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Wednesday 28 April 2010

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.

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