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Thursday, 13 October 2011

Interim Top

Most likely equities made a significant interim top yesterday. How significant? Hard to say & we'll have to watch the retracement for clues as to what happens next. The level of the wave top was ambiguous to say the least, and though some bulls were throwing parties to celebrate the start of a new bull market, the strength of the wave up, and the levels of the highs yesterday on SPX and EURUSD particularly were making a case that could be read as extremely bearish. Kudos to Pug by the way for calling 1219 as his extended wave target last week.

In terms of the high on SPX, I posted the monthly chart yesterday and mentioned that in each of the last two bear markets, after the initial close below the monthly 20 SMA, that MA had been retested once subsequently in each bear market and held until the bear market bottomed out. That monthly 20 SMA was at 1209 yesterday and SPX closed at 1207. Holding so far then. The high was also an almost perfect 50% fibonacci retracement of the move since the wave 2 high at 1356.48 (50% retrace 1215.61) and of the whole bear market (50% retrace 1222.67).

I was also looking yesterday for waves up that had been stronger (in nominal rather than percentage terms) that this wild six day rally, and found nothing in the last bull market that came close. Slightly further back though the October and November 2008 bear market rallies were both as strong or stronger. Volume also declined steadily during the move up which is characteristic of bear market rallies. Food for thought.

In the short term SPX hit the top of my trading range box on SPX yesterday and reversed just 0.14 points shy of the mid to late september high at 1220-39. That is a natural reversal level and there's quite a bit of intermarket confirmation suggesting that high was a significant interim top. Here's how that looks on my SPX daily range chart and it's also worth noting the internal range support resistance levels on this chart as they may well be significant in a retracement here:
On the assumption that yesterday's high was a significant interim top I've been looking at retracement targets on SPX and ES. I've added the fib levels to my SPX 15min chart where I've also sketched the short term bearish trendline setup on SPX here, as well as the (slight) negative divergence on the 60min RSI at the highs yesterday:
I've also marked up the fibonacci retracement levels and significant support levels on ES that were established on the way up. Full details on the chart, but I'm watching the 1180 ES level particularly carefully, as that is both the 23.6% retracement level, and a potential neckline for a possible H&S that would point towards the 50% retracement level if it should form:
I was mentioning that there was some support for yesterday's high in a number of areas, and I'll post the charts for the most significant ones of those. The first is the Vix, where Vix tested and bounced at the very significant support level at 30
30yr treasury futures (ZB) broke the 138'21 level I was highlighting yesterday morning, but bounced not far below at the also significant 137'27 level. That weakens the possible H&S that could still be forming on ZB. What's interesting on ZB though is the positive divergence on the 60min RSI at the low and the double retest of the broken short term declining resistance trendline there. This chart is suggesting a decent bounce on treasuries, most likely to retest the broken 142 support level. That would be bearish for equities short term as the inverse correlation with equities is high:
I have saved the best for last though, and that is the extremely interesting EURUSD chart. Some of the sharper eyed chartists among you may have noticed the declining thin red trendline that I had on my EURUSD chart that I posted a week ago as EURUSD was basing for a move up. You can see that here. That trendline was the theoretical trendline that would be resistance if the broken falling wedge on EURUSD evolved into a declining channel. Here's how the EURUSD chart is looking this morning, after a perfect reversal yesterday at that trendline:
Why is that important? Well if you have another look at the SPX 15min chart I posted above you can see that I have used EURUSD as the background on that chart, and the very high correlation between EURUSD and SPX at the moment is obvious. Now the newly established declining channel on EURUSD might yet break up, but until it does it is a bearish setup that is pointing firmly down, with the next channel support target for EURUSD under 1.30. It may be that EURUSD and SPX decouple in the next few weeks, but right now that bearish setup on EURUSD is a correspondingly bearish setup on equities as well. I'll be watching the EURUSD chart with great interest.

Short term therefore I believe the trend is now down, and I'm watching the 1180 ES level (circa 1185 SPX) level with particular interest today.

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