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Tuesday, 31 January 2012

Retracement, Interrupted?

A very annoying feature of this move up since the December 19th low is that the retracements have been shallow and, mainly in consequence, no strong support trendlines have formed. This was looking very good to be the first decent retracement this year, with a clear target trendline in the 1275-85 SPX area (depending when it was reached) combined with a pullback on EURUSD that also looks overdue.

I posted an ES chart on twitter last night that showed the ideal setup there and that was on the 15min chart below:
120130-I ES 15min HS Setup

This scenario started to fray more or less as soon as I posted it however, as ES then broke over the neckline and has traded as high as 1317.50 overnight. That is worrying, as the setup is also clear on the SPY 60min chart, with neckline resistance yesterday backed up by declining resistance from the high. That strengthens the short setup but that cuts both ways of course, as if both break up then resistance is all the more broken. For the ideal bear scenario today the overnight potential gap up on SPY needs to close by the open of real time trading hours, and then SPY needs to stay below declining resistance from the high. If that gap is not closed by the open then shorting this becomes much more risky:
120131 SPY 60min Trendlines

I still think that we should see a decent retracement soon, but if ES holds on to the overnight gains into the open we may well first see at least a test of the highs last week. I've added a double-top scenario onto my SPX 60min chart:
120131 SPX 60min Paths and Trendlines

The key for the main scenario I was outlining yesterday is EURUSD and bonds. On EURUSD we saw a bounce two ticks below my neckline target at 1.308 yesterday, and while it has gone over my ideal right shoulder target at 1.318 overnight, it hasn't made a new high and negative RSI divergence suggests that it won't be making one before some pullback. If this H&S is going to play out it needs to happen quickly as the right shoulder is already looking extended. Regardless of the H&S a break below rising channel support should signal that a retracement has started on EURUSD, and that is the key level to watch today:
120131 EURUSD 60min Rising Channel and Possible HS Forming

On 30yr Treasury Futures (ZB), my target at 145'10 wasn't quite made yesterday, but I'm treating this move as possibly complete. The uptrend is intact as long as the rising channel holds, and short term support is at 144:
120131 ZB 60min Rising Channel and IHS

A couple of nice charts to end the post with today. The first is the gold futures hourly chart, with a very nice rising channel and negative divergence on the 60min RSI after the last channel resistance. Gold looks likely to retrace here and that retracement might well reach the 1680-1700 area. That would be a dip worth buying in my view:
120131 GC 60min Rising Channel

The second chart is something that a trading buddy mentioned to me yesterday, and that is the long term crosses of the SPX daily 200 and 360 SMAs. I've charted this up on the 20 year chart and it is a very nice bull/bear market indicator that interestingly enough has not crossed bearishly since 2008. These are apparently also very useful looked at over shorter timeframes, to gauge trend in combination with the daily bollinger bands, so I'll be having a good look at that:
120131 SPX Daily 200_360 SMA Crosses
For today the short term setup on EURUSD and, to a lesser extent, ES argues for initial weakness on SPX. I'd expect that to last 30 to 60 minutes into the trading day and then the trend for the day will start to become clear. If the potential overnight gap up on SPY is closed before the open then I'd give the bears a 50/50 chance of extending this retracement further. If SPY gaps up then I'd still expect some weakness in the first hour but overall I'll be leaning long. Declining resistance from the high on SPX/SPY really needs to hold. A break above it won't mean that we'll see a test of the highs, but it will mean that we might well see that test.

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