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Wednesday 21 July 2010

The ES Forecast

I've been on a roll recently. I forecast the low near 1000 & predicted a likely rally to the 1070 - 1090 ES area. Once there I called 1099 as the likely rally top and this week I predicted on Monday morning that we'd most likely start the week with two days of rally with a likely target at 1084.5. Not bad going, though I'm not expecting to match that performance all the time of course.

For the low target I was using a rough declining channel on SPX, for last week's high a rising channel from that low, and yesterday's high has been a key support / resistance level on SPX for quite a while now.

My main tool for assessing likely immediate market direction was Alex Grant's excellent ES forecast, which he sends to his subscribers by email for a very reasonable $30 per month. I've been checking it regularly since he warned his bearish blogger friends last year that the ES forecast was predicting a sharp rise off last July's low lasting for several months. Alex has given me permission to publish his current daily forecast here and so here it is:

The forecast is a mechanical forecast using Alex's proprietary indicators, and reverses sometimes, so that it then does the opposite of what the forecast predicts, but as a tool for assessing likely market direction I rank it very highly, as I know that there is no such thing as an infallible crystal ball for market trading, and if there was, I wouldn't be expecting to get access for $30 per month. The targets given on the forecast are also very rough, so I tend to use my own channels, patterns and support / resistance levels to call these.

If you're interested in subscribing yourself the link is here.

As you can see the ES forecast is now forecasting a strong bearish tilt for the next few weeks taking us into the 900s, which as long as it doesn't reverse direction of course, gives us the likely timeframe to play out the bear scenario if it is going to play out.

That fits my overall bear scenario on the SPX daily in which we are back at the top of the main SPX declining channel:

This gives a model short entry here in my view, with potential downside here of 220 ES/SPX, and a stop at 1101 ES as that would be a break above my SPX declining channel, and would also deliver the bulls their higher high to go with their higher low, though only a break of the June high would finish off the summer bear case altogether in my view.

As for today you can see that the ES forecast is projecting sideways to down over the next few days, and we may fill intraday the open gap at 1093 ES. I had a broadening bottom on ES yesterday that broke up with a target of 1103 ES, but only 59% of these make target, and I'm not expecting to see last week's high broken:

That isn't to say that it won't be broken of course, the risk/reward is very good for a short entry here with ES at 1087 at the time of writing, but the bulls are still in with a good chance and the indicators I watch are very mixed on market direction at best.

'Dr Copper' has a scarily bullish chart, and I was disturbed to see that break up through resistance this morning. Here's my take on that:

Recent action in long term bonds is solidly (equity) bearish of course, but EURUSD up from my broadening descending wedge last week and has't reached my obvious next target near 1.32. It is retracing at the moment, but that may just be a retest of thebroken wedge upper trendline near 1.27:

Oil and CADUSD have also had bullish breaks up this morning and AUDUSD is testing a key resistance level. The bulls are still in with a very real chance here, but I'm not expecting last week's high at 1099 ES to be broken, and until it is, I'm expecting us to fall hard from here over the next few weeks.

If not, we should know very soon and I'd be out or considering exit strategies on all shorts at 1101 ES.

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