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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.

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