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Monday, 5 December 2011

Reversal Territory

It's generally best to be wary of calling for reversals in strong uptrends or downtrends, but there are some nice counter-trend scalps to be taken in these, and equities are definitely in an area where we we would normally expect to see at least a short-term reversal.

One of the best guides for these is the bollinger bands on the daily Vix chart. There's a lot of talk about Vix buy and sell signals from these, but these tend to be mediocre performers, and in the nature of the way these signals form, frequently just tell you that a reversal has already happened, without giving any opportunity to get in as the reversal is actually taking place. A better guide in my view is to look for reversal when Vix initially hits the outer bollinger band. This can sometimes fail badly, but the hit rate is much better than on the more commonly used Vix Buy or Sell signals and the entries tend to be much better. I've marked these up on the Vix chart for the last year with the SPX as the background, and I've added arrows to the two notable failures over this period. You'll note from the chart that Vix has been testing the lower bollinger band for the last three trading days:
On ES I have a decent rising resistance trendline and I'm wondering whether a rising wedge might be forming. If ES retraces into rising support, currently in the 1230 area, and bounces there then that might well be the case:
On NQ I also have a well well defined rising resistance trendline, and the obvious target for a retracement would be rising support, very possibly where it intersects the strong S/R level at 2280:
On TF the obvious retracement target would be where rising support intersects the broken declining resistance trendline from the October high in the 728 area:
Looking at 30yr treasury futures (ZB), I have a decent quality resistance trendline in the 142 area, but I'm looking mainly at the possible H&S forming atthe 140 neckline. We might see a bounce on ZB into the 143 area to make the right shoulder, which would fit with a retracement on equities, followed by a move towards the 135 area, which would fit with a move up on equities into Xmas:
On EURUSD the bigger picture looks short-term bullish, subject to news from the Euro zone of course, and a nice little rising channel has formed from the low. . If that should break down I'd be looking for a double-bottom attempt, and looking at GBPUSD we could well see that. Strong support in the 1.34 - 1.343 area:
I've been watching GBPUSD as well as a possibly better proxy for the anti-dollar trade, as the UK is the largest AAA-rated developed world currency where the country is working hard to balance the budget and avoid any risk of insolvency. GBPUSD broke rising support from  the low on Friday and we might well see a double-bottom attempt here, which would fit with some retracement at least on equities. I have marked up an alternate bullish sloping IHS scenario on the chart and that's worth bearing in mind:
Oil futures (CL) are looking interesting here. The chart strongly suggests retracement soon, as two rising wedges have now formed and broken on CL since the October low with equities. Negative RSI divergence is marked and we could well be seeing a double-top forming here, which would target the 85-7 area depending on where the current move finishes. In the context of that possible double-top, the small complex IHS that I have marked in has a target at 105, and that would be a very attractive area to look for a short term high if it is reached:
ES is more than 110 points above the recent low at the time of writing and for all trhe reasons I've enumerated above, we should be looking for a short term high here. I have declining resistance from July at 1269.40 on ES today, and I'm expecting that to hold. I will get warier of the short side here if it breaks with any confidence.

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