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Friday, 7 October 2011

Breaking Trendlines

I was watching three key levels on SPX, NDX and RUT yesterday and they all broke up. NDX broke up fairly early in the session and the others at the close. EURUSD also broke the declining resistance trendline, and ZB broke the rising blue trendline from yesterday morning's chart and has been testing strong support in the 142 area overnight. These were all significant breaks and as a group they strongly suggest that this rally has further to go, though at over 90 ES points up at the close yesterday from the Tuesday morning low, we might be seeing some retracement sooner rather than later.

All equities charts today, as the various charts for other instruments that I posted yesterday morning are all still valid and you can see those here. The first chart today is my ES 60min chart where you can see that my ES declining channel is now broken. This break looks significant and I'm now regarding the low this week as a significant interim low. As you can see from the chart the overnight action for each of the last three days has had the look of a bull flag, and the last two were followed by a break up, then a sharp retracement, then a strongmove up. We might see the same again today though as I said this move up is starting to look a little extended:
John Murphy posted an interesting wave count yesterday night suggesting that the low on Tuesday was the end of the first five waves down for the bear market. That may well be right, as marginal new lows followed by reversal are characteristic of the end of a big move down. It's rare to see a bear market end with a single five waves down so this count would expect at least a multi-week rally here before the start of the next big move down.
How far might that move down go? Well I've posted the SPX monthly chart a few times in the last couple of weeks, and it's worth reposting now as a comparison with the action so far with the last two bear markets looks interesting. On both of the last two bear markets one significant confirming indicator was the monthly close below the monthly 20 SMA. SPX made that close at the end of last month of course and after the initial close below in both of the last two bear markets there was then one subsequent rally to test the underside of that moving average at resistance. Furthermore in both cases SPX was forming the right shoulder on upsloping H&S patterns that then subsequently broke down and played out to target. Food for thought, and the underside of the monthly 20 SMA is at 1208 today, though it is still rising, and will therefore be somewhat higher by the time it is reached:
In terms of the trading range of the last few weeks, SPX is now firmly back in the range and the next (daily) closing) resistance is in the 1180 area. The daily 50 SMA is at 1180.57 now so that would be a natural place to find resistance if we go higher today:
It's equally possible that we retrace here though. SPX, NDX and RUT all closed near the daily 20 SMA yesterday (the middle bollinger band) and that is a natural resistance level:
On the shorter term chart all three indices are in fairly well defined uptrend patterns. On SPX a tight rising channel has been established since the initial spike up from the low, and a break below it should signal that a retracement is beginning, though the topping process after that can take a day or two:
On NDX a decent quality broadening ascending wedge has been established after the initial spike up. A break down from this should again signal that at least a short term topping process is beginning:
On the RUT 15min chart a rising wedge is forming, again with the base at the first intraday high on Tuesday. That these shorter term patterns all trace back to that high is making a couple of important points. The first is that, though bearish, neither wedge particularly is targeting Tuesday's low and both are therefore suggesting that the next low will be a higher low. The second point is that after this wave up completes, we might see a move back to that intraday high on the retracement. That would be a very sharp retracement of course, but if this is a bear market rally, then we should expect to see a rally lasting two to four months or so that may well not clear the last swing high on SPX at 1230.71. From here that's not that far above in the great scheme of things, and we might therefore see some brutal retracements during this period. From an EW perspective, that intraday high was also a wave 1 high for the current move up with SPX completing either wave 3 or possibly wave 5 at the high yesterday. That high is therefore important as it is the level that should not be crossed on a wave 4 retracement in the same wave up:
I know some will object to the EW counts I've been looking at today but consider that regardless what you may think of EW theory, waves up and down do typically separate into three or five wave structures, depending on whether the move is impulsive or corrective. That being the case a look at the wave structure is something that most analysts will do every so often regardless of whether they use EW much.

Overall I'm now strongly leaning towards the view that the low on Tuesday was a significant swing low, and that the next low established should therefore be a higher low. For today obviously the jobs number has now extended the break up on ES and ZB has broken support at 142. This wave up is now up over 100 points from the low on Tuesday and the air is getting very thin at this levels short term. I'm still hedging my longs for the moment, though I've now moved the hedges up 60 points from my initial exit at 1075 on Tuesday, adding 15 points on the spike up this morning. The chances are we are going to see some retracement soon and it might well be a deep retracement. I'll aim to exit my long hedges for the moment near the bottom of that retracement when it comes.

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