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Tuesday 31 August 2010

Trench Warfare

I knew there was a holiday weekend coming up, and I'd picked up the impression that it was last weekend which was a holiday weekend in the UK. I took the whole long weekend off and was a bit surprised to see when I logged on yesterday night that it had been a trading day in the US. If I'd realised I would have done a post on Monday morning. Oops.

I was talking to a friend on Sunday about the market and told him that at the moment it is a bit like trench warfare in WWI. The market hasn't gone anywhere in a year or so now, with the main support being very close to the intraday high reached on Friday 28th August 2009 at 1039.47 SPX. I said that the bears would win a few yards and celebrate a big move towards victory, and then the bulls would win a few yards and celebrate a big move towards victory, but that it had been quite a while since a really significant level had been crossed, and SPX has been trading in the 1040 - 1130 range for almost eight weeks now.

At the time I was talking to him the bulls were celebrating a big victory on Friday, and there was serious talk of a move back towards new highs, fuelled by Bernanke's comments that if necessary there would be a major new round of quantitative easing. I remarked that if so then the market was being a very cheap date, and that a high that had required a huge stimulus and massive money printing to achieve in April, would now apparently be recaptured on no more than vague talk that Bernanke might show us some green if the economy took a real turn for the worse.

It seemed a somewhat unlikely scenario and having suggested in my Thursday post that ES would turn back down in the 1070 area, I see that it reversed at 1073. No technical damage has been done to the bear case as far as I can see, so we're back to business as usual unless declining overhead resistance can be broken.

On the SPX daily chart we can see that the wave down from the August high is forming a falling wedge, which is narrowing slowly so it could go a lot further before breaking. I've also marked up the main declining channel on SPX from the April high:

On the SPX 60min chart I've had a closer look at that falling wedge and we can see that the trendlines on the wedge are falling at about five SPX points per day. Overhead resistance today is at 1060, and the target lower wedge trendline would be in the 1020 area if hit today. I'm expecting the next significant reversal on a hit of that lower trendline:

We might not go straight there though. Two hits on the 1037 ES support level looked like it might be a double bottom. At three hits it is looking as though it could be the left shoulder and head of a continuation H&S pattern, and if so we could see a bounce today to form a right shoulder peaking in the 1060 area before dropping again. The positive divergence on both RSI and MACD on the SPX 60min chart suggest that we could see another bounce up before breaking that support level. Interestingly, though the lower trendlines on ES and SPX are the same, the top trendline on ES looks more like that of a declining channel:

The steep declining channel on EURUSD broke up last week and it looks as though EURUSD has formed another flatter declining channel. I'm not seeing anything to suggest a major break up on EURUSD either:

I was looking at some of my indicator charts over the weekend and we saw the bounce last week at the level I would have expected to see it on my SPX:Vix daily chart. It looks as though the broadening ascending wedge on this from the May low may be breaking down now, and for the bear case it does need to break, as it is a strong bullish signal that a major low may have been made until it does.

I read a year ago an analyst talking about the technical low in 2008/9 being made in November 2008 well before the SPX low in March 2009, and he was talking of course about the fact that a number of markets made their lows at the earlier low and then positively diverged from SPX. This wedge is a positive divergence similar to that, and needs to break down to eliminate that positive divergence. Once support at 1037 ES can be broken it seems clear that this wedge will break down too, and encouragingly support has already broken down on RSI on that chart, which is signalling that a break is likely very shortly:

My GOLD:SILVER chart was also interesting. Having shown a lot of bullish divergence last week it has turned back up at a level which suggests that a major high has been made on SPX. If my channel holds this should indicate that we will see a serious move down over the next two or three weeks, which would be very good to see, as we need a break of the July lows just over 1000 to clear the way to the main targets at 935 and 870 SPX which should ideally be reached before the end of October:

I have another day of big offline commitments today so I won't be around much. This should be my last such day this year apart from next Monday, which will be a relief as I've been finding my offline commitments very distracting over the summer.

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