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Friday 14 October 2011

Unexpected IHS

I'm not a Jim Cramer fan I have to say, but even Jim Cramer can say something sensible once in a while and I saw a great quote from him while browsing yesterday. It's a good attitude to take and worth remembering, even if he hasn't said much else worth repeating. Markets are all about setups and probabilities.

'Remember, I am neither a bear nor a bull, I am an agnostic opportunist. I want to make money short- and long-term. I want to find good situations and exploit them.'

I was looking for an H&S pattern to form yesterday and one did, albeit not facing the way that I was expecting, as a very nice looking IHS formed on ES in the last 24 hours or so. The retracement into it was shallow, and it's therefore a bit marginal in my view as a reversal IHS, but it might play out, and is worth bearing in mind today. The target is just under 1220 ES. There is therefore a very significant chance that we will see the last high retested or a new high made today:
What would negate this bullish setup? Well as a general rule of thumb short term uptrends and downtrends develop clear rising support trendlines in uptrends and clear resistance trendlines in downtrends. I've marked in the current uptrend support trendline on the ES 15min chart and if that breaks down, ideally with a break of the IHS neckline as well, then I'd be inclined to write off the IHS:
If we do retest or make a new high, the two key resistance levels on SPX to watch are the 1220 area at the high on Wednesday and the very strong resistance level at 1230 that should hold any move up today:
Other things to watch today are the Vix, where I'm expecting the 30 area to hold. a conviction break below would look extremely bullish:
30yr Treasury futures (ZB) have retraced overnight to retest the 138'21 support level. If that breaks then we may see a retest of the 137'27 support level. If that breaks with confidence then that would most likely trash the nice short term bullish reversal setup and I don't have any decent support level until 135.A break down would look bullish for equities of course:
As with yesterday, the situation on EURUSD is very important. As I mentioned yesterday, a declining channel on EURUSD was established at Wednesday's high, but these can sometimes then fail very quickly and we might be seeing that here. Channel resistance has been thoroughly retested overnight and has so far been pinocchioed twice. If we see an hourly close over it then most likely the declining channel is broken and we will see EURUSD move up to the next resistance level in the 1.395 to 1.397 area.

Again, that would be bullish for equities and might even push SPX through strong 1230 resistance to the next strong resistance level in the 1250-60 area, though that still seems a long shot for an upwave which has already come so far without a significant retracement:
There is every reason for bears to be wary today, and treasuries and EURUSD particularly are on the cusp of doing some very serious technical damage to the longer term bear case. If we see a new high made today then I'm expecting 1230 SPX to hold but a run to the next level up cannot be ruled out on a strong push up.

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