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Wednesday 19 October 2011

Huge Reversal

Well that was a real rarity yesterday, a major distribution day on Monday that was followed by a major accumulation day on Tuesday. I posted the following chart on twitter intraday yesterday that showed an large H&S forming that would take ES to the 50% retracement level. It fit the likely reversal scenario perfectly and mid-afternoon yesterday I'm sure a lot of people were playing the expected top of the right shoulder in the 1216.5 ES area. Alas, the news about the French and German massive expansion for a massive expansion of Europe's bailout fund was released and the spike up on the news smashed this lovely short term bear scenario:
So where does that leave us from a technical perspective? Well the first thing to say is that if you take Friday's high as a wave high, then the 23.6% fib retracement would be at 1189.22. Yesterday's low on SPX was at 1191.48 which was very close, and we now have a very well established support level in the 1190-2 area. There's more though. I've shown some examples before of rising wedges that evolve into rising channels and the low yesterday established a very nice rising channel on SPX. This isn't good news for bears though it does give us a solid way to see when this uptrend is topping out:
Here's a look at how that looked on SPY. I've decided to start charting the index ETFs more often as a proxy for the indices. There are some good reasons for this, mainly that the volume levels are available on the sub-daily timeframe charts, and the data feed is better, as for some reason the data shown on the daily SPX and NDX charts particularly are bad at showing gaps. I've corresponded about this with Stockcharts in the past and they say there's nothing they can do to correct it as it is an issue with the main data feed from Standard and Poors that everybody uses. Here's the failed H&S and the negative RSI divergence on the SPY 60min chart:
Now I was talking about Monday's daily candle yesterday as a bearish engulfing candlestick, which is how it appears on the SPX charts, but it wasn't really a bearish engulfing candlestick, as the open on Monday was well below the close on Friday, and the body of the reversal candlestick has to entirely engulf the body of the previous candlestick. This data feed bug on Stockcharts I mentioned showed the start of the candle body incorrectly at the previous day's close. You can see the true candle on SPY and you can also see there that yesterday's candle was a true bullish engulfing candlestick. These candles don't generally mark highs. I've shown the open gap that is (roughly) in the 124-5 area and I'm now wondering about a gap fill  test of that 125 area. That area is now the key resistance area above as the first wave down from the high on SPY bottomed at 135.05:
As yet the main intra-market indicators and instruments that I watch are still pointing down for equities, though unless equities reverse downwards quickly that may not still be that case tomorrow. On Vix the nice bullish (equity bearish) setup is still intact, with a hit of the lower bollinger band on the daily chart, and a double bottom with positive RSI divergence on the 60min chart. If Vix makes a new low by much however then that bullish scenario will get smoked:
On ZB the bullish (equity bearish) scenario looks similar, without the double bottom but with an established rising channel. ZB obviously needs to not break this rising channel for this bullish scenario to remain intact:
On EURUSD we still have a failure at 1.39 resistance, but again it looks as though EURUSD may retest this today. A break of this level would not necessarily be bearish as long as it stops at the blue trendline just above, which if hit today might establish an alternate and slightly higher possible IHS neckline. The low yesterday established a three touch support trendline on EURUSD from the low and a break of that trendline would be a strong signal that this move up is topping out:
There's something to mention on this EURUSD chart. If you look at the upper blue trendline you will see that, while perfect, the first three touches are part of the preceding downtrend, and I've had it pointed out to me a few times that classically, according to Edwards and Magee and other authorities, such trendlines should not be used as part of a pattern developing in the trend that follows. I am obviously aware of this, but I do a lot of charts, and I see these perform well regularly, so I just mentally downgrade the trendline slightly and use it anyway.

I also think that this distinction is somewhat artificial as reversal patterns such as H&S patterns must use touches from both trends, and more importantly horizontal support and resistance levels work well between trends as well. What is a line like this if not just a sloping support and resistance level? If however you have more respect for authority than I do, then you should feel free to disregard any such trendlines.

So what now? I'll be watching Vix, ZB and EURUSD to see whether they give any confirmation to the bullish setup here on equities, and all these markets are now hostage to the big summit in Europe that will be trying to hammering out the details of an expansion of the EFSF to a maximum of 1 trillion euros (according to Germany) this weekend. Given that expansion of EFSF looks like electoral hemlock in Germany there obviously may not be any expansion agreed and yesterday's pivotal news may have been complete B/S.

In the interim the key levels to watch on the upside on SPX are the 1230 and 1250-60 resistance levels, and rising channel support and the strong support level at 1190-2 on the downside. After yesterday's trend day the odds favor a flat or down close today, and the Gap Guy warns that fading gaps in either direction today is risky.

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