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Friday, 23 December 2011

Holiday Resistance

Today is the last trading day before Xmas of course, volume will be low and we might not see a lot happen. I'll take this opportunity to add some longer term charts to the mix today to reflect on what trend, if any, might be emerging from this long road to nowhere this year. SPX reached 1255 yesterday, just under the 1257 break-even level for the year. It looks like it might open a little higher but whatever happens in the five remaining trading days this year, this won't have been a year where equities in the US will have moved much overall.

In the short term on ES we have now reached the double-bottom target at 1255 that I gave on Tuesday. ES has formed a decent rising channel since the low, with channel support now at the 1250 level.  As SPX has now reached the important 1257-1260 level it will be interesting to see whether it is that level or ES rising channel support, or possibly both, that breaks today:
The SX 15min chart is showing some weakness, with rising support from the low broken yesterday afternoon:
The triple-test for SPX today is at the break-even level for SPX in 2011 at 1257.64, and the 200 DMA and declining resistance from July in the 1259/60 area. How significant would a break up be? Not that significant as long as the break doesn't hold long enough for the broken resistance to become broken support. I've done a longer term SPX chart today to give the five year picture on SPX as I see it here. That includes the declining resistance trendline from the 2007 top that would be the next real big test if we do see a break up with confidence here, as well as the rising channel from the 2009 low that the bears have to break if we are to see real downside in 2012:
What else would we need to see to get a forceful break up on equities here? Well EURUSD will need to get up off the mat and break declining resistance from the October high. You can see a little broadening ascending wedge has formed since the recent low but what I have also marked on the chart is the possible lower channel trendline that is in play if EURUSD cannot break decklining resistance and breaks downwards instead. That would have a lower target in the 1.20 area and is worth bearing in mind as that would be a retest of the 2010 lows:
The other thing I'd be looking for is a break down on 30yr treasury futures through the rising support trendline from the October low. That's still holding so far though it is being tested as I write this:
Vix is hugging the lower bollinger band as I've mentioned before. That's not immediately bearish but it is a big warning flag:
I was looking through some of my longer term charts this morning to consider the longer term trend here. If this was the early stages of a strong new bull trend there are a number of things that I'd be looking for as encouraging directional pointers, and those would be positive divergence on emerging markets (EEM), copper, EURUSD and Nasdaq. Currently those are all showing negative divergence to SPX, which makes me doubtful about a strong bull move here. On EEM you can see the very weak relative performance this year on the comparitive daily charts and the middle of the three charts is the EEM:SPX relative trendline which looks very weak:
No need to show the Nasdaq chart here for relative performance. With ES almost testing the December highs NQ is still almost 80 points below. On EURUSD I used it as the background for my longer term SPX daily chart, which is worth a close look. The comparison with with 2008/9 and 2010 is interesting but either way no strong new uptrend took hold either time without a decent bottom being made on EURUSD, and there's currently no sign of that having happened as yet. On the copper chart the rising channel from the 2008 low broke down in the summer and copper made a very nice double-top this year that then just overshot the pattern target and has since been forming a triangle under the double-top neckline. That might break up of course, but the weakness relative to SPX is still very striking:
Overall I take the view that we are still in a bear market until demonstrated otherwise. As for the short term, unless we see a strong break up supported by EURUSD particularly, then I'm expecting a short term high to be made within two or three trading days. The seasonality favors the bulls here of course but against that we have already seen a strong move up from the lows. There are some very interesting stats on Santa rallies here from the excellent (and free) Trading The Odds blog, and you can see that historically we are already pushing the limits of what can be expected from Xmas moves up. Just to hold at the current level into New Year would make this the strongest Santa Rally since 1991, and on a par with the next best result down in 2000. Those two were the only Santa Rallies since 1940 to exceed 4%.

My posting schedule will be slightly more erratic next week, but I should get a post out on Tuesday with a shorter post on Wednesday and possibly no post at all on Thursday.  Everyone have a great holiday!

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