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Monday 15 August 2011

Vix Buy Signal Confirmed

It won't be as reliable in a downtrend but the Vix Buy Signal (for equities) that was triggered at the close on Thursday was confirmed at the close on Friday. These have been a very reliable indicator for a decent rally in equities, and that makes me more confident in my expectation that we are going to see a retest of strong resistance in the 1240-60 area before the next equities decline:

That retest is suggested by the diamond bottom on SPX last week, which has a target at 1243. I posted that on Friday morning and you can see that here. That's a reliable pattern, though the trend is down, and bull patterns are more prone to fail at the moment as a result. In the very short term the key obstacle to seeing further upside is a strong resistance trendline on ES, which was just a possibility on Friday morning, but was greatly strengthened by two touches on Friday afternoon. If we are to see a continuation of the current rally this week then that resistance must be broken. On this ES chart it's worth noting that the hourly 200 SMA was resistance on Friday afternoon and is now support. If we're going up today I would expect that should hold and a break below it would look bearish:

On EURUSD I'm watching to see whether it can manage a decent rally from here. It has broken back above 1.427 overnight and I'm seeing significant declining resistance in the 1.435-6 area. A break through that resistance would open a path to retest the last high at 1.454:

That's it for the short term charts today. There's nothing to add to that really as ES / SPX will either get past resistance or not, and I have some interesting long term charts I'd like to share. The first of those is the SPX weekly chart from 1990 (log scale), where a trendline drawn from a low in the 1995 looks very interesting. A very thought-provoking chart:

The other charts have a look at crosses of the 13 & 34 weekly exponential moving averages since 1980. These EMAs are crossing at the moment, and it's worth a look to review how well these crosses have performed in the past. The first thing to say is that the EMAs have not yet crossed, and that a kiss of these EMAs has in the past marked a low as often as they signalled a bear market. A cross with some conviction will be required for bear market confirmation. If we see that then these crosses have been very good indicators for a bear market in the past, with early crosses in both the 2000-3 and 2007-9 bear markets. Here's how that looks since 2000:

I only have SPX data on stockcharts back to 1980, and obviously this includes the most powerful secular bull market period in history between 1982 and 2000, so the period I am reviewing today is heavily biased towards towards bull markets. In the 1990s there was one cross with confidence in 1990 which was well before the low was made that year and there were two marginal crosses in 1994 and 1998:

In the 1980s there were crosses in 1981, 1984 and 1985, all three of which correctly signalled bear markets well before the lows were made:

I'm bullish today on a break of 1190 on ES. Until then I think there is a very significant chance of a sharp pullback in the short term, with significant support at the hourly 50 SMA in the 1168 area. 

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