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Tuesday, 3 August 2010

The June SPX High

I switched my primary intermediate term scenario to bullish a couple of weeks ago, and I've seen nothing to change my mind since. That doesn't mean I'm a long term bull of course. Current economic policies seem certain to end very badly sooner or later, but that doesn't mean that they will end badly in 2010.

Tim Knight posted a wonderful image last year that sums up how I feel about the current market:

There are quite a number of indicators and trends that led to my changing my view. The ending of the USD rally, the breach of declining resistance on SPX and many others. Here's one interesting indicator telling us that a major bottom has been made. It is EEM, the emerging markets ETF, and kemal_1 once suggested that I should watch it as a lead indicator of market direction. It isn't much use for calling tops, but it called the bottom last year with a very clear positive divergence from SPX, very like the divergence in June as you can see on the chart:

Within that intermediate scenario I've been giving the market direction over the next few days a lot of thought. My friend Pug is calling for a strong break up from here, and there are a number of patterns to suggest that he may be right. Here's one of the main ones, which is the extremely ugly IHS on SPX:

Now I don't like to take the other side of Pug's trades, as that (ahem) tends to be expensive, but I have an alternate scenario that hangs together very well logically and technically, and until we get a break of the June high with confidence, I will be using this as my primary scenario. I'm not seeing a slight break of the June high as significant, as unless we see a very major break downwards, my intermediate scenario will remain bullish.

I'm planning a post this weekend to explain my view of the next year or two in more detail, and to flesh out the theoretical underpinnings for my expectation that the market will continue to rally for at least another year, and to a target well over 1300. I may be wrong of course, but I have solid reasons for my view so try to suspend your disbelief in the interim even if you have a strong short-term bearish bias.

My alternate short term scenario ties in strongly with USD and commodities, but on the SPX side I am expecting a strong bounce off the June high to make the right shoulder on a much better looking IHS pattern:

This ties in with my view on USD, which has been in a steep swan dive for the last eight weeks. I have a broken wedge target of 76 on USD but I'm expecting to see at least one serious retracement on the way there, and I think that we are close to starting that retracement. During that retracement I am expecting SPX to trend down or sideways, which obviously fits well with the scenario above. Here's the falling wedge on USD with support in the 80.15 area if we reach it today, which I think we may:

EURUSD is in a mirror image rising wedge of course, and I've explained on the chart how a retracement might develop into a longer term broadening ascending wedge to get EURUSD to the broken wedge target of 1.46 to 1.50. EURUSD usually forms wedges for large moves up or down, so I'm not considering the possible alternate rising channel seriously at the moment.

Bulkowski doesn't rate rising or falling wedges highly as patterns, and from my experience they are unreliable mainly because they have a tendency to evolve into either channels or broadening wedges. That makes them harder to trade, but with that proviso in mind, makes them much more reliable, but with a wider range of possible targets.

Here's the EURUSD daily chart to show what I think is likely to happen on EURUSD over the next two or three weeks:

I posted a copper chart in a post ten days ago showing an IHS on copper with a target at 337, Copper futures reached 339.25 yesterday and have since pulled back to 335. Oil is in a possible rising channel or bearish gartley pattern with a likely reversal area for either in the 82.5 to 83 area, and we have almost reached that now:

In summary, USD, EURUSD, GBPUSD, Oil, Copper and others have all now either reached, or are close to, likely reversal areas, and ES/SPX is just below the very significant resistance area at the June high. If we are going to see a reversal lasting two or three weeks, then this is the most likely area to see that happen and that is what I am expecting to see start within a day or two unless the June high on SPX is breached with real confidence.

If we see a breach with confidence of the June high, or we see ES close a day more than a couple of points above the June high, then my alternate IHS scenario is probably off the table, and the next likely reversal area will be in the 1150 - 1160 SPX area.

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