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Friday 30 April 2010

Declining Channel or Broadening Top?

The overnight action has been very interesting on equities. We may be near the top of a large declining channel which looks best on Dow and Nasdaq this morning. The ES equivalenr has broken through the top slightly and is testing the strong resistance level at 1207.50. Here is the possible declining channel on the Dow:

This could still go either way but in my view a break above current levels would open the way towards likely new highs, and I have an alternate scenario for that.

That alternate scenario is that we may be forming a broadening top and here that is shown on the SPX daily chart:

Despite the name, broadening tops are a neutral pattern, breaking down 50.3% of the time and upwards 49.7% of the time. They are also a weak pattern and frequently fail to make the target, which is the distance between the highest and lowest peaks within the pattern, subtracted or added to the breakout point depending on the direction of the breakout.

Like quite a few patterns, that just means that they are most profitably traded within the pattern, going short at the top and long at the bottom, with a cautious long or short in the direction of the breakout when it occurs.

As the top trendline is also the very strong resistance trendline on SPX that has now been hit six times without breaking, this pattern does look much more likely to break downwards though.

At the same time that we have reached a critical point between bullish and bearish scenarios on equities, we have also reached a critical support level on USD. I posted a broadening ascending wedge on the DX 60min chart the other day, and while I redrew the top trendline after it fell short of my target then, the lower trendline remains the same, and we have reached it overnight. I have also drawn in the short term declining channel that has brought us to the lower wedge trendline:

Either the declining channel or the wedge will break today. If the wedge holds then the next target for DX is in the 83.25 to 83.5 area, depending on the time taken to get there. If the wedge breaks then DX should reach 81.5 as the next declining channel target within the next 24 hours.

As ever, if the USD breaks down, equities should break up, and vice-versa. 

Thursday 29 April 2010

Possible SPX Declining Channel and ES S/R Levels

After melting up gradually yesterday we have continued to melt up slowly on ES overnight. The support / resistance levels that were established on the way up have continued to be important on the way back up. We bottomed near one at 1177.73 on Tuesday and retested it three times over the next day before breaking up through the next one at 1187.90 late yesterday. Since then we saw a retest of that level overnight and ES is now close to reaching the next one at 1197.21, which looks good for a scalp short as there will probably be a bounce off it even if that level is broken too later on:

That level may not be broken though. If this downswing was not just a two day wonder and we are establishing a declining channel that will last a few more days, then I have a provisional candidate for a new declining channel on the SPX 60min:

If this new declining channel holds, then we should see some very good resistance in the 1200 SPX area, depending on when the line is reached, and would turn down there with a target below 1170 SPX. We would also see a retest of the broken lower trendline of a previous rising channel near the 1200 SPX level.

I don't have any new potential rising channels on the SPX 60min chart as yet, as all three of my previous rising channels have been broken, and we would need to see where we turn down next before I could start to see where a new rising channel might be. On the bullish side on this chart though, there is also the neckline of a potential IHS in the 1198.5 SPX area, and if we turned down from there then we might be watching an RS form with a pattern target in the 1215 area. That is very tentative at this stage though, and even if this forms, the neckline could move if it turned out to be a sloping neckline.

There is another larger head and shoulder pattern that may be forming at the moment, with a downsloping neckline and somewhat further advanced. Here it is on ES:

I don't much like this H&S because of the downsloping neckline, as I have found these less reliable than H&S patterns with horizontal or upsloping necklines in the past. I would find this pattern much more convincing if the right shoulder develops to a similar level to the left shoulder, as classically shoulders should be at a similar level regardless of whether the neckline is sloping. That would take us to my next ES support/resistance level at 1207.46 though and in the process would demolish my provisional declining channel on SPX.

Overall I've no particular feeling as to where this market is going today but I do think that this may well be a good scalper's market regardless of direction. These ES support/resistance levels are roughly equivalent to the SPX ranges 1180 - 1190, 1190 - 1200 and 1200 - 1210, and we seem to be moving up through these ranges at the moment and bouncing well within them. As I've been writing these we've reached my next ES resistance level at 1197.21 and bounced off it and as long as we keep doing that at these levels, then there are a number of scalps to be taken at the least.

Wednesday 28 April 2010

The SPX Rising Channels and The Vix BBs

I was playing around with the SPX daily chart today (Wednesday) and found something very interesting. I was looking at the very strong resistance line that has turned the SPX back down all six times that it has been hit since September, and I traced it back to find that it extended back to the October 2008 low.

I then tried to see whether there was a line parallel to it that would form a channel and I found one that extended back to the November 2008 low. Here's the result with the new channel in red:

Looking at it there is little doubt in my mind that this has been the primary channel that the SPX has been trading in since August, and if we should make a new high from here, it seems likely both that the upper trendline would be the main target, and that the next touch of that trendline would most likely mark the next top.

This new channel's not altogether good news from a bear standpoint, as I was expecting that a break of the lower trendline of the blue rising channel at 1140 SPX would be confirmation of a significant change in trend, and it seems that we would need to break 1100 SPX as well, but it does give us a very solid target for a significant retracement and, when broken, would be likely to open the way to further downside.

We may just have made a very significant top this time though. I was watching the Vix carefully today to see whether it would close back within the bollinger band on the daily, that being the required second day of the three day Vix buy signal for equities, and we closed above it so there will be no buy signal this time, or not this week at least:

By the usual standards today's rally after the trend day yesterday seemed uncertain and weak. Perhaps change is in the air.

An interim top is in & some targets

It was very unfortunate that I didn't check my main SPX daily chart at the weekend. If I had then I would have seen that Friday's new high hit the major resistance trendline on SPX that I had posted last week and that there was also significant negative divergence on the daily RSI and MACD. I started out the week bearish, but I would have been a lot more bearish if I had seen it:

That resistance trendline in red has now seen an amazing six hits without breaking and has marked the top of every significant move up on SPX since September. If we do see a new high in the next few weeks after this current move down, then there is a strong chance both that it will get to and end there.

Now that we have seen a very significant fall since the weekend, and it is clear that a significant interim top is in, we need to consider how far this is likely to go. The key support level over the next few days is the lower trendline of the main rising channel on SPX at 1140. There is much discussion over whether we are in a wave 4 of 5 of 5 retracement or whether wave 5 of 5 up from March 2009 has already finished, and for me the key indicator for that is whether this trendline holds. If we see a test of the trendline and it holds, then we will probably see a new high, and if it breaks then a very significant top and trend change is most likely in.

In the short term we may well have seen the bottom of the first wave down from Friday, but I still think it is very possible that we have not. On the side of arguing that we have, we hit a significant established support trendline yesterday and have tested it again this morning without closing the hour below it. We also had a trend down day yesterday and the conventional wisdom is that a trend day is generally followed by one to three days of consolidation or retracement.

On the other hand, while that has certainly been true of trend down days over the last year, it has not been true of trend up days, and if we have just seen a significant trend change, then we may well now find that the reverse is true.

It is diffiicult to try to identify a new declining channel until we see a significant bounce, but at previous significant short term trend changes a new declining channel has often been established at an obvious new declining trendline. I have identified two likely candidates on ES and in the event that we see more downside today, then I would expect to find support at one of these (marked in blue):

On the more likely candidate of the two in my view we would find support in the 1165 ES area near an established support level there. On the lower candidate we should find support at the 1155 ES level near another established support level just below 1158 ES.

Hitting either of these targets would suggest strongly that the main SPX rising support trendline at 1140 will be tested on the next wave down in the next few days.

Another reason to think that we may well see more equities downside today is USD, which made a new high yesterday and where there is an IHS target in the 84 area. I am hoping to see that equities are strongly in inverse sync with USD on this equities wave down, as they were after the mid January top, and USD has not yet hit what seems likely to be the obvious target for this wave up, which is the upper trendline of the broadening ascending wedge on DX just above 83:

In the short term on ES, I will be expecting that the wave bottom is probably in if ES rises over the overnight high at  1184.75, and that we will see more downside today if we breach the overnight low at 1176.75.

Tuesday 27 April 2010

SPX 1200 Retest and XLF Rectangle

As I suspected we would, we had a down Monday yesterday so eight Mondays up in a row remains the record for the last seven months. The ES rising channel that I posted yesterday is still looking good and overnight we have put in the right shoulder on a head and shoulders pattern indicating to the 1197 ES area:

I think it is likely that we will hit that H&S target today or tomorrow morning. We should also hit the lower rising channel trendline, which will be at the same level in a few hours, but is at 1193 ES at the time of writing. There is however a possibility that we are still putting in the head on a slightly larger head and shoulders pattern, in which case I would expect to see a bounce in the 1202 ES area and in that case we should hit the lower channel trendline overnight tonight or Wednesday.

We also have two possible downside targets from our rising channels on SPX:

Of the two shorter term rising channels, the red channel is the stronger target, as it has been support for the last two lows as well as resistance for the Thursday 15th April high. The blue channel lower trendline is also worth bearing in mind however, and is now slightly lower. Let's have a look at these in close-up for exact targets:

At the open on Tuesday, the lower trendline on the red channel will be at 1198.5 SPX and the lower channel on the blue channel will be just over 1195 SPX. I'll be watching the red channel closely and would be surprised to see a hit of the blue lower channel trendline as it would violate both the red and ES rising channel trendlines.

In terms of upside targets after a lower trendline hit and bounce, the ES rising channel target would then be in the 1222 ES area if hit tomorrow and is rising at about two points per day. On the SPX 60min chart the upper trendline of the blue rising channel may well provide some resistance again in the 1216 - 1218 SPX area. Once that resistance is broken, the upper trendline of the red rising channel is in the 1232 area today and rising at slightly over two points per day.

USD isn't giving much away today. The broadening ascending wedge that I posted yesterday was breached, but to a degree that suggested that the wedge may just have been a bit largely than I had expected. I have drawn in the alternate wedge lower trendline. We are still on course to form the potential IHS on USD that I posted on Friday morning, and there is an argument that the RS may already have troughed, so we may not see any further immediate downside on USD. If the IHS plays out from here then the target is 84.

I'm expecting that we may put in an important interim top on equities in the near future, and that they will trade sideways or down for much of the traditionally weak May to October period, but I'm not seeing much right now to suggest that interim top is already in and am expecting more upside first. That being the case I am expecting to see the 1228 SPX 61.8% retracement fib target hit over the next few days, and the rising channel targets that I have shown support the view that these will be hit on the next upswing.

If we see some major rising channel breaches this week then my opinion may change but in the interim there is a resolving rectangle on the XLF weekly chart that is looking pretty interesting as a short-term long play here:

The XLF rectangle broke upwards five weeks ago with a target of 18 and got as far as 17.12 before falling back on the GS fraud news. Last week when the SPX made a new high XLF made it back up to 16.80 and with the equities weakness so far this week has fallen back to 16.50.

If there is further equities weakness over the next day or two then XLF may well fall further to the 16.20 to 16.35 area and it would look a very attractive long there with a target of 18 on the next SPX upswing. Rectangles are fairly reliable patterns and in the absence of a major reversal in equities over the next week I am expecting that 18 target to be hit soon.

I'm missing the first two hours today. Good luck trading today everyone.

Monday 26 April 2010

SPX Channels, USD, and Cable

We saw a new high on Friday, and it is very likely now that will be followed by further new highs over the next few days. Looking at my SPX channels chart the next upside target is in the 1232 to 1235 area on SPX, if we reach it this week. It will be somewhat higher if we reach it next week as the trendline is rising:

In the very short term though, we may well see some weakness early this week as we appear to have established a new short term rising channel on ES, and we are near the top of it:

That said, it is definitely a day to be cautious on the short side as it is Monday, and as I posted the other day, 26 of the lasted 30 Mondays have closed green. Of the four red closes, two of those closed down less than 2 points and the other closes were only down 12 and 14 points respectively.

Within the last 30 Mondays though, the two longest series of positive closes were of 8 closes in a row, and one of those series is the last eight Mondays. Even by recently bullish standards therefore, we are overdue a red Monday and we may see one of those today.

I'm expecting to see more consolidation in USD during the next few days, but again, that may well not apply today. Over the last few days on the 60 min chart, DX has been forming a broadening ascending wedge that is still holding well, and if it reaches the next upside target, that will be near to a new high. After (and if) the wedge breaks downwards, I am expecting a retracement to the 80.6 area before the next USD wave up begins:

I've been having a look at GBPUSD over the weekend, and it has been very marked how relatively strong Cable has been relative to the Euro in recent weeks. I'm not expecting that to last and after some further upside with a target in the 1.56 area I would expect to see a strong new wave down towards a new low below 136.94. I have put an EW count of where I think we are on the daily chart along with the current rising channel:

There are some other reasons to think that GBPUSD can expect further weakness though in that there is a general election at the end of next week that looks likely to produce another weak and divided government with little or no commitment to putting the UK's fiscal house in order.

That matters a lot as over the last thirteen years the incumbent labour government, which is largely funded by the unions, has gone on  the largest spending spree in UK history. A million new government employees were hired, government spending ballooned from 38% of GDP to 52%, and the budget deficit is 12% of GDP, which on a par with Greece. This has resulted in a situation where over half of the UK population receives over half of their income from the government, either in salary or benefits, and the parties competing for power are largely doing so on the basis of maintaining government spending and increasing taxes on the dwindling number of UK residents with assets in order to do so.

It is hard to see this situation ending well, and unless there is an outright majority for the opposition conservatives next week, which looks very unlikely at the moment, then the situation is likely to get worse until the UK has a currency and debt crisis as it did in 1976 under the last labour government.

Good luck trading today everyone. 

Friday 23 April 2010

SPX looks fairly bullish in the short term

A very strange day yesterday with a plunge down to channel support and then a wild recovery. As ever lately the buy the dippers had a good day.

I've been having a careful look at the charts overnight and am becoming increasingly doubtful about seeing a meaningful retracement in the next few days. On the SPX 60min chart we saw another bounce off channel support yesterday morning and though it could be tested again today, the chances are that we will see a retest of resistance near the high last Thursday at the upper trendline of the blue channel:

The main current channel however is clearly the red channel, as we hit the upper trendline at the high last Thursday, and hit the lower trendline at both lows since then. If we make a new high on SPX, the next target is clearly to hit the upper trendline of the red channel in the 1230 SPX area.

I mentioned after hours last night that I was watching a potential IHS forming on ES, and that we might see an RS on it form overnight. Here's how it looks this morning:

Now until the neckline breaks any head and shoulder pattern is just lines on a chart, but we have seen a lot of IHSs play out over the last year and I am seeing a lot of big IHS patterns at the moment on individual companies. If the neckline breaks today and we make a new high on SPX, then this IHS is indicating to the next obvious upside target and I would expect it to be reached.

Looking at the SPX daily chart I had a close look at the key resistance trendline over the last few months. I mentioned that it had marked the last four significant interim tops on SPX and was hit again at the top last Thursday. Resistance would now be in the 1225 SPX area but I have noticed that there is a possibility that this resistance trendline could be the neckline on a very large IHS that could indicate to the 1360 area. If so that would suggest that we would be trading sideways for a few weeks while the RS forms:

I'm not seeing that as a serious possibility at the moment, but it is worth keeping an eye on.

EURUSD made a new low after hours while the bulls were celebrating a major turnaround yesterday, and I had a look at that to see what is likely to happen on it now. While the inverse correlation between SPX and USD has been weaker recently, equities still tend to trend up while USD is trending down, and when USD is trending up equities tend to trade sideways or correct downwards. The short term direction of USD is therefore still important.

As the majority component in the USD weighting EURUSD is always worth watching and I had another look at the EURUSD weekly chart. Unfortunately for the bears, it reached recent declining channel support at 1.32 overnight and bounced strongly there, recovering over a cent at the time of writing. My next upside target is in the 1.35 area:

Looking at USD, that target would fit perfectly with another potential IHS that is forming there on the daily chart that would indicate to 83.6 after a probable retracement to the 80.6 to 81 area. That would therefore be my highest probability scenario over the next few days:

So on balance my analysis todays shows a bullish picture, and I think that SPX is now likely to break up towards the 1230 area in the next few days while EURUSD retraces to the 1.35 area. After that I am expecting to see consolidation or retracement while EURUSD breaks down towards the 1.30 area and possibly considerably below it if that IHS on USD plays out.

One last thing to consider is that the trading day after today is Monday. That shouldn't be significant but on recent form at least it is. I've had a look at the trading record on Mondays over the last few months, and while there was no consistent picture before September last year, since then Mondays have been consistently bullish. I came up with the following stats:
  • The last eight Mondays closed up
  • Twenty six of the last thirty Mondays closed up, and of the four days that closed down, two of them closed down less than than two points, and the other two closed down ten and fourteen points respectively.
It is a courageous bear that shorts on a Monday nowadays!

I'm going to be out for the first half of the trading day today. Good luck trading everyone.

Thursday 22 April 2010

Irresistable Force vs Immovable Object

Well, it should be an interesting day today. So much so that as I start to write this I'm wondering how out of date this post will be by the time I publish it. I will therefore try to keep the commentary short!

Firstly the SPX daily chart which shows very well why last week's top was the obvious interim top. The key trendline is the rising trendline that has marked the last four (arguably five) important interim tops:

In terms of the last wave up we have reached the downside target that I gave yesterday and are testing it. If it is broken with confidence then there is little below it in terms of support for quite a while, and in my view the interim top last Thursday will be confirmed:

Here's a close-up view of the same chart:

This support level corresponds to a support level on ES at 1187.9 that I was looking at this morning & was mentioning at slope as the key support level in my view. It is being tested as I write but has not yet broken:

A key thing to watch here is EURUSD which is showing a lot of weakness today. A major support break on EURUSD may well coincide with a similar break on SPX:

Wednesday 21 April 2010

SPX at an important cusp and shorting AUDUSD

After another very bullish day on SPX we are now at a very important cusp, having come very close to a new high overnight.

I've been having another look at SPX since the Feb 5th low this morning and we have three multi-week rising channels on it that are all important at the moment:

The first channel with black trendlines is the main wave 5 rising channel. In the last move down the lower trendline was broken, and SPX has retested and broken back above that trendline. This channel is particularly significant because the top trendline may be the target for a large potential IHS building on ES at the moment.

The second channel with red trendlines is a very significant mainly interior channel with multiple touches that is almost as longstanding as the main channel. It has had one break through the top halfway through this wave up and is of particular significance at the moment because it defined both the recent SPX high and also the recent low.

The third channel with blue trendlines has defined most of the SPX action in the last few weeks. I posted it yesterday and said it was likely to prove good resistance and that was right, with no move above it until after the close yesterday and, at the time of writing, ES has now moved back within this channel.

The upper trendlines of these channels are the key resistance levels in the event that we make a new high today, and the key support levels in the event that we don't.

In the event that we don't make a new high today, I would expect a pullback to the lower blue trendline in the 1190 SPX area.

There is good reason to think that we may go up however, and if so, we have a very interesting potential IHS on ES:

I posted this IHS at an earlier stage yesterday morning as a very speculative potential pattern, but the right shoulder is largely made now so it is a very real possibility for today. The neckline is sloping upwards slightly now, but that doesn't weaken the pattern and it is a very nice symmetrical pattern as it stands. If it were to play out then I would expect the right shoulder to trough near the 1202 ES level, probably no lower than 1198 ES.

If the right shoulder is made and the neckline broken today, then the target is in the 1238 ES area. Depending on the time it takes to play out, that could fit exactly with a hit of the black channel upper trendline on the first chart.

That might not be bad news for bears if we are making a significant top at the moment. It might give us a terminating head and shoulder pattern that could look like this:

This is obviously a very speculative potential pattern, but in the event that the IHS plays out, then it would be a possibility well worth bearing in mind as major waves up or down often end with these patterns, as they did in both March 2009 and Feb 2010.

On an unrelated subject I've been watching AUDUSD and it is looking like a very interesting short here on the weekly chart:

Patterns have been good performers in the past on AUDUSD, as you can see from the chart, and it broke out of a rising wedge a few months ago, with a target of 62.5.

Since that breakout, it has formed a right-angled and descending broadening formation, and it is currently very close to the top of that pattern at about 93. If it continues within the pattern, then the next target would be the lower trendline of the pattern, currently at 82.5, but very probably at 82 or 81.5 by the time it was reached. That would be a drop of more than 1000 pips.

I think there's some more upside coming on AUDUSD in the very short term and there is a good chance that it may retest resistance at 94. If so, there would be a perfect entry for a short there with a stop at 95 and a reasonable expectation of reaching 82, so there would be credible risk/reward ratio on this trade of 1 to 12.

In the event that AUDUSD reached 95 and the stop was triggered, then the pattern would be broken and resolving upwards. There would then be a good trade going long at 95 with a stop at 94 and a target of 98. The target would technically be 106.5, but these patterns aren't particularly good performers and often fall short, so I wouldn't be greedy. Like quite a few patterns, these are easier to trade while they are developing than after they break.

Bulkowski has an excellent writeup for these patterns on his website, which is a very useful reference site for chart patterns and candlesticks.

I don't think that this will break up though, for a number of technical reasons as follows:
  • AUDUSD has failed to make a new high since the rising wedge broke and the action since has the look of a triple top.
  • The broken rising wedge suggests that the next significant move is likely to be downwards. 
  • There is strong negative divergence on both RSI and MACD.
  • The stochastics also look toppy here.
Altogether it is much easier to make a technical case for AUDUSD falling from here.

Good luck trading today everyone!

Tuesday 20 April 2010

Two Possible Head and Shoulder Patterns

We had a disturbingly bullish finish to Monday. I read somewhere that 18 out of the last 19 Mondays have been bullish, which sounds about right as I really can't remember the last Monday which closed down.

Overnight we have seen a consolidation on ES that was either an Elliot Wave reverse symmetrical triangle or a high and tight flag, either of which would be bullish, and have broken out at the time of writing to the triangle target as high as 1203 ES before pulling back to just under 1200 ES.

The question is where do we go from here?

I'm still leaning strongly towards a significant top having been made last Thursday, on the basis of the broken wave 5 channel and other indicators, but the bullishness of this market has continuously surprised for quite a while now, and it may be that there is some more upside coming regardless. The next day or two will clarify matters.

For the upside today, looking at the wave 5 channel on the SPX 60min chart, there is an internal channel, marked in black dotted lines, that should provide good resistance at the 1208 SPX level:

As for the rest of the week I am looking at two competing potential head and shoulder patterns that both look interesting. The first is bearish and we would be near the top of the right shoulder at the moment. If it plays out it would target 1150 ES:

The second pattern is bullish and much more speculative, as we would still be making the head on it at the moment, but if we were to reach ES 1207.50 on this upswing and then bounce off, then we would need to consider it as a serious possibility. It is an IHS that would indicate to 1235 ES:

A lot of people have been saying that as and when we do make a major top, then the drop would be so fast that there would be no opportunity to short it near that top. With the greatest respect to them, that very often isn't true. Many wave 2s retrace most of the preceding wave 1 down, the top of the EURUSD advance being a textbook example. We may just be looking at a deep wave 2 retracement here. Significant declines don't have to begin with a Lehman.

Good luck trading today everyone.

Sunday 18 April 2010

A modest proposal for the week

I've been looking at a lot of charts this weekend to consider how significant this top may be and there are a number of reasons to think that it may be very significant.

On the SPX main rising channel since March 2009 the advance has failed at an important interior trendline almost halfway up the rising channel:

As for this wave 5 of 5 up on SPX, on the most obvious count it looks complete, and we broke the wave 5 channel on Friday and closed below it:

There are two main alternative counts that I am considering seriously. The first is that we have just completed wave 3 of 5 of 5, and saw 4 of 5 of 5 on Friday. PUGugridiron has been looking at this count and should we make a new high from here without any further downside, then it would be the most likely count, with the 5 of 5 top somewhere between 1229 and 1250.

The other alternative count that I am considering is that we have just finished 1 of 5, and that we are in a wave 2 that we could expect to bottom within the main SPX rising channel above 1130. This is worth considering as wave 1 between March and June 2009 rose 290 points, and wave 3 between July 2009 and January 2010 rose 285 points, and while wave 5 would have to be the shortest wave, it could rise as high as 1328 if wave 5 was to be approximately the same as wave 1, as is often the case. I'm treating this as an unlikely alternate count, but it is worth bearing in mind.

But I think my primary count is the right one, both because of the wave and channel structures, and where we topped, and because of the next indicator, which is one of my favorites.

That indicator is $SPX:$VIX, and on this we do seem to have made a very significant top. There is a large broadening acending wedge, and smaller patterns within it. The last touch of the upper trendline marked the wave 3 top in January, and an interior wedge called the most important interim top before that. You'll also note that the three touches of the lower wedge trendline were at the July, October and February bottoms. We just saw a touch of the top wedge trendline and the recent interior wedge has broken, and that is a strong signal that we have just made a significant top, and on past experience we shouldn't expect to see a bottom to the current move before we reach the lower trendline:

Another indicator that caught my eye this weekend is the $NYA50R daily chart. Since the peak in May 2009, it has been trending down gently, and the last touch of that declining trendline was at the September high. There has been a gently rising trendline since the October peak, and the last touch of that was at the January high. It may not be significant that we have just touched both of those converged trendlines, but I suspect it is. Note also the recent negative divergence on RSI and MACD.

The negative divergence on the stochs, RSI and MACD is also worth noting:

So what can we expect of the coming week? I have a possible scenario that would be elegant, though it might not play out this way. I've charted it up on ES:

I noticed the potential H&S on Friday, and I think it may well play out for two main reasons which are that:
  • We only saw three waves down from the top on Thursday, and there should be five unless we are in the 4 of 5 of 5 count. We can therefore expect a fourth and fifth wave which could finish and play out this H&S.
  • Mondays in recent months have all been bullish or flat. While this one could be different, I would be reluctant to put much money on it. Chances are that this Monday will be the same.

Friday 16 April 2010

Have we just seen the wave 5 top on SPX?

I've been looking at SPX this morning and the evidence that we may just have seen the end of wave 5 of 5 looks compelling. If so we have just made a major top. Let's consider the evidence.

Firstly I was looking at ES this morning and I see that a possible H&S pattern is forming with the right shoulder on that pattern developing now. Looking further at it and dropping my preconception that a rising channel is forming I now see that recent action fits much better with a rising wedge:

Now I am fairly convinced that we are in wave 5 of 5 up from the low in March 2009 here, though we may instead be looking at a wave 3 extension for the bearish interpretation. What we are looking at here is a textbook wave 5 termination pattern and I have an example from EWI of one here for comparison:

Looking at the SPX chart for the wave 5 of 5 up since the Feb 5th low, I have marked in the wave count for what I think now looks like the highest probability count unless we make a new high today:

To add further weight to this scenario, jacksoo pointed out this morning that we hit significant resistance yesterday on a line drawn from the November ES high:

This all adds up to a compelling scenario that this wave top may well now be in. There is still some room for upside in the rising wedge of course, and there is also a little wiggle room on the resistance trendline from the November high, depending on how it is drawn, but not much. If that H&S finishes forming today then I think that it will signal an excellent short on a break of the neckline at 1201.5 ES, at which stage the rising wedge will also be at breaking point. If the lower trendline of that rising wedge, currently at 1203 ES, is broken on an hourly basis, then that will also be a signal to position short.

If the wave top is in, then we should now at minimum now see an abc retracement that should take SPX back below 1100. If the move since March 2009 has been a rally rather than a cyclical bull market though, then the top may be in, and we could then be starting a move towards a new low.

One caveat of course is that wave 5's can extend too. As ever in this strange market, some caution is required. Good trading everyone!

Wednesday 14 April 2010

Rising Channels on ES, Gold and Oil

Just a quick post with three rising channels that I have been looking at over the last day that people may find useful.

The most tentative is the new rising channel on ES for this current subwave up. This is tentative until we see another peak as this may not be a channel at all, and could be something else such as a rising wedge. Still, ES has been channeling well, and this looks good on the basis of the information available at the moment.

The IHS, which I posted before the open at slope yesterday, had a target of 1207 which has already played out to target so that pattern won't take us to the upper channel trendline:

I also have a rising channel on gold, and the lower trendline looks solid. The upper trendline looks pretty good too but there is a chance that we could see a breakthrough to the parallel red trendline above. If there is a break up then that should be the target:

The last rising channel is on oil, and it looks solid. The next target is the upper channel trendline:

I'm still on vacation and will be missing most of the trading day on Thursday so I'll check in later on in the session. Good luck trading everyone!

By the way, Leisa asked me for a Haiku yesterday while chatting about the UK man recently convicted of being overly amorous towards a donkey and a horse and these were the result. Enjoy!


There was an old man whose desire
Was a stable romance to acquire
But the donkey and horse
took legal recourse
So the neighs meant the outcome was dire.


Horses and donkeys
can be patient to a fault
But neigh still means nay

Tuesday 13 April 2010

Same S**t, Different USD

I'm still on vacation until the end of the week, but I've been keeping an eye on the markets in my absence. Still no real sign of an imminent equities top so far, but the evidence that USD has peaked for the moment looks powerful.

The main USD rising channel since November has broken, and the first five wave sequence up in USD would therefore seem to be finished. I've marked the likely fib retracement targets on the chart, and have a provisional channel for the first wave down:

As for SPX, the melt-up of this wave 5 (or wave 3 extension) since the Feb 5th low continues. The latest wave channel looks likely to break up soon though we may well see another touch of the main lower channel trendline before that happens:

This USD top is significant though. There's now a distinct possibility that the likely abc correction in USD will bottom as this wave 5 up (or wave 3 extension) in equities tops. That's mixed as far as good news goes though, as that abc is likely to take us into May.

A bit of comic relief I'd like to share with everyone. A man pleaded guilty yesterday in Leicester (UK) to some extremely innapropriate relations with a donkey and a horse, and when his lawyer was asking for bail before sentencing he admitted that 'the defendant does not have a stable address'.

Click the donkey for the full story: