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Wednesday 4 August 2010

Nothing goes up in a straight line

Just a quick two chart post to help Tim out while he's in mourning for the bear case this year.

As I've said before, I'm expecting to see a new high at least on SPX in the coming months, but I'm not feeling bullish over the next few days, though many or most seem to have written August off on the bear side. There are a number of reasons why I think we could make a significant interim top here. EURUSD looks close to an interim top, and may have made it already, GBPUSD as well. USD looks overdue for a bounce and may already have turned. Oil hit my upside target this morning and SPX is right underneath a key resistance level that may well hold for a while longer, even if it is just to make the alternate IHS that I was posting about two days ago.

One of my indicators has also just given a topping signal and that is the $GOLD:$SILVER ratio on the daily chart. Here it is with the SPX in green as the background:

The $GOLD:$SILVER ratio has a strong support trendline that is almost a year old now. I've put in a red (sell) vertical line wherever that support trendline has been hit and you can see that it has identified most of the major interim tops in that time, often a few days early, but when it is early, the market doesn't move up much afterwards, and falls significantly after the top is made. There have been no false positives.

On the identifying bottoms side (blue vertical trendlines) it has been pretty good at that too. Even when it broke up from the rising channel for a little while, it called a significant interim low just before it broke up, and another when the resistance level above was hit.

Now that support trendline will break sooner or later, as all trendlines do, but this is a strong signal that we are likely to turn down in the very near future, and while resistance at 1130 may be broken, it isn't likely to be broken by much before the next interim top is in. My only caveat for that would be that the action over the last few months has the worrying look of an H&S pattern, and that if that support trendline broke, then we might see a major break up on SPX.

My second chart is an annotated version of the Dow H&S chart Tim posted tonight, and my comment here would be that if we were now making the top of the RS, then that would be a perfectly valid H&S pattern indicating to 7900, just with a downsloping neckline:

As I said, I'm strongly favoring the intermediate term bull side now, but my point is that while the bear case is badly wounded, and would be further wounded by a break of the June highs, it isn't dead quite yet.

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