- This blog has a copy of all header posts that I publish anywhere, so that those interested in seeing what my thoughts are on the markets can find them easily.
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Tuesday, 28 December 2010

Sideways and Up

I was wondering whether we would see some correction this week, but I'm not really seeing anything suggesting that might happen. On ES and NQ we are continuing to chop sideways to up. ES broke short term support and is now crawling up the broken trendline:

There is no good news for bears from USD either. EURUSD has made a rounded bottom and broken up from the declining channel from the early November top. I'm expecting more upside:

One thing we have been missing since the beginning of the equities spike up in December is any sort of pattern to suggest when we might see a top. We do have patterns, but they're larger and longer term, and we haven't reached the upside targets yet. I've posted the rising wedge on IWM a few times and here's the RUT version of that:

There's also a rising wedge on SPX and the upside target is in the 1285 area. You can see it here on the SPX daily chart.

Will we make those upside targets? Hard to say but it looks very possible. One thing I'm watching carefully for directional clues is silver, which is still in the triangle I first posted two weeks ago:

 Bonds look a better play than equities here and TLT is still heading towards the upside target on the falling wedge. That's currently in the 95.5 area:
 I'm only going to be posting intermittently until Wednesday 5th January though I'm expecting to do posts on Friday and probably Saturday this week.

Thursday, 23 December 2010

Holiday Patterns

It's been very boring watching the market grind steadily higher this week, and I'm wondering now whether we'll see any correction next week. We're overdue a visit to the SPX daily 20SMA and I'm expecting to see a return to that soon, but quite a number of significant milestones were passed this week, and I'm wondering now whether we'll see 1280 before correcting. I've marked up the current rising wedge on the daily SPX, and also the main SPX rising channel since March 2009, onto my daily 20SMA chart to give a good idea of exactly where SPX is now within that bigger picture:

On the much smaller picture ES has broken down into the lower half of the recent rising channel. I'm expecting to see a return to the bottom of the channel today and will be watching that for a break. If we see a break down that should signal a deeper correction next week:

The Vix has been signalling an imminent correction all week and is still signalling that imminent correction. The key support trendline was hit on Friday and then again yesterday. Here it is on the weekly chart:

I've been having a careful look at USD today and on the EURUSD chart we have been consolidating sideways all month within the main declining channel. The blue support trendline on the EURUSD chart is being tested as I write and a break of that should signal that a more aggressive wave down is starting. That would have a very good chance of carrying equities down some way with it:

GBPUSD looks somewhat different, but is also in a declining channel from the early November high. A falling wedge has formed which may limit further downside. I have two alternative lower trendlines for the wedge but an upside breakout through the upper trendline would look very bullish and would signal an earlier than expected reversal:

I posted triangles on silver and gold earlier in the week and silver is still in that triangle though gold has broken down within a falling wedge. I'm looking for a break down on both and a break up would look very bullish both for for them and also for equities. Here's the triangle on silver:

One thing that has made me much less confident about an imminent correction on equities is watching the very strong action on financials. XLF blew straight through my 15.9 target yesterday and my next target is in the 16.3 area. If it makes it there then I'd be seeing a move to rising wedge resistance in the 1280 SPX area as likely. We'll see what happens today.

This is my last daily post before Christmas so everybody have a great Christmas, and for the non-christians, have a great holiday. :-)

Wednesday, 22 December 2010

Grinding Up

Watching this tape grind up day after day really couldn't get any duller really. Alphahorn says that there's a fib turn date on 23rd December & that could well be the turn date. Short term I have a rising channel on ES that looks likely to give the range for today unless we break downwards:

We are now really very close to the likely high on IWM, which I've been watching for for some weeks. That should be in the 79.75 area and we'll most likely hit it today. Looking at the chart IWM is now up over a third since the lows in July and late August. Wow:

We're also close to my target on XLF, which is in the 15.9 area:

When we reach those targets, I'm expecting the interim top on equities to be made there. There is a chance we might break up through them, though I'd be surprised. If we did break up through them I'd be looking at the top trendline of the rising wedge on the SPX daily chart, which I was originally expecting to be hit for the next high. It looks a long way away right now in the 1275 - 1280 area but it is just possible SPX could make it up there:

Oil is another that is still well short of the target I was originally looking for at the upper trendline of the rising channel in the 93.5 area. If it can break through resistance at the current fanline it might still make it there, but as with SPX it looks ambitious:

Vix bottomed at key support on Friday, and unless we're going to see a major break down there we must now be very close to the next interim top on equities. Looking at the IWM and XLF charts particularly, I'm expecting to see that top made today or tomorrow.

Tuesday, 21 December 2010

Upside Risks

I saw an alarming rising channel on EURUSD last night, and I'm watching that very carefully this morning. An IHS of surpassing ugliness may be forming within it:

Equities have been trading sideways to up for the last few days, while EURUSD has been moving down. If EURUSD reverses decisively and rises 400 odd pips from here to the top of the channel then we might well see that end, and equities move up quite a bit. One to watch and I am reminded looking at it that my ES daily rising wedge upper trendline was never hit. That would be in the 1270 area now.

On ES itself I'm seeing a gentle rising channel with support at 1241 and resistance at 1249 at the time of writing. That looks fairly solid and may well define the trading range today:

IWM broke the previous high with confidence yesterday and my upside target trendline for IWM now looks likely to be hit. That target is in the 79.5 area today:

I've been having a look at copper this morning, and have a couple of observations to make. On the 60min chart there is a strong trendline running through the rise from 360, and if that is hit again then the upside target would be in the 430 area. I've drawn two trendlines below to show immediate and slightly longer term support:

On the weekly chart there is an obvious target for copper in the 440 area and that is pretty much the final major resistance trendline on the copper chart. if that is broken then the upside looks wide open, though I have drawn in a green trendline that would then be the trendline to watch.

I'm still very doubtful about seeing much downside on equities this week.

Monday, 20 December 2010

Christmas Week Begins

I was asked an interesting question last night, and it was in response to my saying that we had been chopping around in the same area for a week, which is generally a good signal that a top is being made. I was asked how many such formations had turned out to be consolidations in the last two years on SPX and I estimated fewer than one in three. Looking at it this morning the correct answer is actually much fewer than that, if the formation is well above the daily 20 SMA when it forms:

We've also hit support on Vix on Friday on the daily chart, where the resistance trendline for the year to April 2010 has since been a strong support trendline:

That's not to say though that we can't rise a bit further and I see on the ES 15min chart this morning that a megaphone has formed overnight that indicates to the 1250 area on an upward breakout. It may just be an overthrow but it appears to be breaking up, and I see that ES has now reached a level slightly higher than the previous highs a week ago:

EURUSD was weak overnight and is stalling again at a level that looks very significant on the USD chart. If this resistance level on USD breaks then the way looks clear to rise to the next significant resistance level at 83.65:

TLT has reversed earlier than I expected, and looking at the chart this morning what I thought was a broadening descending wedge is resolving into a falling wedge. The upside target for this move up is therefore in the 96.5 area:

Which way am I leaning this week? Well if it wasn't Christmas week I'd be leaning strongly short. However it is Christmas week and it will be a low volume, heavy POMO week so I'm a bit doubtful about seeing much in the way of downside on equities until the week after Christmas which is a very different story. Last year there was a decent correction to the 20 SMA on SPX in the week after Christmas as you can see on the top chart. Meantime I am very aware that my rising wedge target on ES is in the 1265 area now and it's still just possible that could be reached. We'll see.

Friday, 17 December 2010

The dog that didn't bark

Yesterday's bear setup was a disappointment. The ES and EURUSD channels both broke up but the really interesting action happened overnight, mainly because of what should have happened, but didn't. I'll explain with the charts.

EURUSD broke the short term declining channel at the close yesterday, and as I expected it rose quite a bit overnight. A short term rising support trendline was established overnight which has just broken while I've been writing:

Generally speaking, in a move which saw EURUSD rise over 120 pips, I'd expect to see other USD currency pairs and equities rise too, but that is the very interesting thing that didn't happen last night. Of the currency pairs GBPUSD didn't move much or at all:

On equities ES and Nasdaq were flat, and the Nasdaq broadening descending wedge that I posted yesterday is still intact, though there was a pinocchio up through it at the close:

So what does this mean? Possibly nothing, but the way I would generally interpret a dollar move down with equities flat is that equities are in a larger wave down, and will resume moving down once USD reverses back up, as it may be doing right now. While NQ and ES fail to make new highs, that's what I'm wondering this morning. It is worth mentioning with that however that the ES and NQ overnight could be interpreted as bull flags, and on Opex Friday all sorts of strange things can happen.

I've been having a look at gold and silver this morning and a nice looking declining support trendline has been established on gold. With the declining resistance trendline we could have a falling wedge on gold, though the resistance trendline really needs another touch to confirm it. If gold can make it back up to 1400 I'd see that as a bullish break:

The silver picture looks more complicated and I've taken a broader view on that chart. Right now we have a triangle forming that could obviously break either way. I'm still leaning short on silver but a break up through the declining resistance trendline would look bullish. For the bear side a break down through the triangle support trendline would open up a return to the main support trendline from $18. If that breaks then the way is open for a much deeper retracement.

One comment to make about triangles though is that they are pigs to trade, as they have a very nasty habit of breaking in one direction and then playing out in the other. Wedges, which are a sort of triangle really, sometimes do the same with overthrows or underthrows, but generally to a lesser extent and with an easier exit on the reversal. Something to consider on silver particularly if that triangle breaks up.

Thursday, 16 December 2010

More Downside Likely

We've had two Hindenburg Omens in the last two days, and you need two for a confirmed Hindenburg Omen, so we now have a confirmed Hindenburg Omen. It's worth taking a moment today to review these and what they mean.

From historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%. The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%. Though the Omen does not have a 100% success rate, every NYSE crash since 1985 has been preceded by a Hindenburg Omen. Of the last 25 confirmed signals only two (8%) have failed to predict at least mild (2.0% to 4.9%) declines. Once the signal has occurred, it is valid for 30 days, and any additional signals given during the 30-day period should be ignored. Wikipedia has a good page covering this and they update the page with new omens as they happen. You can find that here.

We had a string of HOs in August of course, and they were fully satisfied by the greater than 5% move down in late August.  What does this current omen mean in practical terms? Well it means that we're likely to see a greater than 5% correction in the next 30 days, but after a 200 point move upwards in the last four months, we don't need a Hindenburg Omen to tell us that we may well see a 5% correction in early January. It isn't a signal to go heavily short right here, the HO would be fully satisfied if we rose 10% from here and then dropped 5%. It is a warning to pay attention to downside risk.

Do I think there is an imminent likelihood of a 5% decline this week? Well no, but I am expecting more downside today and tomorrow, and having fallen almost 1% from the high on Monday, bringing that up to 2% certainly looks possible. On ES a nice declining channel has formed that I'm expecting to see play out further. Resistance is at 1237 ES at the moment and the downside target today would be in the 1225 area:

NQ is messier than ES and I have a sort of broadening wedge there, but it isn't something I'd see as readily tradeable:

So why do I think that more downside is likely? Two reasons, and the first is EURUSD, which broke an important support trendline yesterday. More downside looks very likely and my next target is in the 1.308 area. The current decline is within a steep declining channel that would put that target within reach in the next couple of days, and should also signal when the current decline is over when it breaks:

The second reason to think that more downside is likely here is the Vix. I''ve noticed that significant highs and lows on the Vix are usually signalled by negative or positive divergence on the 60min RSI respectively and I've marked those up on my 60min Vix chart. A low has been signalled here and I'd expect the Vix to rise further. Very unfortunately the broadening formation on Vix has been broken, and though I've seen that reinterpreted as a megaphone I'm not really seeing that myself so I have no upside target, but I'd generally expect the next downside reversal to be signalled on RSI too:

Oil's looking interesting here, though the signals are mixed. The upside target of the rising channel has not been reached and I'm seeing a topping fan suggesting that it may not be hit. A break below 87.75 that is sustained would mark a probable top made. The other view however is that action is recent days is forming a bull flag and that might yet play out. If oil can break 90 again I'd be looking for a hit of the upper channel line in the 92.50 area:

So there we have it and I'm leaning strongly short today. A break of those declining channels on ES and EURUSD would be bullish though, and if both were broken that would look very bullish. A lot of people are looking for 1250 SPX here and in that event we might well see that.

Wednesday, 15 December 2010

Short Term Top Made?

Just a quick post today as I'm very busy with offline stuff. ES made a marginal new high yesterday with negative divergence on RSI, and it seems likely that a short term top is in. Due to the channel and pattern desert that we have seen in this latest wave up it isn't easy to put a retracement target on this but I'm leaning towards the 1215 ES (Mar) area for a number of reasons. The technical rising wedge target is in the 1212 area and to get there some strong support in the 1230 area must be broken:

On EURUSD we are seeing a correction and the first target is in the 1.324 area. If that breaks then I'm seeing channel support in the 1.307 area:

I posted a broadening descending wedge on TLT a few days ago and it has been making good progress towards my downside target, which still looks ambitious though. We'll see if it can reach 87 - 88:

I've been enjoying some of the text to video xtranormal videos posted in recent days. I've made a contribution myself explaining the thinking behind current US economic policies. You can see it here on YouTube or below:

Tuesday, 14 December 2010

EURUSD breaks up

That was a very nice setup for the bear side yesterday, but sometimes it just goes the other way. EURUSD broke resistance and the trend there is now up until demonstrated otherwise. I capped a chart this morning and was expecting the next move on EURUSD to be down towards rising support, but since then it has broken resistance again and the next obvious target is 1.36:

That leaves the situation for an short term equities correction looking somewhat doubtful though the ES rising wedge I posted yesterday is still hanging on, just about:

The wedge has also broken and retested on NQ and might yet play out:

If equities and EURUSD break up today I do have an upside target on ES. That's based on a rising wedge on the daily chart from the summer lows and the target would be 1258 on ES (March). The chart is a longer term chart in the continuous ES feed which is still priced on ES Dec:

IWM is looking interesting. It hasn't quite made target though RSI is looking somewhat bearish. XLF looks similar as it has also not quite made the obvious target:

Monday, 13 December 2010

Ending Diagonals

I don't know whether this is the top but I think it might well be. I'm not expecting to see any serious falls before January in any case but I think this might well be as high as SPX and Nasdaq go. After not seeing much in the way of channels or patterns on the latest spike up we finally have some very nice rising wedges or ending diagonals from the last low. These are generally a fifth wave formation so for these to appear at a point where we're looking for the final move up is significant. Here it is on ES:

Here it is on Nasdaq:

Everything looks right for a top here. Silver has made a top at the right place and copper is in the right area too. Numerous 'risk-on' markets have failed to make new highs. EEM particularly appears to have topped in November which is interesting as it doesn't generally show negative divergence at tops, though it usually shows positive divergence at bottoms. Other 'risk-on' markets like Brazil that do generally show negative divergence at tops are also showing it now though, so EEM is just giving additional confirmation:

SPX:Vix has been in a rising channel since June and has made a high in the right area:

Most importantly of all USD has been consolidating and looks ready for another move up. A rising channel has formed on the daily chart that looks solid:

Pug's calling a likely wave 1 top here, and I'm joining him. We might see a marginal new high within the rising wedges today but what I'm expecting now is that we see a first wave down this week, see a second wave retracement back up over the Xmas period, and start the third wave of A in early January.