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Friday 24 September 2010

Mixed Picture

I've been having a careful look at the overnight action this morning and, at best, we are looking at a very mixed picture.

On the bear side on the bigger picture the Gann guys have been talking about this week as a likely key reversal week, and while I know some don't take them seriously, I've seen them be right so often in the past that I always watch them carefully. Any key reversal here would seem likely to be downwards so far, though if we saw a big decline today then it could possibly be up.

On the chart side SPX has faltered before reaching 70 on the daily RSI, which is so far failing to confirm a change in trend to bullish in my view, and the daily RSI has broken the recent rising support trendline, which is bearish. The obvious target is the support trendline on MACD which I'll be showing in my SPX daily chart below, and that would suggest a reversal towards rising support from the July low in the 1060 area.

Financials across the world also look relatively weak, and longer term the US economy is being forced down the rabbit hole by well meaning but short-termist policymakers, which doesn't give much confidence on the bull side for equities longer term. My personal assessment of the odds that we started a new secular bull market in 2009 puts those odds close to zero, though we have definitely been seeing a cyclical bull market since within the overall secular bear market, and that cyclical bull market may not have peaked yet.

On the bull side USD has faltered badly under the repeated recent assaults from the Fed, and may well soon confirm and strengthen the current downtrend by breaking a key support level at 79.63. That is traditionally bullish for equities. Copper is also in a strong uptrend and if the current rising wedge breaks up, will soon make a new high for 2010, which would also look bullish for equities. SPX broke back below the SPX IHS neckline yesterday though, which while it doesn't invalidate the pattern, makes it less likely in my experience that we will see it play out. A close much below yesterday's would weaken it further.

Here's the SPX daily chart and I would draw your attention to the RSI and MACD as there is a  distinctly bearish short term message there.

USD has been very weak overnight and as I said, we are very close to key support now, as well as significantly below the neckline of the scary looking but uneven H&S pattern:

On copper we have a very nice rising wedge on the daily chart that is showing some signs of breaking upwards. I've put this wedge in the context of the larger picture. as and when we get a break from the wedge on a daily close basis I will be regarding that as a very significant indicator of where SPX is headed next.

Back in the short term though, ES fell sharply yesterday in the pre-market and then rallied to touch declining resistance before falling back to support again. That was good short-term bearish action and unless we see a break of that resistance trendline I'm on the short side today. We should know soon as I am watching that trendline being tested while I write.

If that trendline breaks on an hourly basis, I'll be a lot more cautious about shorts today and will be watching the thinner declining trendline a little above it. If that breaks even for a couple of ticks then I'll be out of shorts today altogether. The main decline trendline is slightly under 1128 ES at the moment and the higher ttrendline is slightly under 1130 ES. Add 5 points for SPX of course. Here's the ES 15min chart:

I'm expecting a significant move today, probably downwards. If this resolves down I'm expecting at least a test of gap support at 1110 ES, but my preferred target is 1099 ES. If declining resistance breaks then I'm expecting a move that may well be capped at 1140 ES, but could make it as far as 1155. If the higher target is hit then I'm expecting a reversal on Monday that would reverse most of the gains today.

While I've been watching ES has broken up through both of my short term declining resistance trendlines and I'm therefore very doubtful about the short side today. There is still some possible resistance at the lower trendline of the broken wedge at 1132.75, but that's already been tested once from below. A second test suggests that it is breaking up.

I'm out for most of the trading day today at my younger son's birthday party so everyone have a great weekend.

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