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Wednesday, 14 March 2012

Breakout Candlesticks

An extraordinary day across a number of markets yesterday, with the breaks through the bollinger bands on SPX and Vix looking particularly remarkable. I've been doing a bit of research this morning on similar setups in the past and they are a real rarity. On the Vix there was only one similar close in 2011 where the Vix both opened and closed under the daily bollinger bands. That was in April 2011 and it marked the 2011 low for Vix, though the 2011 high on equities was a week later. That candlestick on Vix should see a significant low there made yesterday or within the next day or two:
On SPX the open was within the daily bollinger bands but spiked up through it with great conviction. These too are rare candlesticks to see, and I've looked at instances of these back to March 2009. On the chart below, from September 2011, I have marked two similar candles in blue circles and four less definite closes above the BBs in black circles. Both of the directly comparable examples were close to significant highs, but did not mark the high, and none of the highs on those six days marked a swing high. It is unlikely therefore that yesterday's high was a swing high. Cobra has made a similar observation about major accumulation days generally in his writeup last night so this high should not be treated as an immediate shorting opportunity:
I'm not an EWaver myself, but the main wave count here looks obvious even to me, and that is that we are putting in a fifth subwave on the wave 3 up that started in November. On this count we should make an interim top in the next few days, then make a wave 4 down and a final wave 5 up that should bring us into the ideal seasonal topping area in April/May, ready for the usual summer weakness. That count is a bullish count that would see a major wave 2 down in the summer followed by a wave 3 up that might obviously be larger than this monster move up from October. I've marked in the shorter term wave count and would caution that my targets at the trendlines marked might not hold:
Another reason to think that yesterday's high was not the high can be seen on the Transports chart. I mentioned yesterday morning that a break up would look bullish and the pattern target is at 5384.15, still some 130 points away from yesterday's close. I've marked on the chart as well that the March low on TRAN was at a very strong support / resistance level which might therefore hold for a while:
Short term on ES my IHS target was obviously exceeded yesterday, so that is now no longer in play. The possible channel resistance I marked in yesterday's chart was broken and I'm concerned to see that the broken trendline held as support overnight, and might therefore hold as support today. That said, I'm leaning towards seeing at least some retracement today after yesterday's trend day, and there is a promising short term-double top that may deliver a test of short term rising support in the 1380 area. If that breaks then I have rising support from last week's low in the 1374 area. If that breaks then, regardless of the short-term  bullish statistics, yesterday's high might be an interim top, and the long side would look less attractive:
Two last charts today, and the first is the TLT chart. The break downwards that I was speculating about on the ZB chart yesterday obviously came through with a lot of confidence, and while we may see an oversold bounce here I'm expecting more downside afterwards. The first obvious target on TLT is rough declining channel support in the 111 area, and I have a bigger picture target at the October low at 108.41. That second target is the valley low for a possible double-top on TLT, so a break below there would look extremely bearish for bonds, with a technical target on TLT in the 93.5 area:
I've been watching USD and EURUSD very carefully over the last few days, and the bigger picture looks bullish for USD and bearish for EURUSD. However, the short term setup on EURUSD is looking much more bullish, with marginal new lows on increasing positive divergence on the 60min chart, and I'm thinking that we may see a strong bounce here. On the USD chart below I've been watching the valley top for the possible short term double bottom, and that hasn't broken up with any confidence yet. Until we see that confident break up, the possibility remains that the possible double bottom is the left shoulder and head on a possible small IHS, and that USD might be about to retrace to make the right shoulder. That possibility should be borne in mind by anyone long USD or short EURUSD here:
As I've been writing this ES has retraced from the possible short term double-top high (good) and is currently finding support at broken channel resistance (bad). That could hold but I think it will probably break. If so I'm looking for some early retracement today, more than likely followed by a move up that should not greatly exceed yesterday's high. If we are to see a swing high this week then the most likely day would be tomorrow.

The high yesterday was at 1395.95, and that was a couple of points short of my strong resistance trendline that would therefore be in the 1398-1400 area today. That should hold today I think, though I'm doubtful about it holding longer than that. If it breaks I'll be very sorry to lose it, as it is really the only decent muliti-month trendline I have on SPX since the October low. The move up since then has been a trendline desert compared to the big moves up in 2009/10 and 2010/11. The trendline setups on TRAN and RUT are much cleaner and clearer, which is interesting as they have both underperformed in recent weeks.

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