the near future. This is a particularly good example of a rectangle by the way, with perfectly exact touches of the bottom and top trendlines, a breakout either way has a good chance of making the rectangle target, and any close above or below the rectangle will be a very strong bullish or bearish indication for equities generally depending on the direction of the break.

However, the rectangle is of course a generally bullish pattern with 69% of breakouts to the upside, and upward breakouts particularly are often signalled by a partial decline in the rectangle before a second touch of the top trendline, so if we see the top of the rectangle touched again next week that would be a strong warning of a potential upside breakout with a target of 18.5, and to reach that target would likely require a major wave upwards in equities.

All in all though, there is a very strong probability that we are about to put in at least a significant interim top on equities. Oil and gold both broke downwards from their respective short term rising wedges on Friday, with targets of 72.5 and 1060 respectively, and while of course it is still possible that they will break back upwards, it is unlikely. Resolving to those targets would fit with a strong retracement in equities and that is what I think we will be seeing for most of the rest of March.

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