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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.

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