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Friday 28 May 2010

SPX Retracement Targets

I got the reversal confirmation that I was looking for yesterday, albeit not by much. We broke the declining channel I posted yesterday, cleared the neckline of the IHS comfortably enough, though getting much past it was a slow and painful business. The Vix closed under my channel trendlines on the 60 min chart, just a little bit but enough, and the RSI on the SPX daily chart broke up from the declining resistance trendline of recent weeks. For my money, we're there, and the interim low is in.

Even EURUSD has risen from the deathbed it has been occupying in recent weeks and is showing some signs of life. I have a retracement target if reached within two weeks of slightly over 1.30 for EURUSD, and of slightly over 1.50 for GBPUSD over the same period. 

My $SPX:$VIX indicator on the 60 min chart, one of my favorites as it tends to trend and pattern well, broke up from the recent broadening descending wedge, retested the broken trendline and broke upwards again. Normally this wedge would indicate a return back to the highs and lows of SPX and Vix respectively, but I don't tend to regard such targets as firm for this sort of derived indicator:

Now some of the more bullish EW analysts have regarded this fall from the high as an ABC correction and are regarding wave C as completed. If so, we can expect that we would make a new high within the right angled and ascending broadening formation on SPX in the 1250 area.

Possible, but unlikely I think. If they are right though, we'll find out when EURUSD and GBPUSD reach their retracement targets and then break upwards from their respective declining wedges. In the event that happens, this will be worth another look.

In the interim however, I'm sticking with my primary EW count, which is that we have just finished wave 1 down, and have now started wave 2. That is important, as wave 2 retracements are often very deep, and can retrace almost all of the preceding wave down in some cases, as we saw with the first two waves after EURUSD peaked a few months ago. I don't think that's likely, but it could happen, and I'll be looking for some indicator and forex confirmations before I short the top of this too heavily.

On the SPX 15min chart the IHS still looks pretty good, which is reassuring as the right shoulder was beginning to look a bit of a mess on ES yesterday afternoon. I'm expecting that the neckline at 1090 SPX should be a firm floor for SPX in the next few days, and that any drops below it will weaken or even invalidate the IHS, which has a target of 1140 SPX. I have marked in a rising support trendline on the chart, and a very tentative rising channel line above as a possible immediate target area. That only has one touch so far though, and until we see the next short term reversal it is only an educated guess:

I've marked in possible fib retracement targets on the SPX 60min chart. The main ones are the 50% retracement at 1130.29, which seems low for me, and my preferred target of 1151.41 at the 61.8% fib. That would be a typical wave 2 retracement, and I have two important trendlines that will be near that level within two weeks. I have also marked in a declining channel trendline from the top in early May that looks compelling, and that I am seeing as the first serious resistance in the 1120 - 1125 area:

On the SPX daily chart I am seeing two key broken trendlines that look interesting as potential resistance and they are the broken lower trendline of the main SPX rising wedge, which will be in the 1150 area within two weeks, and the broken lower trendline of the main SPX rising channel from the March 2009 low, which will be in the 1170 area within two weeks.

The main declining trendline from the SPX high will intersect the broken rising wedge trendline in the 1150 area in two weeks as well, and that too is likely to prove significant resistance and is another reason why I like 1150 as the retracement target from the low this week:

In terms of timeframe no doubt you'll have noticed that I'm using a working timeframe of two more weeks for this retracement, specifically with a speculative working target of Friday 11th June. That is a workable contender for a turn date, and I don't think that the USD currency pairs leave room for a much longer retracement period unless they break up from their declining wedges. In practical terms I am assuming that we have at least another week of retracement and perhaps as many as three.

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