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Wednesday 28 September 2011

Inflection Point

I've been considering a possible multi-week bull scenario this week and that's very well summed up in the chart below which was posted on twitter yesterday by Gann360 (aka Joe8888), a chartist I admire. I've been using twitter a lot in recent months (username shjack666) but I originally signed up to twitter last year to follow Joe's charts there:
This monthly chart suggests a potential strong rally here that might last into the end of the year and is based on SPX holding a key pivot level at the end of the month.

What do I think of this scenario? Well from a TA perspective I like it a lot, and it fits very well with the forex charts I've been posting on GBPUSD and AUDUSD particularly, as well as the hits of significant support and resistance levels in the last week on bonds, silver, oil and so on. People tend to expect trends to play out quickly but that's often not the case. The 2007-9 bear market had been going almost a year before the collapse after the failure of Lehman Brothers, which was already sufficiently well telegraphed on the charts that I warned my sister in late August 2008 that in my view there was a 50% chance of a crash in the following few months.

What are the problems with this scenario? Well it doesn't seem to fit with the timeline of the current Euro area crisis at all. Short term the resolution of this crisis seems to hinge on the solvent members of the Euro, essentially Germany with some weaker sidekicks, agreeing to guarantee a huge amount of debt from borderline Euro members over whom they have little practical control to ensure good behavior afterwards. For obvious reasons this is unpopular on the german street and may also be unconstitutional there, as well as potential political suicide for the current german government if they back the plan. Against that, in the words of CNBC's Steve Liesman yesterday "If the market is going up on my (€TARP) rumor, it is ahead of itself... Europe is either in for €2T, or the euro is done."

So Europe is between a rock and hard place here and to say that the proposal that this can be sorted out in the next six weeks is ambitious is a profound understatement. Chancellor Merkel has carefully avoided committing herself to any such program and yesterday some german officials even seemed to be denying that there was any such proposal. This proposed rescue plan could unravel easily and could do so at any time, which isn't a great starting point for a big relief rally. We'll see what happens next as the crisis continues to unfold.

Short term the charts I'm looking at this morning are ambiguous, though they suggest strongly that that we are an important inflection point today and the direction of any break today may well therefore be very significant. On the SPX 30min chart the high yesterday had slight negative divergence on RSI, but not enough to be confident that a short term top is in:
In terms of where we saw the close on SPX yesterday, SPX closed back below the significant closing level in the 1178-80 area that I highlighted before the open yesterday. I've marked these current daily candle ranges on the chart below showing the overall current range within the black box:
On ES after short term rising support broke yesterday a rising channel was established at the low before the close. In the overnight session that channel broke, and the premarket high so far has been a perfect retest of that broken channel. This looks bearish unless and until we see a break back over that broken channel support trendline:
On the NDX 30min the upside gap filled yesterday as I expected, and the decline before the close didn't quite fill yesterday's opening gap, which remains open at 2234.28:
RUT's 30min chart looks the most interesting of the three this morning, with yesterday's high failing at declining resistance from the late July high. Again the opening gap from yesterday morning at 665.62 has not been filled and that is close to important rising support. A break down through that with confidence today would look bearish:
In terms of the significant inflection points that we have reached here these are best summed up in the USD and treasury charts. On USD I'll use the UUP (dollar bullish ETF) 60min chart as a proxy, and you can see that UUP bounced at significant short term support yesterday. If that rising trendline breaks today I'd expect to see significant further downside on USD and I've marked in the obvious UUP support levels:
It is the 30yr treasury futures (ZB) hourly chart that perfectly captures the inflection point that we are sitting on here though. On the (bond) bear side rising support broke yesterday before a failed retest of the important support / resistance level at 142. A second more confident break of the rising support trendline that broke yesterday would look very bearish for bonds here, and therefore bullish for equities. On the (bond) bull side the support break yesterday failed, and that trendline is holding as support since the 142 level retest. The decline into the support break formed a decent looking bullish falling wedge that may now play out in a bigger tretracement upwards that would be bearish for equities.

On the purely technical view I am leaning slightly towards the (bond) bear camp here, as my experience with these in the past suggests that falling wedges into important support levels are only bullish until those levels break, and often turn bearish on a support break. A good example of that is the falling wedge on gold that broke down through trendline support as it was forming a few days ago. Obviously we all know how that ended, though I would add that the gold falling wedge never broke up with any confidence as this one has, and that two rising support trendlines on gold broke and retested from underneath before gold then fell off a cliff from the falling wedge:
So there we are, the markets could either go up or down from here in my view. We'll have to see which way this breaks :-)

Other things to mention today are that I have short term rising support from the overnight low on ES at 1172, that the gap guy favors down gaps over up gaps today, and that I often add notes and details to the charts I post that I don't mention in the write-up, so click on the charts if you want to see those. Lastly we have a confirmed Vix Buy Signal at the close yesterday which could be bullish, though in a bear market this often just tells you that you have already had a short rally. Anyone buying on confirmation of the last of these signals a couple of weeks ago almost perfectly caught the short term high then, so I haven't bothered showing the signal on a chart today.

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