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Wednesday 20 October 2010

More Downside Coming?

The rising channel on SPX was broken yesterday and SPX closed well below it. At the least that is signalling to me that a topping process has started, for an intermediate top if not a major one. Looking at the charts yesterday night and this morning I'm leaning towards our seeing some follow through today, and I have some lines in the sand that I wouldn't expect to see breached if we're going to see that.

On the SPX 60min chart you can see the broken channel and the much larger rising channel where we have reversed at the top trendline is also well worth noting. We've reached similar trendlines on quite a number of charts worldwide and while there's not much in terms of patterns to suggest that we've just made a major intermediate top, the possibility is worth bearing in mind. The lower trendline of that big rising channel is in the 1065 SPX area of course:

Short term I have a declining channel on ES. The upper trendline is in the 1172 area at the moment and if we make it up to that declining resistance trendline, I'd expect to see a reversal there if we're going to see more downside today. The tip from the GapGuy today is that since 2000, fading gaps that follow unfilled down gaps has delivered 245 winners of 319 (77%), with shorts and longs performing equally well. If we do reach that declining resistance trendline the odds therefore look pretty good for a gap fill:

In terms of a target, if we see more downside today the rectangle target is 1145 ES, and I have a rising support trendline that you can see on the top chart at 1148 SPX. That's the same target of course so I'd be looking for a move to there.

I'm not particularly happy with the level that we've seen USD bounce at, as it looks to me as though there is unfinished business to the downside. That being the case I'm slightly doubtful about seeing a big five wave move here, and on both EURUSD and GBPUSD we can see three clear waves already. Having said that both of them have had two waves down of almost equal length and this is therefore looking as though that may well have been the first two drives of a three drives pattern. Here it is on EURUSD:

If it is a three drives pattern then I've marked the likely reversal areas and third drive targets on the charts and would add that if the third drive plays out, then that will strongly imply that both will then correct before continuing down. Here's the GBPUSD chart:

I'll leave you with a very thought-provoking chart today. I've talked about some charts showing the recent high at a major resistance area, and there are quite a few of those. Here's one that is telling a different story, and it is the MSWORLD chart for non-US stocks, which really looks very bullish indeed:

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