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Friday, 16 March 2012

Equities Testing Resistance

If we were not in a very strong uptrend, I would have loaded the boat up short on SPX yesterday, as the bearish reversal setup there is really very nice indeed. The candlestick setup I was looking at yesterday suggested we might see a slightly higher high, which we've seen. Over the last two days rising wedge resistance on SPX has been hit at the high on both days. A Vix Sell (equities) Signal triggered on Wednesday and confirmed yesterday. Decent negative divergence on the 60min and very much on the daily while overbought on both. It really is a nice setup.

We are in a strong uptrend though and in strong uptrends bear reversal setups can fail repeatedly. That gives some reason for caution here. Another reason for caution is that short term swing tops on SPX have been taking quite a while lately, and the last one just trickled up my resistance trendline for a couple of weeks before the modest subsequent reversal.

The trendline setup on SPX really is looking nice however, with rising wedge resistance hit at the highs in the last two days, with some negative divergence on the 60min RSI, and marked negative divergence on the daily RSI:
On Vix the Vix Sell (equities) signal confirmed yesterday with a higher close. I don't put a lot of faith in these but the bollinger band and candlestick setup indicates a high probability of reaching at least 17.5 within a few days and very possibly 21:
If this bear setup on SPX does fail then I've been looking at other indices to gauge where a break up might be headed. On the Wilshire index we have a clear rising wedge from the November low, and the obvious target would be some 1% to 1.5% above, so on SPX that would translate to the 1410-20 area:
TRAN and RUT have been sharply underperforming SPX over the last six weeks but both are now testing resistance at their early Feb highs. On RUT, using the IWM ETF as a proxy, there is a clear rising wedge from the October low. A failure here would trigger a potential double-top, and a break above resistance would give a rising wedge resistance target at 87-87.5, some 5% above the current resistance test:
TRAN has been a model of technical perfection this week, with a strong break up from the broadening descending wedge on Tuesday, a retest of broken wedge resistance on Wednesday, and then a strong spike up almost to the wedge target yesterday. That wedge target is at 2384 and a failure there would trigger another potential double-top. A break over resistance would target rising channel resistance in the 5525-50 area,some 3% above the February high:
One reason that I am edgy about a possible break up on equities here is the current collapse on bonds. To an extent this is just correcting the divergence between equities and bonds since October in favor of equities, but in the short term it is helping to feed the upswing on equities. Looking at TLT this morning it's hard to feel optimistic about the immediate prospects for bonds, as TLT broke below my declining channel support on the move down and has been consolidating below it. TLT looks very oversold short term, but might just form a bear flag here and then continue down to the 108.4 double-top neckline target. If we do see a bounce then 114-5 would be the obvious target to fill the open gap and test broken support:
I didn't get a chance to do a post on gold and silver yesterday, but they're both big picture charts so I'll add those here today. On gold I've identified three important support levels down to 1500. A break below the 1500 level would suggest a move considerably lower:
I've been looking carefully at the support levels on both gold and silver because of the currently very bearish setup on silver, which is targeting 27.4, but in effect suggests a retest of very strong support in the 26.15 - 26.30 area, and the rising support trendline from the 2008 low just below that level at the moment. If that level and then that trendline break, lower downside targets would then open up, starting with strong support in the 19.50-20 area:
Yesterday was Thursday, the most bullish day of the week since the October low, and we saw the standard first hour low then grind up for the rest of the day. Today is Friday, the most bearish day of the week since that low. Within this very strong 330pt uptrend Friday's have seen 12 up closes and 10 down closes, with a net 84 points made on Fridays made during this period. On the up closes however, five of those up closes were in the 19-24 range, putting that 84 point net gain on Fridays above the overall daily average of 66 points.

It's also opex Friday today, so I'm leaning against seeing a big break up or down today. If we are to see a big break up I would favor that being with a gap over SPX resistance on Monday morning. If SPX wedge resistance holds through Monday's close then I'd be leaning strongly towards seeing a decent retracement starting on Tuesday or Wednesday.

Short term on ES, resistance at 1394.25 was broken yesterday and has held yesterday afternoon and overnight. Downside targets if we see weakness this morning at therefore at 1394.25 and rising support from last week's low in the 1388 area. A break below 1388 would look bearish and a break over 1399 in trading hours would look bullish, as that should break over my SPX resistance trendline. Worth noting that ES is testing 1400 as I write, and that an open at this level would be a gap over my SPX wedge resistance trendline.

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