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Thursday, 9 February 2012

Some Divergence Here

Obviously calling tops has been a hopeless task during this big bull move, and on the bigger picture I'm not seeing much to suggest that we might see a really big reversal here. We don't have anything in the way of large bear patterns here really, on equities anyway, and the lack of decent big support trendlines on the major indices makes it particularly hard to tell when a big reversal might happen. There is also currently very little in the way of topping patterns, and we are between big resistance levels on SPX.

That said, though it might be hard to point to a recent example, nothing goes up in a straight line, and even in a big bull move you will see some substantial dips. It might be another mirage of course but we are once again in an area where we might  see such a dip. Let's consider the evidence.

I posted the Transports index chart yesterday and observed that the rising support trendline from the October low was being tested, and that a break below it would be a sign of weakness. Well it has broken, and that is most definitely a sign of weakness:
120209 TRAN 60min Rising Support Trendline Break
I posted the NYMO chart on Tuesday showing negative divergence there on the daily chart. That divergence doesn't always deliver a reversal, and the last one failed to, but while it's there it is a significant signal for a potential reversal of whatever degree:
120209 NYMO Daily Divergence
On SPX I've been complaining a lot about the lack of a powerful support trendline, and we'll need a decent retracement at some stage to establish one. What we do have however is a powerful resistance trendline and we've just hit that. Supporting a reversal at that trendline is negative divergence on the 60min RSI. This negative diverence is an excellent reversal signal in a weakly trending market, and often gets steamrollered in a strongly trending one, just as the last one in January was. For what that's worth though, we're showing 60min negative RSI divergence here:
120209 SPX 60min Trendlines
What also looks interesting here is the huge falling wedge on Vix, and I've mentioned before that this pattern is running out of road. What I mean by that is that the support and trendlines will cross within three or four weeks, and in the longer term the trendlines are declining steeply. I would estimate roughly that the declining resistance trendline will hit zero in about ten weeks, and the support trendline will hit zero in slightly over five months. These are therefore not destined to be long term trendlines. In the short term Vix hit wedge resistance yesterday, and should now either break up or fall back towards the support trendline in the 15.5 area. If it breaks up then that would be a strong signal that we might see a decent retracement on equities here, and if we see that then the upper Vix daily bollinger band is just under 22 and that would be a reasonable target:
120209 Vix Daily Falling Wedge
In the very short term I'm watching a rough rising channel on the ES 15min chart from Wednesday's low. Support is in the 1342.75 area now and a break below would suggest a move back into the 1330s, very possibly to test the support trendline marked in the 1335 area. If channel support holds then I have both shorter and longer term trendline resistance on ES in the 1355 area, and I'd be watching that level very carefully:
120209 ES 15min trendlines
I've mentioned a couple of times that I think the longer term technical bull setup for USD in 2012 looks pretty good, after some more short term weakness, and I'm putting together a dedicated post to look at that. I'll try to get that out over the weekend. In the meantime I haven't posted any AUDUSD or CADUSD charts in a while, so I'll post those today to show the potential bear setups there. On CADUSD a very large potential H&S is forming, and I'd like to see CAD remain under 102 to avoid weakening that pattern. At the moment CAD is stalled below the 2011 double-top base and that is a strong natural resistance area:
120209 CADUSD Weekly Poss HS Forming
On AUDUSD I'll show the 20 year monthly chart, as the current resistance trendline comes off the 2004 high. After the strong recovery there since October a double-top may well be forming. if AUDUSD makes a new high then long term resistance is not far above and a reversal there would still leave a valid double-top, subject obviously to a return to, and then break below, the 2011 low:
120209 AUDUSD Monthly Trendlines and SR Levels
For today the main thing to watch in my view is that ES 15min chart. Since I capped the chart the support trendline has been touched again and is now a strong four touch support trendline. A break below should deliver a move back into the 1330s and I'd be watching the 1335 level then for a bounce. On a break to a new high that 1355 area is the level I'll be looking for the next short term reversal.

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