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Wednesday 14 December 2011

Tricksy Markets

That was a strange day yesterday, with Vix gapping down through rising support to make a lower low on the same day that SPX also made a lower low. We did see a reversal in the 1243/4 ES area that I suggested we might yesterday morning and that means that declining resistance is at least clear. Rising support is less clear, with a strong pinocchio through my support trendline yesterday at the low, though ES recovered above it by the end of the hour and (so far) it has been retested overnight and held. As long as that remains the case, and looking at the ZB chart, I'm expecting a bounce to test declining resistance again today. If declining support breaks breaks then I have two viable support trendlines with three touches each below. More details on the chart:
If we do see a break down, where might SPX find support? Looking at the bigger picture SPX daily chart the obvious target would be at declining support from the October low in the 1185-90 area. If that rising support level should break then the next obvious target would be a long long way below. If it holds and we see another move up for the (possibly cancelled) Santa rally, then strong declining resistance from the July high has been established as the main upside target, and on a break of that declining resistance from the July high, the target would be declining resistance from the bull market top, and that would be in the 1320 area by the end of December:
The larger bull scenario that I have been looking at was heavily dependent on the big possible H&S forming on 30yr treasury futures (ZB). That scenario is fading as the right shoulder has broken resistance and extended, so the pattern is losing symmetry rapidly. In the short term ZB has formed a rising wedge since the last low, and the next obvious move is down to test wedge support, which is one reason I'm thinking we see a bounce on equities today:
I was talking yesterday about gold testing the daily 150 SMA as a key test and that has now broken on a daily close, taking out the remaining immediate trendline support at the same time. Gold and silver now look likely to correct sharply into the targets that I detailed yesterday. GDX had also formed a triangle within a larger broadening top, and that has also broken down. I'm expecting GDX to test broadening top support in the 49-49.50 area next, and if that breaks then I'd expect GDX to drop a lot further:
EURUSD obviously broke the October lows yesterday and has then taken out 1.30 overnight. I'm seeing some potential support in the 1.29 area, but the obvious target now is the 1.275 H&S target that I suggested to my EURUSD EW analyst friend five weeks ago and posted at the time. I asked him for an update yesterday as his target low had been broken, and he is considering other options, though he thinks 1.275 - 1.28 has a decent chance of a decent bounce. I'm having a look at my EURUSD chart to consider where this falling knife might find support.

Meanwhile this is a very important level for USD. Looking at the UUP chart (USD bullish ETF), UUP peaked at 22.61 yesterday. The October high was at 22.62 and the February high was at 22.63. If that resistance level breaks then USD might run quite a bit further before the next reversal. The overall context for UUP is the very large bullish falling wedge that has broken up and can no longer evolve into a declining channel:
Short term, as I said, I'm leaning towards seeing a bounce into declining resistance on ES today. After that the signals are mixed but on balance I'm expecting more downside before any interim low is made. There are some arguments against that worth noting however, and those are the surprisingly weak Vix, growing positive divergence on the ES 60min RSI, and the possible falling wedge overthrow on ES yesterday. If declining resistance on ES should break with conviction, my bias would switch to long, at least until SPX reaches declining resistance from July in the 1260-5 area.

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