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Thursday 22 December 2011

Seeking Alphahorn

I called the retest of 1225 ES as the retest target yesterday morning and the low was at 1223. Pretty close. The SPX low was 1229 which was called as the likely target by both of my EW analyst friends Pug and Alphahorn. Both of them are seeing the 1257 level as the next really important resistance level, and that fits with the 1257-60 SPX level that I've been talking about. I have done another SPX daily chart showing the importance of this area, with the breakeven level on SPX for 2011 at 1257, and declining resistance from July and the daily 200 SMA in the 1259/60 area. The daily 200 SMA is a very important bull/bear market dividing line of course, and both attempts to recover above it in October and November were very short-lived:
On the SPX 15min chart the move up from the low has the look of a rising wedge so far and that is suggesting that 1257/60 resistance will be a tough nut to crack this week. I've also added a possible IHS to the chart, though I don't like it particularly as the decline into it is short:
On the ES chart the move has been within a perfect rising channel. I've also added the stronger looking IHS there, though the decline into it is obviously still short, and the double-top target at 1255, which is very slightly above my 1257-60 SPX resistance zone. This chart is worth looking at closely as there's a lot of information on it:
The support trendline from October that I was looking at on ZN (10yr treasury futures) has now broken down, which looks bearish for bonds and bullish for equities. On ZB however (30yr treasury futures) that trendline is still intact and may get tested today at the intersection with the strong support level at 142'25. One to watch:
The other important trendline to watch is declining resistance on EURUSD, which was conspicuously weak yesterday. There is obviously a potentially very bullish setup brewing here on equities but it's hard to see that happening without EURUSD breaking up. We'll see. Declining resistance is declining fast, so either way EURUSD can't stay at this level into next week without breaking declining resistance:
If EURUSD can bounce here, the beautifully classical reversal setup on GBPUSD should then play out. I'll be watching that carefully:
There are a number of reasons to think however that even if resistance in the 1257-60 SPX area breaks, that we may see a sharp pullback next week in any case. One key reason is the Vix, which touched the lower bollinger band yesterday, reaching a level not seen since August. This is a very high level of complacency that suggests that the next interim top will arrive soon. It is a strong reason to be a nervous long here:
There is something I wanted to mention today as a possibility to consider, and that is the potential implications  of the European LTRO program. This program is pumping 489bn Euros of freshly minted digital money from the ECB into European banks for 3 years at a rate of 1% per annum, with the intention that much of that money will be used to buy EU sovereign debt for a sort of carry trade. As EU sovereign debt is (laughably) considered risk-free on the balance sheets of European banks, this will allow European banks a capital and provision-free carry trade return on EU sovereign debt over this period, at the obvious risk that they will be exposed to potentially huge capital losses in the event that those sovereigns later default.

If this program succeeds in its intention, then it might have an effect comparable to QE2 in Europe, and might even create a situation where the Euro falls while equities rise, as QE1 and QE2 did for USD, with those programs effectively having effectively devalued USD with a wave of new money. Something to watch.

I'm a member of several subscription sites, which I use to broaden my view of the market and give me other perspectives as well as potential trades. One of those subscription sites is that of my friend Alphahorn, who has been a blogger friend of mine since early 2009. Alphahorn uses EW and a number of his own custom charts and indicators to call market direction, and has been calling the turns very well indeed this year. He started a portfolio on 4/1/2011, publicly recording his trades, with the stated intention of making a return of 70% by the end of the year, and it is up 73% since then at the moment. That is a simply amazing return and he is one of the canniest chartist traders that I have ever come across. I know a lot of people don't believe in joining subscription sites but I'm just sayin'.

For today I'd expect to see the channel support trendline on ES hold and would be concerned if it doesn't. As long as it holds then I'll be expecting a test of the 1257-60 SPX area today or tomorrow. Whether that level holds or folds we'll probably still see a sharp reversal shortly after that. If that reversal comes after an hourly close much above 1260, then I'd expect more upside after the reversal.

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