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Tuesday 14 September 2010

Slouching Towards Bethlehem

I won't post updates of any of the charts that I posted yesterday as they're all still valid today. In terms of updates for those charts SPX hasn't quite made it to the IHS neckline yet, but 30yr Treasuries and AUDUSD made target, as did oil with a slight overshoot, and all have bounced back from the target hits. EURUSD came very close to target this morning, making it to 1.2908 before falling back hard. Copper fell three bucks short of target yesterday and CADUSD is still well short, but I'm not expecting that CADUSD target to be hit much before the end of the week if we see it hit this week at all.

On the SPX chart I am expecting an exact hit of the IHS neckline for a couple of reasons. Firstly H&S necklines on larger patterns are by definition key support or resistance levels, and these tend to attract exact hits rather than near misses. We could see an intraday overshoot but it is important for the bear side that we don't see a close above the neckline as that would confirm the pattern, with a 74% probability then of meeting the target at 1250 SPX according to Bulkowski's stats. It is worth noting that this IHS is technically of good quality with well formed shoulders of equal depth, and I've marked the steadily declining volume as the IHS has formed, which is a textbook decline. If the neckline does break then, outlandish as it seems, the 1250 target should be taken very seriously:

The second reason that I am expecting an exact hit is because we have again not quite made target on my SPX:Vix daily rising wedge. This could fall slightly short but I would expect to see a hit closer to the upper trendline of the wedge:

The Vix is obviously important as well on this SPX:Vix indicator and on looking at the Vix I'm seeing two likely targets, the first just above 20 and the second slightly above 19. I'm leaning towards the second as that support trendline has been more important in recent weeks and it fits well with my SPX:Vix wedge target:

My Gold:Silver ratio indicator has broken down in recent weeks, which is bullish for equities, though we're hitting some support at the moment:

I've been having a close look at this indicator and the reason for the breakdown is of course the recent break upwards in silver. The logic behind this indicator I'm thinking is that unlike gold, silver has industrial applications, and is mainly used as an industrial metal, though it is also popular, like gold, with investors who prefer a kind of money that can't be printed by central bankers in unlimited quantities. The rationale is therefore that when silver outperforms gold then that is a sign of economic optimism. Whatever the reason, the gold:silver ratio works well as an indicator of sentiment and on the daily chart the GLD:SLV 5min indicator is a good indicator for daily moves.

I'm not seeing a likely top for this silver breakout in the near future and it may be that gold will be lagging silver for quite a while looking at the chart. That is a reaon for some caution on the bear side here and if the SPX IHS is broken on a daily basis I'll be abandoning the bear side for a while apart from playing retracements:

So why am I still leaning bearish here? Well, until the neckline breaks and the pattern confirms any H&S pattern is just lines on a chart with an important support / resistance level, as anyone trading in July 2009 will recall. In the short term we are also coming up against a string of likely reversal levels and I would expect a reversal here even if it proves short-lived. The economy is also not in good shape and earnings forecasts are in steady decline and have been since April, so a major bull breakout just seems a little far-fetched here as well.

On that last point Chart of the Day emailed out a great chart yesterday. Their free daily charts are well worth getting and you can see the full article for this chart here. You can sign up for the free daily emails on the same page. This chart shows 12-month forward earnings estimates mapped against SPX. You can see that the forward estimates reversed down in October 2007 and then up in March 2009. It peaked in April 2010 and has fallen for five straight months since. There is no sign of a reversal up so far. The indicator isn't perfect, and as you can see it troughed in 2002 a few months early. By the time it did that though the bottom on that bear market was close and it was then flat until the bear market low. No indicator is perfect and this one, for what it's worth, is suggesting that we may well have some more downside ahead of us:


While I've been writing ES has broken the support trendline from 1032 (Dec E-Mini ESZ0), and I'm now expecting to see some retracement today. This isn't unexpected, ES and SPX have been crawling up the support trendlines in recent days which is often a precursor to a break down. I'm not expecting a big break downwards this week as I'm expecting a return to the IHS neckline later in the week and I'm not expecting to see a big decline happen in opex week. I'm seeing likely support today for ES in the 1102 - 1104 area, so 1107 - 1109 on SPX:

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