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Friday 29 July 2011

Debt Ceiling Carnage

Well we got the bounce I was expecting yesterday, but it wilted before it cleared 1315.5 on ES, and new lows have been made overnight. I'm very sorry to see that the TF declining channel didn't make it through the night. A sad loss, as navigating this decline just got significantly tougher. A shorter term declining channel of decent quality is still in play however:
On ES the apparent declining channel is actually a gently broadening wedge. As with the others ES is now showing very significant positive divergence on the 60min RSI:
There's a sort of falling wedge forming on NQ but the trendlines aren't strong enough to take much notice of this yet. NQ is still holding above 2350 on an hourly close basis:
EURUSD held the 1.427 area yesterday and retested broken wedge support. Overnight 1.427 has been broken on an hourly basis however and I'm expecting more downside from EURUSD:
Looking at the DX 60min chart, the likely shape of the EURUSD decline looks clearer. There's a nice looking falling wedge on DX that has broken up and retested, and a small IHS that has formed with the target at 75.60. Short term this DX chart is looking very bullish, and subject to the geopolitical rumblings this week and the GDP figures this morning, more upside for DX looks very likely today:
I posted the rising wedge on gold futures yesterday morning and that wedge has now broken down and retested. I'm expecting a reversal down for gold here, which would fit well with the move up on USD that also looks likely:
I've been looking at the 30yr treasury futures, and it is astonishing how well these have held up in a news-heavy week where the news has been a battle to avoid defaulting on US debt. ZB has been consolidating in a range since May and looking at the chart over the period, what this most resembles is a continuation IHS. I've drawn in arrows to show what I mean. IHSes often fail at the neckline of course, and this pattern may not complete or play out, but if it were to play out that would suggest more trouble ahead for equities:
The last chart for today is the daily SPX chart. This shows the progress of the possible H&S that is forming, and that SPX is currently at the bottom of the bollinger bands. Most importantly it also shows the daily 200 SMA, which held as support in June. That's in the 1285 SPX area now and that is the key support area for today if we see more downside:
There's plenty of positive divergence on the 60min charts, but overall the setup looks bearish for equities today. I'll be watching big support in the 1285 SPX area as very key. A break down from there would look very significant.

Thursday 28 July 2011

Floating above the world

Many technical analysts, including myself, work and trade in a world of trendlines, moving averages and indicators that is sufficiently divorced from the day to day world that we mostly ignore the news, on the assumption that the news will show up in the TA beforehand more often than not. Is that happening in this particularly news-dominated week? Perhaps, but if so then the TA is increasingly suggesting the news is not going to be that great.

Front and center this morning is the TF declining channel that I posted yesterday, mentioning that we could see a move into the 795 area on a break of the rising support trendline in blue. TF has bottomed overnight at 794.3,which was a perfect channel support hit. All the equity indices are looking oversold on the 60min on this move down and I'm expecting a bounce here with an upside target on TF in the 820-30 area:
NQ has fallen into the 2350-70 support zone. a break below would most likely see NQ drop to the 2315-20 area:
ES broke the falling wedge I posted yesterday while I was writing my morning post. The target at 1309 was made and ES bounced at rising support just under there for much of the day before giving it up in the last part of the session. If we're going to see a bounce near here, I have a support level near the overnight low at 1295.5, and there's a zone with quite a bit of support running down into the 1290 area:
A key chart at the moment is obviously the EURUSD chart and I was going to post the rising wedge on that to support the case for a bounce here. Somewhat to my surprise however it has broken down from the wedge and is now testing strong support at 1.427. A break with confidence down through 1.427 could lead to a serious further slide in EURUSD in the short term and I'm watching that carefully:
Oil was trying to break resistance at 100 and that seemed likely. It turned back down yesterday and another move to test strong support at 95 looks likely. Another trader was remarking to me yesterday that failed breakouts often precede strong moves in the other direction, and that's some thing I'm bearing in mind here for oil, and indeed for NQ and EURUSD this morning, as both of those have also had breaks up that currently appear to be failing. Here's the oil chart:
Gold is looking very interesting here. You can see from my gold futures chart that it has formed a decent quality rising wedge from the low at the beginning of July. Negative divergence on RSI is suggesting that this may well break down soon and I've mentioned before that I'd expected gold to hit the daily 150 SMA (1450 area) this summer. If it does so now then we could see a very nice move down on gold after a break of this rising wedge:
The last chart for today is the Vix daily chart, where there was a close above the bollinger bands yesterday. I've left the annotations for the last Vix Buy (equities) Signal on the chart and I'll be monitoring this daily. If we see another move up on Vix then there is an unfilled gap just over 26 and I've marked that on the chart:
I am leaning long for a bounce here today, but that's mainly based on the TF declining channel. If that channel breaks down then we could see a serious further slide across the board. A lot of technical damage was done yesterday and I'm expecting further downside after a bounce.

Wednesday 27 July 2011

Limbo Dancing

It's been interesting to watch the relative performance of the equity indices this week. Normally on a strong bull move we'd see NDX and RUT lead SPX, but although NDX has been leading here, RUT has been trailing a long way behind. I've added the comparative trendlines to this SPX chart and you can see than apart from NDX, all the main indices are trailing SPX here, including the equal weighted NDX, confirming the obvious, which is that this move up in NDX has been dominated by the big NDX components such as AAPL and GOOG:
I'm leaning bullish from here on balance and I'm looking at two patterns for short term direction. The first is a falling wedge that has developed on the ES 15min chart. This should break one way or the other today:
The second is on TF, where rising support from the low is now being tested. This is an interesting level as I still have a viable declining channel on TF and until that breaks up it is still very much in play. A break down through rising support would open up the lower channel target on TF, and that's under 800 now:
I saw someone referring to a golden cross on Vix that is taking place at the moment, so I've had a look at this. For anyone not familiar with these a golden cross is where the daily 50 SMA crosses the daily 200 SMA from below, and a death cross is where it crosses from above. These have been fairly impressive the last three years, and I've taken the view back six years to consider a reasonable sample of these. I've added a thick red vertical line for golden crosses (sell equities signal) and a thick blue vertical line for death crosses (buy equities signal). The crosses are hit and miss in my view, and the misses that spring most to the eye are the death cross in May 2008 that almost exactly captured the Vix low there, and the golden cross in May 2010, that almost exactly captured a Vix high then. You could argue that the May 2010 cross marked the flash crash then but by the time the cross was completed the flash crash was history, Vix had peaked, and SPX was in a bottoming process, so I wouldn't see this as a particularly successful signal. If the current cross is telling us anything, it is just a warning that the bears may not be finished quite yet:
I have a friend over to visit this week,so I've been writing my morning posts and then going out for the rest of the day after I post them. I was in a bit of a hurry yesterday and mislabelled Pug's EW count here as 2 of P3, when in fact it is of course 2 of 3 of P5, with P5 being the fifth wave from the March 2009 low. Apologies for any confusion that my slip of the keyboard may have caused. You can always see Pug's overall view at his longer term SP500 page here, and that includes his SP500 weekly chart below:
As I've been writing ES and TF have both been breaking support. That's switching my short term view to bearish for today. Next decent ES support at 1315.50.

Tuesday 26 July 2011

Debt Ceiling Limbo

Not a lot happened yesterday, but the marginal new intraday high on NDX was enough to penetrate the resistance trendline of the broadening top on NDX that I posted yesterday morning. That's a small break and wasn't held into the close, but it looks significant, and the bull case here feels somewhat more weighty as a result this morning:
Short term here though, the trendlines on the 15min index charts look bearish to me. SPX has broken down from the rising channel I posted on Friday into a larger rising channel which is now also breaking down:
Dow has also broken down from the rising channel I posted on Friday morning into a larger rising channel. Support on that larger channel was being tested at the close yesterday:
NDX has broken down from the rising wedge I posted yesterday into a larger rising wedge, and is testing that new support trendline:
The trendlines all look pretty clear on the three charts above but they're fuzzier on RUT. RUT looks the weakest of the three however with an nice little double top on negative divergence:
So what of the longer term situation here? Can a major new bull wave be in progress. My bullish EW friend Pug thinks so, and taking the other end of his trades has been an expensive business the last couple of years. He has us in wave 2 of major P3 here, with 3 pf P3 starting after a retracement to 1327 SPX to 1315 SPX. Considering the likely reaction to an announcement of a debt deal here, which if it will be made at all should be made by next Monday, it isn't at all hard to see a powerful reaction move to new highs in response, which would deliver Pug's third wave move through overhead resistance.

On the bear side I understand there's an important Bradley turn date on Friday and as Cobra points out in last night's post, QQQ is showing some characteristic topping candles.

One of the most important things to see in a new bull wave up would be a significant new decline on USD, and I posted the chart on Friday showing the break down from the short term triangle. That break down has been sustained and consolidated since, and the triangle target would be near main declining support for USD in the 71 area. If we see that then that should certainly give equities a significant boost:
We're in limbo this week while the debt ceiling deal in being negotiated in the US. It's hard to see a big move up before there's serious progress there. Leaning short for some correction in the next day or two.

Monday 25 July 2011

Faces of NDX

The big news this week is the talks to increase the US debt ceiling. Officially the deadline is August 2nd, but I've seen credible estimates that could extend that by a week or so. What's interesting here is the degree to which both sides have a significant incentive to wreck any agreement. On the Republican side the populist Tea Party movement is dead set against tax increases and even tax loophole reform where that results in net tax gains. This is making the Republicans take a much harder line than they might otherwise. On the Democrat side there is an opportunity to transfer ownership of the economy back to the Republicans if the talks fail, and Republican intransigence can credibly be blamed. The government shutdown in 1995 was an electoral disaster for Republicans and at least some of Obama's advisors may well be advising him here that his best chance of re-election may be to be seen to try hard, and fail, to reach an agreement here.

Of course a loss of confidence in the bond markets that led to a significant increase in interest rates might well eat up all of the currently proposed savings in increased interest payments but hey, it's not their money.

ES gapped down overnight. That wasn't a surprise as SPX, Dow and RUT had all broken the support trendlines that I posted on Friday morning by the end of the day. ES broke briefly below 1329.50 support and I'm thinking we might see a move down to 1315.50 support today:
NDX was the only one of the four indices that I posted on Friday morning not to break support by the end of the day. On the 15min chart this now looks like a rising wedge and the obvious target if we see the support trendline break at the open would be the open gap just under 2370:
That would break NDX down through the 'neckline' of the now completed cup with handle on the 60min chart, which weakens that slightly but doesn't invalidate it:
The cup with handle isn't what I'm primarily looking at on NDX though. It's an ok pattern, and there may also be an IHS forming there too. The important pattern to my eye however is the megaphone, or broadening top, that NDX has now been forming since December of last year. Another touch was needed to confirm the upper trendline and we got that at the new high on Friday. Despite the name a broadening top is a neutral pattern with a 50/50 chance of breaking up or down, and is a weak performer in reaching targets. However a break of the upper trendline should be a reliable breakout signal, and if we were to see a big reversal here, then the lower trendline would supply an ambitious downside target that should provide solid support:
I'm leaning short today and watching this retracement carefully for signs that it may mark a significant high. If the bear case for the rest of the summer has any weight, then we reached the obvious reversal levels on Friday. A break above those would suggest that the bulls are right about a new bull wave up.

Friday 22 July 2011

ST Targets Made

Most of my upside targets from earlier in the week have now been made, so what now? Well I note that having stalled at 1343 resistance for much of the afternoon yesterday, ES broke up through it after hours and has traded with it as support overnight. It may well go higher today though I think we may well be close to a short term reversal. Fortunately some decent support trendlines have formed on the indices on the way up so I'll be watching those for a break. Here's the not quite perfect rising channel on SPX:
Dow has formed a gently narrowing rising wedge, though when a wedge looks this much like a rising channel, I tend to treat it as a rising channel and not a wedge. Dow is stalling at the July highs:
NDX has formed a broadening ascending wedge and like Dow, is stalling just under the July high:
RUT has been by far the weakest of these four equity indices on the way up, which is a concern for anyone looking at the health and breadth of this move. It has also formed a rising channel on the move up and has not yet reached my target at 845. It is a long way short of the July high still:
What do I think of this bull move? Well there are a lot of people that think that a big new bull wave up has started, and they could be right. I'll need some more evidence before I agree, but one big argument in the bears' favor was damaged yesterday, with the break down on USD. USD is still in the last stages of a huge bullish falling wedge, but the break down yesterday through the shorter term triangle at the end augurs badly for USD in the short term here, and opens the path to a significant move further down, and possibly even a new low. :
My friend strawberryblonde was saying yesterday that most stocks she was looking at were forming IHS-like or cup with handle-like formations, and the same is true of the indices of course. These aren't quite what we saw at the 2009  or 2010 lows though, the ones on NDX that Tim Knight posted yesterday and SPX which I'm posted below are continuation IHSes if anything, following earlier continuation IHSes that broke up and then failed. Will these fare better? Perhaps, but these aren't strong patterns:
I posted the oil charts a couple of days ago and was suggesting that a triangle breakout looked imminent. It retraced just afterwards but has now broken triangle resistance. On a conviction break of 100 I'm looking for 105, possibly 108, and if those levels can be held, possibly higher:
I'm looking for a short term high to be made soon and am watching the support trendlines on the top four charts for a reversal signal. I have an open mind over what happens afterwards and will be watching the depth and speed of the subsequent retracement for an indication of how far this summer rally might go.

Thursday 21 July 2011

Secular Bear Markets 101

Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon. 
Winston Churchill

I'm sleeping badly this week and I'll probably skip trading today though I have some equity longs I'll leave on as I'm leaning bullish. I'll keep the post relatively short too as I've started late and the market prospects today can easily be summed up in a couple of charts. First though I've been meaning to talk about a popular myth that I often see referred to, and that is the myth that stock market performance is unrelated to economic performance.

Over shorter timeframes, as with some other popular myths, this can be true, but the apparent lack of correlation vanishes over longer timeframes, as you would expect logically of course. Those longer timeframes are of course the generally 15 to 20 year periods of the secular bull and bear markets.

There's a reasonable (and concise) view of these periods since 1906 in an article here, and it's well worth a look to give the overall context of the current period that we are trading through now. Looking at the last 60 years though, the secular bull market period 1950-1966 was a very strong period for equities at the same time as a period of strong economic growth. During the secular bear market 1966-82 economic performance was weak and equities lost value in real terms. In the secular bull market 1982-2000 we saw another very strong period for equities at the same time as a strong period for economic growth. That growth was slower than earlier bull cycles but it is a fact that economic growth slows down in more mature economies, possibly because of the higher proportion of government spending and consequent crowding out of the private sector. In the ongoing secular bear market from 2000 growth has been weak and fitful and equities have again lost value in real terms. The chances are that will continue until this secular bear market ends, most likely in the 2015-2020 period.

What's also interesting are the reasons that economies and equities have peaked and then corrected. My favorite book on this subject is Galbraith's The Great Crash 1929, which also has a very illuminating foreword written near the peak of the 1950-66 secular bull market. Galbraith talks there about the role of leverage in the great bubble of the 20s, and then talks about the rediscovery of the power of leverage in the late 50s, a key factor in the bubble that culminated in the mid-60s, and the painful deleveraging period that followed during the next secular bear market. You could reasonably assume reading this book that not only do these cycles look fairly similar, but the causes of the booms and busts look rather similar as well.

Those who cannot remember the past are condemned to repeat it. 
George Santanaya

What we have learned that is new in this current cycle though, is that even with famous scholars of previous cycles (Ben Bernanke), in key policymaking positions, all policymakers are managing to do is find new ways to make the same old mistakes. A slightly dispiriting refutation of the implication of George Santanaya's quote above, which is that if you study your history, you have less chance of repeating previous mistakes. Perhaps by the time the next secular bull cycle is peaking in the 2130s policymakers will have managed to learn something useful.

So how does this apply to us today? Well the first thing to note is that of the three secular bear market periods since 1906, the shortest lasted 16 years and the longest lasted 20 years. Realistically therefore, there is no good reason to think that this current secular bear market will be any shorter, not least because we can easily see around us that the policy response to overleveraging has been denial and a 'pretend and extend' policy based on the idea that if the problem can be brushed under the carpet long enough, it will somehow resolve itself. That seems unlikely, current policies look likely to end in a major sovereign debt crisis, which will lead to austerity and/or inflation, which should end the secular bear market cycle after another major downswing in equities.

Anyway, that's economic cycles history 101 concluded for today so let's see how the markets are looking in the short term.

A very key chart for today and the next few days is the EURUSD chart. Overnight EURUSD made the target just under 1.43 that I gave on Tuesday morning and reversed hard there. A significant inflection point then came an hour ago when EURUSD hit the rising support trendline from the recent low. EURUSD bounced hard there and my suspicion that an ascending triangle might be forming on EURUSD was confirmed. Looking at the chart the next target is triangle resistance at 1.427 - 1.4285, but the important thing to note about these triangles is that they break up 70% of the time. If and when this triangle breaks up that should give equities a decent boost and carry ES up with it to the next resistance level in the mid-1340s. Here's how that looks on the 60min chart and you can read more about ascending triangles at Bulkowski's site here:
ES has respected the established support / resistance levels well. I marked in the current key levels at 1329.5 and 1315.5 a couple of days ago and was happy to see the high at the upper level yesterday and a double test of the lower level overnight. If 1329.5 can be broken today then I'm looking for a move to the next level up at 1343. If support fails at 1315.5, I'd be looking for a retest of support at 1302.25:
I haven't posted the XLF chart much lately, and that's because apart from a worrying support break and some positive divergence on the daily chart, it isn't really saying much to me. I did post the JPM charts the other day showing the potentially stellar long setup there on a break up from the declining channel on the 60min chart, and yesterday JPM broke up from that channel. I've taken a spec long at 41 and it was trading under that at the close yesterday for anyone thinking of joining me:
That's it for today, apart from adding that I'm doubtful about this current move being the start of a big bull wave up like the one we saw last summer. I think there's a good chance of ES recovering the 1343 area, but after that I'll be watching support trendlines and patterns to signal a reversal which I suspect may not be long in coming. Meanwhile I'm enjoying the bull side here.

Wednesday 20 July 2011

Wedges and AAPL

Rising and falling wedges are some of my favorite patterns, not because they reliably reach target, because they don't, and as a result they aren't rated particularly high by Bulkowski and others, but because they really are good at signalling reversals. The falling wedges on Dow and SPX and the rising wedge that I posted on silver yesterday were excellent examples of that. They seem to perform better for me that for others, but that may well be because I'm more particular about exact touches to establish trendlines, and because I don't give the classical wedge targets much weight. A vague trendline often isn't a usable trendline at all in my experience, though I know a lot of others like them. The SPX wedge I posted yesterday broke up very nicely and the target there is just under 1345:
The same on the Dow, with another potential IHS neckline pencilled in just above the closing level yesterday. I'm not really expecting that to form but it's worth noting:
NDX broke up from the declining channel and I'm very much looking at the almost fully formed cup with handle pattern there. The target would be in the 2650 area, which should carry SPX well over 1400 if it is made:
RUT also broke out of the declining channel there, and a small IHS formed indicating to the significant resistance level at 845:
Here's a close up of that little RUT IHS. I posted this on twitter yesterday afternoon:
I posted the little rising wedge on silver yesterday that obligingly broke down in the afternoon. The obvious target to my eye is the potential H&S neckline at 37.87, though there's some positive divergence on the 60min RSI now and it may not make it that far:
Oil is at a critical level this morning. I posted a possible triangle developing on oil the other day and the low this week overthrew the lower trendline slightly,suggesting a break up soon. There's some stiff resistance below 100, but if CL can clear 100 with any confidence then a run to 105 at least looks likely:
I'd normally post a EURUSD chart here to close the post, but it hasn't done much since yesterday and still just seems poised to go to 1.43 and possibly higher. Instead I'll post one of the most important charts for this cyclical bull market and that is the AAPL chart. I've been watching this develop since the April high last year and we are now near (what could be) the climax of the huge broadening ascending wedge I have for AAPL, which should be at double trendline resistance in the 410-20 area. AAPL is trading at just under 400 overnight and yesterday's earnings were obviously stellar. My target may well be reached this week and the question is what happens then? Does AAPL break up and lend enormous weight to that NDX cup with handle? Or do we see a big reversal at resistance which would effectively kill any big bull move up on NDX and probably on the other equity indices as well? This is a major inflection point approaching on a massively influential stock, and anyone who doubts the power of these longer term trendlines should check out my post on BP in June last year, calling the low on the basis of a 13 year old pattern a day or two below the low was made. You can see that here. Food for thought and something to watch closely:
In the short term today there is strong resistance at 1329.50 ES and ES is stalling there at the moment. The Gap Guy is saying that the odds of a gap filling today are excellent. If that resistance level on ES can be cleared I'll then be watching the 845 target on RUT for the next possible reversal level.

Tuesday 19 July 2011

Possible Low Yesterday

If we are to see a rally here, which I'm leaning strongly towards, then the low yesterday was an excellent candidate for the short term low. On SPX the falling wedge overthrew before closing back within the wedge. I've tweaked the upper trendline of the falling wedge to improve the quality and resistance is now in the 1310 area. On a break up the target is 1343.89:
The lower trendline of the falling wedge on Dow broke down rather more convincingly and then again recovered the broken trendline by the close. The low established an alternate lower wedge trendline which I've marked up as the revised main support trendline. Wedge resistance is in the 12460 area and the target on a break up would be the July high at 12753.74:
On RUT the declining channel I've been using performed perfectly yesterday, with a clean bounce off the lower trendline. The channel upper trendline is just under 830 and that is the next target, though I'm thinking that this channel may now break up:
On NDX I have managed to find a declining channel, which now looks obvious and I'm wondering why I didn't see it before. NQ is at 2358 at the time of writing and has broken up from the futures equivalent of this declining channel. An open at this level would break up from this NDX channel as well:
Silver has now made the IHS targets that I posted the other day as it was breaking up from the neckline. Looking at the 60min chart however, the move up has formed a rising wedge and there is definite negative divergence on the 60min RSI. Silver may reverse downwards today or tomorrow:
Gold has had a very strong run up to new highs here, but there is something strange about it in that the reversal didn't make it to main support at the daily 150 SMA. The 150 level was hit in January of course, but you can see from my daily chart that it was hit in February, April (near miss) and July 2010, and before that in January, April (near miss), July and August 2009. Gold is close to main rising resistance in the 1635 area and we may see a reversal there or beforehand to hit the 150 SMA again. If gold is going to break the three year resistance trendline then I have a shorter term rising channel that I'm watching in blue dotted lines:
I said yesterday morning that I was watching for a break of the the declining channel on EURUSD to signal a rally and while I've since tweaked the channel into a broadening descending wedge, we saw that break up yesterday. The wedge target is the last high just under 1.43:
Copper has broken up to a new high overnight, and I have rising resistance at just over 450 and the next main resistance level at 455. Copper is now within striking distance of the year's high at just over 465, though I'm doubtful about this move up on copper making it that far:
Why am I looking for a rally here? There are a number of reasons. The falling wedges on SPX and Dow are pointing upwards. The action on equities over the last few days has shown decreasing downwards momentum, reflected in the formation of those wedges. NDX has been outperforming the other indices, which is generally bullish, and the futures charts have now broken up from their declining resistance trendlines, which is suggesting that we rally from here. How far will that go? Possibly to new highs but I'm not expecting a big new move up like the one we saw after last summer's correction. We'll see.