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Monday, 27 February 2012

Trendline Setups

I've been hearing a lot of talk over the last two weeks about how it's bad to call tops or bottoms, and that the SPX may get to the moon before we see a meaningful reversal. That's a view certainly, but there are a couple of points to make about that view. The first is that buying low and selling high is about not blindly buying trends. When you've seen a strong uptrend and you're in overbought territory you should look for some reversal, just as you should after a strong downtrend in oversold territory.

The second is that more than anything else I am a trendline analyst, and I look for short term reversals at trendline support and resistance, and bigger reversals when trendlines break. That doesn't always deliver the goods, but it delivers them a lot of the time, and SPX is currently showing trendline weakness, on negative RSI divergence, at major long term resistance. That is an obvious level to see a reversal of whatever degree. It might not be a major top, but it may well be a minor one.

Here's the setup on the SPX daily chart showing the negative divergence on the daily chart, the strong resistance area SPX is in, the very strong uptrend that has brought us here, and the obvious room within the daily bollinger bands and above the 50DMA (1301.48) for a retracement within this uptrend:
On the 60min chart a break above the strong resistance trendline would obviously be bullish, but we haven't seen that yet. We have however now seen two breaks of the support trendline from the Dec 19th low, and that broken support trendline is now acting as short term resistance. While that is the case the trendline bias has to be short here:
On NQ the trendline setup is also leaning bearish. NQ broke down slightly from the strong rising channel last week, bounced over 2600, but has now broken back below 2600 and the channel support trendline. Again, this is a short term bearish setup:
Vix could go lower from here, but short term it is bouncing at obvious support at the daily lower bollinger band and the longer term falling wedge setup looks bullish for Vix and therefore bearish for equities:
EURUSD broke over short term trendline resistance on Friday, and while we may well see an overbought retracement here, I'm not looking for a major high here. The two levels I'll be watching for that are declining resistance from the August high, currently in the 1.364 area, and declining resistance from the 2011 high, currently in the 1.3925 area:
I'm not sure about the higher EURUSD target, but the lower one would certainly fit well within my overall USD rising channel with possible monster IHS forming. That's progressing well with a possible falling wedge forming within the larger rising channel:
I posted the important double resistance on silver futures last week and as it happened SI reached it that day. There are some signs of weakness on both silver and gold here and we might see at least a retracement here. Gold and silver may well both be into strong new bull moves here, but for confirmation I'm looking for silver to break declining resistance and the possible double bottom neckline and for gold to break the possible double-bottom neckline. Both may well retrace here before doing that:
The overall setup on equities today looks weak, though we might well see a bounce to fill the opening gap. Strong trendline resistance is now in the 1375/6 area, and we might yet see a bounce to test that, though I'm leaning against that on balance. In terms of a bullish break up, there is nothing to see unless that trendline breaks upwards, and though we might see SPX continue to crawl up that resistance trendline, while it holds the trendline bias is short. There is a potential short term double-top on SPX which needs a lower low to confirm. As I said last week, I'm looking more a move below 1350 SPX to confirm a short term high is in.

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